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* Illinois’ Gross State Product is about $630 billion. That means the $8.7 billion Gov. Pat Quinn wants to borrow on the bond markets to pay off old bills is about 1.4 percent of GSP. Injecting that kind of cash into the economy provides a definite boost. It’s not new money, of course, so the boost isn’t as big. But it is money that’s long-owed to vendors, schools, hospitals, nursing homes, human service providers etc. And those past-due bills are a drag on the state’s overall economy. No doubt about it. Just think of all the little local banks that could be lending money for jobs-producing business ventures that instead have been using precious (and still very tight) capital to keep state vendors afloat.
So, I really don’t get why David Merriman, a “state budget specialist” at the University of Illinois’ Institute of Government and Public Affairs, would turn his nose up on eliminating that economic drag…
Merriman agreed that Illinois might cut procurement costs by paying its bills and attracting more bidders. He snickered at the idea of payment boosting the economy.
“It strikes me as a very weak argument,” Merriman said.
1.4 percent of GSP is not a “very weak argument” no matter how you slice it. And, more specifically, try telling all the businesses and other vendors who are owed money that the state’s past-due debts to them don’t matter, or haven’t caused hardship. It’s a very real thing to them and to their employees and to their own vendors. These overdue bills have a rippling effect throughout our economy.
The borrowing proposal can surely be scaled back. And I believe it will. But if “state budget specialists” like Merriman and others think the government ought to make cuts to pay off the old bills without going to the bond markets, then they ought to detail how they’d pay for it. Simple as that.
And while I’d personally prefer, as some have suggested, a gradual payoff of the old bills of, say, five years, in combination with a lower bond offer, I understand that a lot more cuts will have to be made before the state is able to do that. Perhaps the state budget experts can show us the way. And I also fully understand that a gradual pay-down will mean stringing out the state’s vendors for another half-decade, which is not going to be a pleasant thing to do.
I’ve always held Merriman in pretty high regard. I don’t understand why he completely brushed off the impact of this proposal, however.
* And this is a misrepresentation…
“While I am all for paying our providers in a timely manner, $8.75 billion is an excessive amount of money to borrow and it will cost taxpayers another $3 billion in interest to repay,” [GOP state Rep. Mike Bost] explained. “Limited borrowing may make sense, but his plan simply backloads the debt. The bulk of the money will be due just as the Democrats’ tax increase is set to expire. This is their way of ensuring that the tax increase will become permanent.”
Bost is right that the repayments are backloaded. There’s a ramp. It starts at $100 million, and then rises to $765 million by Fiscal Year 2016. But, half a point of the income tax hike is dedicated to the bond repayment, and that won’t expire until the bond is paid off. That half a point is more than enough to make the payments.
* And, no offense, but I’d like to see his alternative…
“I came away from the Governor’s speech thinking there had to be more to the budget proposal. The Governor’s plan is based on an additional $9 billion in borrowing,” [GOP state Sen. Dave Luechtefeld] said. “I know we have severe problems in the state, but the Governor needs to be serious about cutting our state’s budget. These are tough times, but a tax increase alone will not get the job done.”
He’s absolutely correct that a tax hike alone won’t get the job done. And as I wrote elsewhere today, I think Quinn made a big mistake with his budget proposal. But is Sen Luechtefeld ready to cut SIU-Carbondale’s budget to help out?
* This press release by Democratic Sen. Gary Forby deserves the same treatment…
The bottom line is that we must continue to look at responsible places to cut spending and pay our bills before we can spend any more.
OK, great. Start listing stuff in your district that you’d be willing to give up, Senator.
* Related…
* Decline in bond market has states nervous: All told, more than $178 billion of the bonds were sold, according to Bloomberg. The states and local governments in four states — California, Illinois, New York and Texas — accounted for nearly half of the bond sales. But as states and localities rushed to sell them before the December 2010 deadline, there was a glut in the bond market, depressing demand for traditional types of municipal bonds.
The extension of the Bush-era tax cuts last year may also have played a role in the declining popularity of municipal debt. With less income subject to taxation, the tax-free aspect of government bonds holds less allure.
posted by Rich Miller
Tuesday, Feb 22, 11 @ 2:27 am
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Why Illinois certainly should certainly jump at the chance to borrow money with backloaded bonds. This will not only provide more money to be spent as lavishly as it has in the past, but as an additional benefit will allow the state to borrow its way out of debt and into prosperity. It’s been a proven way of sucess in Illinois for a long time now
Comment by Laughing_All__The_Way Tuesday, Feb 22, 11 @ 5:28 am
>OK, great. Start listing stuff in your district that you’d be willing to give up, Senator.
I think demanding representatives give things up unilaterally is just as irresponsible as calling for cuts without enumerating them.
How do we know cutting stuff in his district isn’t going to cost Illinois more money in the long run?
Comment by Leroy Tuesday, Feb 22, 11 @ 5:39 am
The money’s already being borrowed, but in a backhanded, more expensive way, from providers.
There are plenty of folks in the private sector who do business by being chronic deadbeats, but the state shouldn’t be one of them.
It should be noted that a lot of the vendors that Quinn is trying to get square with, he’s also proposing cutting in the next budget. In other words, “we’ll pay what we owe you, but after that we can no longer afford your services.” That seems responsible.
