Illinois's Fiscal Picture: A Portrait of Profligate Spending

Introduction

The state of Illinois was once an economic and industrial giant in the Midwest. The state supported extensive agricultural, industrial, and business infrastructure, as well as one of the largest population bases in the United States. After the 1950 Census Illinois had a 25-member Congressional delegation and 5.7 percent of the US population. Today, the state can claim just 19 Congresspersons and 4.4 percent of the US population.[1] Illinois is no longer the Midwestern powerhouse it once was.

This downward population spiral, however, has not affected Springfield's propensity to spend beyond its means. In a 10-year period from 1994 to 2003, annual state revenues increased on average by 3.9 percent. Expenditures, however, quickened at an average yearly pace of 7.4 percent, leading to the current structural deficit. Moreover, in a nine-year period from 1995 to 2003, revenues increased 3.1 percent on average, while expenditures rose twice as fast (6.2 percent).[2] Who has had to pick up the tab for this fiscal profligacy? The taxpayers, of course.

Recent Budgets Add to Taxpayer Burden

Illinois's unsustainable budget growth has been exacerbated in recent years with new (and unprecedented) health care liabilities, for which proponents cannot even estimate the long term costs. This unrestrained spending led the state to raise taxes by over $186 million in Fiscal Year (FY) 2005, the eighth-highest amount in the nation, and propose $312 million in tax hikes in FY 2006 (the fourth-highest proposal in the nation). Yet, in FY 2005, eight other states managed to find room in their budgets to carve out tax cuts, some proposing over $150 million in relief. Furthermore, Illinois taxpayers shelled out $828 million in additional taxes in FY 2004, the third-highest tax increase in the nation.[3] Politicians in Springfield have expressed their desire to cloak many tax hikes in the seemingly less menacing rhetoric of "fees." Governor Rod Blagojevich stated in his opening budget letter, "By eliminating waste, making government smaller, holding agencies accountable, making targeted economic development investments and not raising the sales or income tax, we have helped stimulate our state's economy…"[4] But when such "fee" increases generate over a billion dollars in more revenue, the disposable income of working families is nevertheless diminished. In the past three Fiscal Years (2003-2005), Illinois has increased taxes over $1.6 billion. If politicians wonder why the state is slowly bleeding valuable human capital, the fiscal policies of Springfield should be the starting point of their inquiry.

Governor Blagojevich's latest budget request of $55.3 billion is commendable for limiting total government growth next year to 1.7 percent.[5] Nonetheless, had he and Governors George Ryan and Jim Edgar limited past growth (since 1995) to this figure, the budget would be just under $39 billion. But, Illinois's storied past of extravagant budget increases without commensurate offsets has created three consecutive years of billion-dollar deficits. For example, from FY 2000 to 2002, revenue declined by 15.3 percent, while expenditures increased 19.3 percent![6] With that kind of record, Springfield should look to its profligate spending to address budget deficits, not taxpayers' wallets.

Even though Governor Blagojevich and the State Legislature have raised taxes by more than $1.6 billion over the last three years, Illinois is still in deficit. This year's budget does not shy away from tax hikes either. The Governor has proposed a 67 percent tobacco tax increase in an attempt to close the state's budget gap.[7] If this scheme is enacted, it would mark the fourth successive year Illinois has picked the pockets of taxpayers to fund new spending. Despite the state's squeeze on citizens, bigger government has not attracted human capital or businesses to drive employment and subsequent economic growth.

In fact, the unemployment rate in Illinois is above the national average of 4.7 percent, and higher than neighboring states like Wisconsin (4.8 percent) and Iowa (4.4 percent).[8] In virtually every major index of economic growth and vitality, Illinois has fallen behind the national resurgence. From FY 2003 to 2007, overall US employment increased 0.94 percent on an average annual basis. Illinois, however, saw job growth remain almost flat (at 0.06 percent annually). Average US employment has quickened at a pace of more than 15 times that of Illinois. In addition, during this time period, wages and salaries rose 4.68 percent on average nationally, while Illinois lagged behind substantially at 3.82 percent. Finally, population increases, which are burnishing state coffers around the US, are lackluster in Illinois. In the past five fiscal years, US population growth has averaged 0.94 percent, while Illinois has crept along at 0.5 percent, or roughly half the national rate.[9] Illinois's fiscal picture and business climate are not proving to be hospitable to new residents.

