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 As Illinois enters 2021, the state’s economy is smaller, the
COVID -19 recovery has stalled and the state’s Office of Management and Budget
is projecting a budget deficit of $3.9 billion for the current fiscal year that
could grow $1 billion worse.
While it is easy for state politicians to blame Illinois’ fiscal struggles on
the global pandemic, Illinois’ economy has persistently underperformed the rest
of the country for the past two decades. That left the state with tiny reserves,
massive debts and a near-junk credit rating even before the pandemic.
Two decades of rising pension and debt service costs left Illinois with fewer
and less reliable public services. Spending on child protection, mental health,
state police and college aid for low-income students fell by 32%. Even state
general assistance was eliminated in 2011 while state politicians approved a
record income tax hike that same year.
The combination of falling public investments and higher taxes raised the cost
of life in Illinois and caused the state’s contribution to U.S. economic growth
to decline. The cumulative cost for failing to keep up with the rest of the U.S.
economy during the past two decades amounts to $154 billion, or 17.4 % of
Illinois gross domestic product in 2019.
Lower economic growth means fewer job prospects and longer unemployment for
everyone. It also means disproportionately less employment for Blacks – who are
historically fired first at the first sign of economic weakness.
COVID-19 shrank Illinois’ tax base more, worsened existing disparities and left
a huge hole in state government finances. Gov. J.B. Pritzker’s threats of
“painful cuts” to core government services and massive tax hikes would only make
matters worse, greatly harming any hope for a full economic recovery.
Instead, state lawmakers should act now to reform the state’s
worst-in-the-nation pension crisis. The only realistic path to balancing
Illinois’ budget while protecting programs for the state’s most vulnerable
residents starts with a constitutional amendment to allow pension reform.
COVID-19 punished Illinois’ sluggish economy more than other states
COVID-19 caused gross economic output to decline by 30.6% (annualized) in the
second quarter of 2020. Employment also declined by 799,500 from February to
April, according to data from the Illinois Department of Employment Security.
During 2020, total non-farm employment declined by 423,300 jobs. Estimates using
data from the monthly Current Population Survey show among prime working-age
Illinoisans, roughly 418,000 jobs are still missing because of COVID-19 (see
appendix). The job losses were more severe for women, prompting many experts to
call the current downturn a “she-cession”.
Employment losses were also more severe for both men and women compared to the
national average. Female employment in Illinois declined by 15.1% because of
COVID-19 and associated mitigation measures, while female employment nationally
declined by substantially less at 11.8%. Meanwhile, male employment fell 8% in
Illinois and only 6% nationally.
As job losses accumulated, the Illinois Policy Institute correctly predicted
that roughly 130,000 Illinois mortgages would be delinquent by year’s end,
causing the mortgage delinquency rate to double to nearly 9%. Second quarter
data released in August showed mortgage delinquency had risen to 124,000, making
Illinois the state with the highest mortgage delinquency rate in the Midwest.
Illinois was particularly vulnerable because public policy mistakes – property
tax hikes despite lower local public investments – had weakened Illinois’
housing market even before COVID-19. Illinois was the only state in the Midwest
with housing markets among the 50 counties in the U.S. most vulnerable to the
COVID-19 shock. This is because Illinois already had a large number of
underwater homes as well as the second-highest foreclosure rate in the country
as of February 2020.
In addition to massive job loss, school and day care closures raised the cost of
child care, forcing more women than men out of the labor force. While state
politicians tout declining unemployment rates in the last quarter of the year,
they are failing to count the many Illinoisans who stopped looking for work. An
estimated 125,000 Illinoisans are missing from the workforce because of COVID-19
(see appendix), with the largest missing segment being women with children in
the home.
Working mothers in Illinois were especially affected by COVID-19 and the state’s
mitigation efforts as 4.5% of these women left the labor force entirely.
