By Andrew Thomason Illinois Statehouse News
SPRINGFIELD — Illinois ended fiscal 2010 as the most broke state in the nation.
Illinois owed $37.9 billion more than all of its assets combined, including cash, investments and property, as of July 1, 2010, according to a recent statewide financial audit by the Illinois Auditor General William Holland and Illinois Comptroller Judy Baar Topinka.
Illinois even shorted unknowing taxpayers of $1.4 billion. An examination of the Income Tax Refund Fund by auditors revealed a $1.4 billion deficit, because the state didn’t put enough income tax revenue into the fund, causing a delay in getting the taxes returned to individuals and businesses.
The deficit would have been worse without a $3 billion cash infusion of federal stimulus money.
Illinois was one of four states with a deficit when comparing all its debts to assets in fiscal 2010, and of those four, it was in a hole of about $10 billion more that its nearest cousin — New Jersey, which ranked second.
A combination of mismanagement and a global recession are the largest factors in Illinois monetary woes.
Former Gov. Rod Blagojevich, who was convicted on corruption charges in federal court recently, came into office in 2003 during a small recession. He immediately promised he wouldn’t raise taxes, but he and the Legislature did not cut spending, resulting in a full-blown fiscal crisis.
“We had a period, maybe three, four or five years, from 2004 to 2007, where we could have, not solved all our problems, but gotten things under control. But we wasted those years and got deeper and deeper in the hole just because of a lack of discipline,” Fred Giertz, an economist with the Institute of Government and Public Affairs at University of Illinois at Urbana-Champaign.
Another reason for the state of Illinois’ financial misery is how it keeps its books, according to the audit. Ralf Seiffe is the director of research at the Institute for Truth in Accounting, a nonprofit that works to make governments provide accurate financial reports, according to its website.
“Bad accounting policies and bad budgeting policies are the means and manner by which legislators and the governor get away with essentially spending more than they should,” Seiffe said.
The state was faced with a smaller, but similar problem in the early 1990s. Former Gov. Jim Edgar and the General Assembly were handed a $2 billion deficit and produced a $1.5 billion surplus by 1999 through a tax increase, budget austerity measures and some good fortune in the financial markets.
“Edgar was either good or lucky, or both,” Giertz said, adding that a similar combination is needed to pull the state out of its $37.9 billion hole.
Bringing the state’s finances in line will be a struggle. Illinois recently instituted what was billed as a temporary income tax increase on individuals and businesses.
Money from the tax hike is paying off old bills and making sure new ones are paid on time. Politicians will be faced with a situation where letting the income tax hike expire is unpalatable, because that would require a corresponding $6.8 billion cut to the state’s budget to make up for the lost revenue.
Most people agree that the state needs to reduce spending, said David Yepsen, director of the Paul Simon Public Policy Institute at Southern Illinois University. When presented with the programs that eat up the majority of the budget, however, people are hard pressed to point to areas where they would take the blade.
“It’s no wonder that politicians have got us to this point, because they reflect what the sentiments are of a lot of people. A lot of people want something for nothing,” Yepsen said. “We want public services, yet we don’t want to pay the full price of them, and we don’t trust government to spend money wisely or to cut budgets fairly.”
Massive public worker layoffs, school closures due to a lack of funds and the firing of entire fire departments statewide are examples of the kind of crisis needed to spur the public and government to take steps toward fixing the state’s finances, said Yepsen.
A mini-crisis earlier this year is partially responsible for prodding the Legislature and Gov. Pat Quinn into action.
The organizations that rate the state’s credit worthiness and its main source of borrowing — selling bonds — threatened to downgrade those bonds, when legislators floated a plan to leverage $3.7 billion to make the state’s payment to the pension system this spring. When a government’s bond rating falls, it’s harder to sell bonds, because investors don’t see them as good investments.
Faced with that prospect, Quinn and the Legislature decided to make the state’s contribution with cash for first time in two years, instead of adding to the $13 billion the state owes in pension payment bonds.
Additionally, since fiscal 2010, the state has taken the first steps of a long journey to get it on a more solid financial footing. Pension and workers’ compensation reforms, changes to Medicaid, a slimmer budget and an income tax increase were all passed this winter and spring.
What’s needed to turn those baby steps into full strides?
“It’s going to take Republicans talking about finding additional revenues. It’s going to take Democrats (finding) ways to talk about making cuts, and I think you’re seeing a form of that here with Quinn and the union. He’s clearly telling them something they don’t want to hear,” Yepsen said.
Quinn has refused to pay state employees who are members of the American Federation of State, County and Municipal Employees Council 31 public worker union a 2-percent pay hike that is outlined in their contract.
Quinn continues to say the Legislature didn’t include the money for the raises in the budget it sent him, and without the money, he can’t pay the extra $75 million. Two lawsuits, one in Illinois Circuit Court and one in the U.S. District Court in Springfield, are pending on this issue.
While politicians seem to be moving in the right direction, Yepsen said he is concerned about the speed with which they are doing it.
“I just worry that it’s not fast enough. And that what’s going to happen to Illinois is as this recession ends, other states are going to get out the problem quicker than we are. And those states are going to become more attractive to economic growth and development than we are, because we are going to be lagging behind in cleaning up this mess,” Yepsen said.
If the state was in the red for $37.9 billion in 2010, then what does the fiscal picture look like now? The audit released Thursday answers that question by simply saying: It’s nearly impossible to tell.
However, the state’s mounting debts were contrasted against the state’s assets in this audit.
A report by Treasurer Dan Rutherford released in May said the state owes $45 billion in debt through 2036, including interest. Taxpayers owe $140 billion in unfunded pension and retiree health care liabilities, according to the same report.