Rising Entitlement Spending Threatens Taxpayers

The state budget is burdened by two spending leviathans that must be controlled in order to manage government growth. First, health care consumes a disproportionate share of the state budget—a 30 percent portion when combined with family services. Medicaid alone devours approximately 25 percent of the state's budget. In addition, Illinois's Medicaid liability has grown 65 percent since FY 2000, and its group health liability has increased an astounding 96 percent since FY 2000.[10] The Governor and the General Assembly have pushed recent legislation that only darkens this looming fiscal cloud.

On November 15, 2005, Illinois became the first state in the nation to provide universal health care to every child.[11] The Governor estimates that this will add health care "to 400,000 more uninsured children and parents."[12] The problem, however, is that there are no definitive cost estimates for this giant new entitlement. The Fiscal Note for the bill claims that "there will be no fiscal impact."[13] This statement is misleading at best and an outright lie at its worst. In the FY 2007 budget, the state will add 16 percent more participants to its health care rolls than it did in FY 2005. From FY 2005 to 2007, General Fund spending on health care and family services will increase 13 percent. In addition, enrollment in this so-called "KidCare/AllKids" program is expected to climb 47 percent from FY 2006 to 2007, further burdening state finances and increasing the likelihood that elected officials will turn to taxpayers to cover potential budget shortfalls.[14]

The FY 2007 budget also calls for universal "Preschool for All." This project alone will cost taxpayers $45 million.[15] Illinois currently claims that it is the only state in the nation to provide both universal health care and universal preschool for children. One can definitely say that children are well-represented in the FY 2007 budget. The long term liabilities of these unfunded mandates are far more tenuous, however. The propensity of universal government entitlements to far exceed the cost projections only increases the possibility that taxpayers will be tapped to make up for any shortfall. One need only look at Medicare, enacted in 1965, which was projected by the government to cost $9 billion annually by 1990. Instead, during that year, the government spent over seven times the projected amount ($66 billion).[16]

The state's continued mismanagement of its pension system will also affect taxpayers in the future. As the FY 2007 budget notes, "The unfunded pension liability of the state's five state retirement systems is our state government's single greatest financial challenge. In fact, Illinois State Government's unfunded pension debt has been significantly greater than all of the state's bonded debt combined for several years."[17] Until 2004, for 30 consecutive years, the state could not manage to fund its pension system fully. Even during robust economic growth, the pension system was poorly capitalized. By 1995, the unfunded liability reached close to $20 billion.[18] In fact, according to the Illinois Policy Institute, Governor Blagojevich has borrowed more money than any governor in the past 185 years. The state's bonded debt has actually doubled since Blagojevich took office.[19]

If Illinois cannot significantly pare back spending and enact major overhauls of its health care and pension systems, unfunded liabilities will grow even further out of control. As a corollary, taxpayers will be forced to compensate for this fiscal mismanagement, and potential residents will shun Illinois in favor of low-tax and moderate-regulation states that are able to tame the wild expansion of the public sector.

Taxpayers Could Benefit From Reduced Spending

How does this spending hurt the typical taxpayer? Suppose Illinois had restricted its rising expenditures to no more than population growth plus inflation, beginning in FY 1995. Under this scenario, yearly spending would have increased on average by about 3.12 percent, leaving the state budget at approximately $43.5 billion, rather than the current request of $55.3 billion.[20] This difference amounts to a savings for taxpayers of $11.8 billion, or over 21 percent of the proposed budget (more than the Gross Domestic Product of over 40 percent of the world).[21] In other words, if the state had limited its spending to population growth plus inflation, taxpayers would have over $900 in per-capita savings. Instead, this money is with the state government, which will (taxpayers can only hope) put it toward closing a billion dollar budget gap.

Conclusion: Springfield Must Shift the Tide

For every bleak fiscal reality in Illinois, the Governor and Legislature seem to defy logic and implement discordant policies that exacerbate long-term debt and take from taxpayers what should be devoted to the private sector. When revenue declined by double-digit margins early in the decade, policymakers chose to raise spending by commensurate amounts. It is not clear why they chose to further burden state finances and enact $1.6 billion in tax hikes, but what is now crystal clear is the state's fiscal picture: an under-funded pension system that represents the largest state liability, skyrocketing Medicaid bills and health care costs that will doubtless grow larger as the state implements a universal health care proposal, and indicators lagging behind the national average in population growth, wage growth, and job creation. If Illinois's political establishment can't recognize the errors of its fiscal policies, someday the state just might run out of residents to tax.

Notes

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