Nationally, the number of female labor force participants with children in the
home only shrank by 3.6%. These figures were much more favorable to men with
children in the home, who saw the smallest decline in labor force of any group,
with labor force declines of 1.6% in Illinois and 1.4% nationally.
The economic pain also fell disproportionately on low-income families and Blacks
– those whose jobs could not be performed at home or were deemed non-essential
by Pritzker.
Public policy mistakes likely created racial gaps for decades, but COVID-19 and
Illinois’ response made things worse
First, the racial employment gap was larger in Illinois than in other states
even before COVID-19. This is perhaps not surprising given Chicago’s history as
one of the most segregated cities in America. Estimates using data from the
monthly Current Population Survey show non-Hispanic Blacks were on average 9
percentage points less likely to be employed than similar whites before
COVID-19. Hispanics were an estimated 1 percentage point less likely to be
employed than similar non-Hispanic whites (see appendix).
Second, prime working-age Black Illinoisans were less likely to be in a job than
other Black Americans even before COVID-19. The opposite was true for other
groups. The employment rate of Illinois Blacks is shocking because they, just
like Illinoisans of other races or ethnicities, tend to be younger, are more
likely to be college educated and are more likely to live closer to jobs in
metropolitan areas than other Americans. All those factors raise the likelihood
of having a job.
Third, employment declined more in Illinois for every group than in the rest of
the country. However, the estimated cost associated with COVID-19 was larger for
non-Hispanic Blacks than any other group. The estimated cost of COVID-19 on the
employment rates of Blacks was 1.5 times larger in Illinois than for Black
Americans on average.
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Why Illinois was among most unprepared states for deep COVID-19 downturn
In the past two decades, Illinois’ contribution to U.S. economic growth
continued to decline, according to data from the U.S. Bureau of Economic
Analysis. Since 2000, U.S. real GDP grew at an average of 2% per year compared
to only 1% for Illinois. In 2019 alone, Illinois’ economy would have been 1.7%
larger had the state grown at the same rate as the rest of the country. The
cumulative cost for failing to keep up during the past two decades was over $154
billion (17.4% of Illinois GDP in 2019).
Illinois’ particularly sluggish growth was not simply because of a larger
regional trend. Illinois’ economy has performed worse than the rest of the
Midwest during the past 20 years, with most of the underperformance stemming
from the failure of the state to recover as quickly from the Great Recession.
During the past 20 years, the rest of the Midwest has grown 22% faster than
Illinois’ economy.
Midwestern states, only three – Ohio, Missouri and Michigan – have
underperformed Illinois. Meanwhile, eight states – North Dakota, South Dakota,
Nebraska, Iowa, Minnesota, Kansas, Wisconsin and Indiana – have all outperformed
Illinois’ economy in terms of growth. Despite the largest population center in
the Midwest, top-rate secondary education options, one of the most
highly-educated workforces in the nation and a widely diversified economy,
Illinois’ performance has lagged its peers.
Then the COVID-19 pandemic and state-mandated mitigation efforts ravaged the
state’s economy. Illinois lost 423,300 jobs (6.9%) during 2020, the most in any
year since the U.S. Bureau of Labor Statistics began tracking them in 1947.
Illinois’ economy was among the worst hit by the COVID-19 pandemic and
state-mandated mitigation efforts. Illinois lost more jobs in 2020 than most
Midwestern states, except Wisconsin, Minnesota and Michigan. “Other services”
was the only sector of the state economy to perform better than the median
Midwestern state, meaning virtually all areas of Illinois’ economy were hit
harder by COVID-19 and state mitigation protocols.
Unprepared for a recession
Illinois sluggish economy entered the COVID-19 downturn with only
$1.19
million in reserves – enough to run the state for about 15 minutes. The
COVID-19-induced decline in economic activity left public finances in dire
straits, limiting the state’s ability to help struggling households and failing
businesses.
