 After Puerto Rico declared a form of bankruptcy May 3, The New York Times used
these words to describe the U.S. territory’s fiscal woes: “borrowing to pay
operating expenses, year after year”; “unable to provide its citizens effective
services”; and “rising pension costs, crumbling infrastructure, departing
taxpayers and credit downgrades.”
This diagnosis should sound very familiar to anyone living in Illinois.
The striking similarities between insolvent Puerto Rico and the Land of Lincoln
serve as a dire warning: Without real reforms, Illinois won’t be able to shake
off an eventual junk bond rating or get off the path to financial ruin.
The Times says as much: “While many of Puerto Rico’s circumstances are unique,
its case is also a warning sign for many American states and municipalities –
such as Illinois and Philadelphia.”
The Times went further, saying that the island’s total financial collapse will
only make things worse: “Government workers will forgo pension money, public
health and infrastructure projects will go wanting, and the ‘brain drain’ the
island has been suffering as professionals move to the mainland could
intensify.”
Illinois is destined for a similar outcome if it doesn’t pass the structural
spending reforms that Puerto Rico avoided for decades.
Of course, Illinois isn’t Puerto Rico. The island’s per capita debt, pension,
budget, out-migration and economic crises are far more dire than Illinois’ own.
But it’s not just the crises themselves that invite comparison, but rather how
Illinois and Puerto Rico have responded to them. Or rather, not responded.
Puerto Rico, Illinois leaders avoid reforms necessary to prevent fiscal collapse
Politicians in both Puerto Rico and Illinois have been unwilling to pass the
structural reforms both places desperately need. The political class is beholden
to public sector unions, trial lawyers and other politically connected insiders.
As a result, necessary pension and spending reforms have been ignored, massive
borrowing continues, out-migration has picked up, and high taxes have gone even
higher, all while finances have spiraled downward.
Puerto Rico, like Detroit before it, represents the endpoint of politicians
maintaining a failed status quo: total financial collapse.
Previously, there were no laws that allowed Puerto Rico to declare any form of
bankruptcy, but in 2016 Congress was pressured to pass special legislation that
allowed the island to do so. With that precedent, it’s a possibility that
Congress could treat Illinois similarly.
Illinois isn’t there yet, but the state’s worsening situation can easily be
compared to what’s happened to Puerto Rico:
- A massive, growing pension crisis
For decades, Puerto Rico did nothing to fix its pension crisis. Today, the
commonwealth’s pension system is basically insolvent. Every penny that goes
into the fund is immediately spent on current retiree benefits.That sounds
awfully familiar to what Dick Ingram, the head of the Illinois Teachers’
Retirement System, or TRS, said in 2012 when he cited a forecast indicating
TRS’ funds could run dry by 2029.Some Chicago pension funds are also on
track to collapse soon.Illinois has been ignoring a pension crisis that
piles a bigger burden on the backs of Illinoisans every day that reforms
aren’t enacted.Total state pension debt has skyrocketed over the past 15
years to over $130 billion in 2016.illinois pension debt
In 2002, the state pension debt burden per household was $7,600. Today, it
is nearly four times higher, at $27,000 per household.
And that’s just state pension debt; that doesn’t include local government
pensions or health care debt.
In fact, when it’s all added up, total unfunded pension and retiree health
care debt across all levels of Illinois government has grown to $267
billion. That’s $56,000 in total government retirement debt per household.
What’s even more disturbing is the fact that this massive debt is based on
official government numbers that use rosy assumptions. Under more realistic
assumptions, the situation is much worse for Illinoisans.
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- A collapsing credit rating
Puerto Rico’s bankruptcy reflects its failed pension system, as
does the massive penalty it’s been paying to borrow money due to
its junk rating.Similarly, Illinois’ credit rating has taken a
dive as the state has failed to pass any significant spending
reforms over the last several years.
The state’s rating is now just two notches above junk status
after experiencing nearly 20 downgrades from the big three
ratings agencies.illinois credit ratingThe state’s borrowing
cost is now far higher than that of any other state. And it may
join Puerto Rico in junk status very soon. Both Moody’s
Investors Service and Standard & Poor’s Global Ratings have
warned that Illinois could be downgraded again, possibly by two
notches, if the state’s financial crisis continues.If that
happens, Illinois would be the first state in the nation to fall
to junk status – delivering another blow to Illinois’ already
low reputation.illinois credit rating
A junk rating would further discourage investment, job
creators and the in-migration of new residents. It would also
hurt Illinois financially and push up borrowing costs, taking
even more funds away from core government programs and social
service providers.
- Accelerating out-migration
Puerto Rico has been bleeding residents at a rapid rate. Jobs
are growing more and more scarce, and taxation is high. The
island has lost 20 percent of its jobs and 10 percent of its
population since 2007 alone, according to USA Today.Illinois has
been suffering an exodus of its own. Illinois has lost a net of
700,000 people to other states over the last decade.illinois
outmigrationThanks to international immigration, Illinois has
avoided actually shrinking for a majority of those years. But
things are changing.
International migration has slowed, and Illinois has actually
declined in total population over the past three years – the
only state in the region to do so.illinois outmigration
What’s worse, Illinois’ out-migration and population loss are
having a profoundly negative effect on the state’s tax base.
Illinois has lost just under $50 billion in annual adjusted
gross income over the past 20 years as residents have left
Illinois to find opportunities in other states. That’s deprived
the state of billions of dollars in tax revenue.illinois
outmigration wealth flight
Getting Illinois back on track
The fate of Puerto Rico should make lawmakers even more anxious
about finding the right solutions to avoid a similar collapse in
Illinois.
Illinois is far stronger economically than Puerto Rico, and its
problems aren’t as far along. But that’s not an excuse to pretend
Illinois isn’t in a deep crisis.
What it does mean is that Illinois’ path back to prosperity and
financial stability can be easier – as long as lawmakers act now to
fix the state’s deep structural problems.
That’s why Illinois cannot waste time on yet another bad deal like
the Illinois Senate’s proposed “grand bargain.” That plan would hit
Illinoisans with billions in higher taxes because it has no real
reforms to address the state’s out-of-control spending drivers.
Illinois can’t afford to try another Band-Aid fix in hopes of
staving off its day of reckoning. That path leads to Puerto Rico and
Detroit.
Instead, Illinoisans need a real spending reform plan that fixes the
state’s structural problems and balances the budget without tax
hikes.
State Sens. Kyle McCarter, R-Lebanon, and Dan McConchie, R-Hawthorn
Woods, have released such a plan.
The Illinois Policy Institute has also provided a reform road map.
The plan provides tax relief to struggling homeowners through a
comprehensive property tax reform package, and enacts major reforms
to spending on health care and government worker compensation.
Most importantly, it implements a 401(k)-style retirement plan for
government workers going forward, a solution that’s been under
lawmakers’ noses for nearly 20 years.
Illinois can still be the economic powerhouse and beacon of
opportunity it once was. It still has a strong economic base, a
well-educated workforce, and a number of natural advantages.
But without reform, the state could end up suffering a fate similar
to Puerto Rico’s.
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