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 A new report from credit rating agency Moody’s Investors
Service highlights the potential consequences of Illinois’ poor fiscal health.
Lawmakers in Springfield should take away a simple lesson: without meaningful
action to structurally reform the state budget, the next recession will cause
serious problems for the Prairie State.
Recent surveys have found 75% of business economists in the U.S. expect the next
recession to hit by 2021.
According to Moody’s, Illinois and New Jersey are the two states least prepared
for the next economic downturn and “are likely to face more difficult challenges
than other states.” Recession preparedness is stronger for 22 states and
moderate for the other 26.
Moody’s stress test looks at four factors:
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Revenue volatility, which measures how much state revenues
decline when the economy slows
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Coverage by reserves, or whether a state has enough rainy
day funds set aside to offset lost revenue from a recession
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Financial flexibility, which looks at both the number of
restrictions imposed on state budget making and the percentage of revenue
going to fixed costs such as debt service, as well as each state’s long-term
structural balance
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Pension risk, a measure of what would happen to public
pension funds if a recession leads to a loss in investment assets on hand to
pay benefits
Consistent with past research, Moody’s finds that Illinois
scores particularly badly on pension risk and coverage by reserves. The state’s
paltry rainy day fund could not cover even half of the revenue loss likely to be
caused by a downturn, and Illinois’ pension debt-to-revenue ratio is far worse
than any other state’s. If Illinois continues on its current path, the only way
to pay pension benefits and balance budgets after a recession would be severe
cuts in services, more tax increases or more borrowing.
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While Illinois scores as “moderate” on the other
two criteria, Gov. J.B. Pritzker’s plan to scrap Illinois’
constitutionally guaranteed flat tax in favor of a graduated or
“progressive” income tax structure would make Illinois’ revenues
more volatile. Tax systems that rely heavily on the wealthy
experience more dramatic ups and downs with the economic cycle.
That’s because a bigger share of revenue is coming from a smaller
number of people whose income contains more earnings from capital
gains and other investments likely to decline in a poor economy.
Moody’s acknowledged the link between progressive income tax systems
and volatility in its report. “States with historically the most
volatile revenues are those that rely on the energy sector as well
those relying on the highest earners through high and progressive
personal income tax rates,” Moody’s stated.
Illinois must break with the status quo to prepare for the next
recession
Unfortunately, bad budget news is nothing new to Illinois residents.
Illinois’ pension debt-to-revenue ratio of 601% was an all-time high
for any state, Moody’s reported last year. From 2005 to 2018,
Illinois’ average annual rainy day savings of less than 1% of
operating revenue placed it at 45th in the U.S., the Illinois Policy
Institute found. Finally, Illinois’ overall budget health was ranked
as the worst in the nation by the Mercatus Center at George Mason
University.
But despite the poor state of affairs, Illinois’ fiscal health is
not beyond repair.
The Illinois Policy Institute shows how necessary, commonsense
reforms can be achieved in its recently released “Budget Solutions
2020: A 5-year plan to balance Illinois’ budget, pay off debt and
cut taxes.”
State lawmakers must rein in the growth in spending, and the most
critical single aspect of any good budget plan in Illinois is
meaningful pension reform. Amending the Illinois Constitution’s
pension clause to allow for adjustments to the growth in future
benefits could put the state on a trajectory where pension
contributions are significantly lower in the short term, but also
sufficient to eliminate the state’s unfunded liability more quickly
than planned under current law.
Springfield has the power to eliminate annual budget deficits, pay
off growing debt and set aside sufficient reserves to prepare
Illinois to comfortably weather the next recession. To do so,
lawmakers must have the courage and political will to break with the
state’s failed status quo.
Moody’s most recent report is yet another warning. Illinois leaders
need to act.
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