The weakening of Illinois’ social safety net before COVID-19 was
mostly caused by a persistent rise in pensions and debt service costs, coupled
with record tax hikes, that all harmed economic performance. This is because
those cost increases came at the expense of public services and new public
investments Illinoisans depend on, while tax hikes squeezed private consumption
and investment. Together those forces cut the state’s economic potential.
From fiscal
year 2000-2020, state spending on pensions for government workers grew by a
whopping 501%,on top of a 127% increase in health care costs for state
workers. Total state spending only increased by 15% during those two decades.
State spending on everything from child protection, mental health, state police,
college aid for low-income students and more protections for the state’s most
vulnerable residents fell by nearly one-third during that time. Every other
expenditure, including social services and education, was sacrificed for
government employee pensions, and still the pension debt has ballooned to the
nation’s second-highest with
the second-worst funding ratio.
Research shows higher
pension contributions as a share of state expenditures are associated with on
average 0.08 percentage points lower growth in per capita personal income. For
Illinois, that represents roughly $1,400 out of the pocket of person each year
on average.
It isn’t surprising that by 2014, Illinois began to experience
population losses. By
2020, Illinois had suffered seven consecutive years of declining population.
The entire decline in the state’s population is because of rising moves out of
state by young Illinoisans in search of lower costs, more job opportunities and
better living standards. A decrease in immigration from abroad coupled with the
rapid rise of work-from-home because of COVID-19 likely partly explain why
Illinois population decline worsened in 2020.
Population decline has frightening implications for the future of
the state’s economy and the state’s ability to pay down its debts. This is
because when Illinoisans leave the state, they don’t go empty handed. They take
with them financial assets and talent that would otherwise have remained in
Illinois and enriched everyone.
Preparing for the future
COVID-19 made things worse for everyone – but even more for Black
families. Although a win against COVID-19 will help Illinois’ struggling
economy, it will not fix the damage done by decades of fiscal mismanagement and
corruption in Springfield.
By pursuing reforms that address the root cause of Illinois’
economic crisis, Illinois can solve its fiscal problems, protect core services,
improve outcomes for all Illinoisans while also undoing decades of persistent
racial inequality. A constitutional pension amendment would free up billions of
dollars in future state budgets.
State lawmakers should pursue the following:
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Increase the public pensions funding target to 100% from 90% in
accordance with actuarial best practices. The goal year for 100%
funding would remain 2045.
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Gradually
increase retirement ages for current workers under age 45 by a
maximum of five years.
-
Apply a
pensionable salary cap of $100,000 that grows with inflation.
Government workers could still earn more than $100,000, but
their pensions could not be based on more than the cap. The cap
would only apply to employees not currently receiving a
retirement check.
-
Replace Tier 1
retirees’ 3% compounding benefit increase with true
cost-of-living adjustments tied to inflation. Annual increases
would be simple, not compounding, and rise with the consumer
price index for urban consumers, as reported by the U.S. Bureau
of Labor Statistics.
-
Increase Tier 2
COLAs from half of inflation to full inflation. This would end
the unfair subsidization of older workers by younger workers and
could prevent a potential lawsuit.
-
Implement COLA
holidays to allow inflation to catch up to past benefit
increases. If a worker has been retired for eight years or more,
they would skip every other year for 16 years for a total of
eight adjustment periods at 0%. If a retiree has been receiving
benefits for seven years, they would skip one payment every
other year for 14 years, and so on.
-
Enroll all newly
hired employees in a defined contribution personal retirement
account with a 4% guaranteed employer match. This would ensure
the state never gets into pension trouble again. This would also
provide state workers with a portable retirement benefit they
could take with them from employer to employer, rather than
being forced to stay with the state in order to maximize
retirement benefits.
Without pension reform that frees up resources for
desperately needed investments in struggling Illinois communities,
fixing pre-COVID racial disparities may never materialize, young
families will continue to flee and the state’s economy will suffer
longer than it needs to.
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