Comment by wordslinger Tuesday, Feb 22, 11 @ 6:24 am
I know Rich you strongly support the borrowing plan with all of its warts and problems. But . . . .
The REAL drag on the economy came from the State of Illinois which deliberately continued to order supplies and services from providers without having the means of paying for it. The State in effect sat down at a restaurant each night, ate a meal, then stiffed the restaurant on the tab that it ran up. Playing the role of Wimpy in the Popeye comic strips (ordering a hamburger now and offering to pay for it tomorrow) was the real drag.
The fears those of us have about this massive borrowing program remain in place. Spending “caps” by a bill which allows $4 billion in new spending over four years. A backloaded repayment plan which kicks in after the “temporary” lame duck midnight income tax increases are scaled back. A new Quinn budget which blows the doors off the spending caps bill (which he conveniently signed after he presented the new budget).
A legitimate debate on this issue needs to include the behavior which the State is still reluctant to abandon. Its behavior that has caused a serious credibility gap on the part of the State.
What is the State doing to resolve its credibility gap on spending? Other than proposing harsh cuts then withdrawing them when people scream? Other than claiming $3 billion in “cuts” through imaginative accounting practices rather than real cuts?
Comment by Louis G. Atsaves Tuesday, Feb 22, 11 @ 6:56 am
Maybe if the borrowing is done from local banks. But unfortunately we don’t have LaSalle and First Chicago any more. So I’m curious as to what kind of fiscal drag there would be from that interest headed out of state.
On a related note I’m glad Rahm Emanuel has at least started some kind of a debate on tax reform. That’s the real question Illinois needs to be asking; why its state revenue simply doesn’t recover after a recession any more, while Wisconsin’s grows at four or five percent a year as long as Governor Dropout doesn’t rebate it all to his campaign donors. And tax reform is inevitably part of that debate, though by no means all.
Comment by Angry Chicagoan Tuesday, Feb 22, 11 @ 7:50 am
I think Merriman’s statement is based on an analysis of the overall impact of the borrowing. It may provide a short-term boost to the economy, but that will be more than offset by the money that flows out of the economy as the debt is repaid.
Comment by Pelon Tuesday, Feb 22, 11 @ 8:29 am
What’s the interest cost of not bonding and just paying our vendors the interest? I believe bonding is actually a better deal and more fiscally responsible when you take into account the back log of bills is not interest free and is actually a higher rate.
Comment by Ahoy Tuesday, Feb 22, 11 @ 9:06 am
The income tax to support the borrowing is .5% per year. Having the payments backloaded means that initially, that .5% doesn’t need to be spent on paying down debt and will likely find it’s way to new spending. At the end of the cycle, the .5% likely may not be enough to make the entire payment unless we’ve been saving all along (and somehow I don’t think we will).
You combine the backloaded 8.75B borrowing, the backloaded 4ish B pension borrowing and the ramping up of pension contributions, we not only will be back at the same deficit level in 4 years, we will be much worse because debt payments will consume an ever larger chunk of non-discretionary spending.
As far as paying back bills, it isn’t a boost to the economy as much as it is a removal of a drag (at least among vendors and social service providers). Businesses will tell you that don’t need credit, they need customers. But the payment cycle most certainly is a drag on the economy and it makes everyone rightly think the state isn’t being an honest broker with its promises.
It’d be one thing if the 8.75B was all to pay back overdue bills, now half is being used to float the GRF, which just means we are yet again paying operating expenses with one-time revenue sources and we’ll have to figure out where to get that $4B next year.
As I’ve said, if you hold the position that the state can’t cut anything, 5% income tax was never enough. You needed at least 7%. Come 2014, at this rate, you’ll need 10%.
Comment by John Bambenek Tuesday, Feb 22, 11 @ 9:52 am
When asked what should be cut to balance the budget, I offer the following:
Sometime in the past, there was a year which, when adjusted for inflation and population, had spending that would equal the revenues currently projected by the state gurus. Since that year, a number of new programs were added, and another group of programs was expanded.
There is your baseline.
What new/expanded programs were added? If we were to cut those programs back to their pre-2011 levels, is there a legal impact (e.g. were the programs added as a result of an unfunded mandate from the Feds, etc). What other impacts would occur?
I contend that the state would survive just fine if we were to cut the scope of government to the levels that are sustainable by projected revenues. Things were okay in 2005, or whenever the graphs cross. Probably better than things are now.
Discuss.
Comment by Cincinnatus Tuesday, Feb 22, 11 @ 10:05 am
Is Quinn thinking that he can cut social services because he’s also about to pay off the outstanding debts? That one infusion of cash will make up for the decline in the budget line? I have no idea; if that’s the plan, it’s really sticking it to the providers, but does anyone here know if that’s part of the thinking?
Comment by Elo kiddies Tuesday, Feb 22, 11 @ 10:39 am
- Elo kiddies - Tuesday, Feb 22, 11 @ 10:39 am:
“… but does anyone here know if that’s part of [Quinn’s] thinking?”
Just about the unintended funniest question ever! Does anyone know what’s going on in Pat Quinn’s Brain?
Comment by Cincinnatus Tuesday, Feb 22, 11 @ 10:55 am
What a lot of folks are missing in this whole argument is, we might not have a choice. Everyone assumes that all other things are equal and fixed and all we have to do is decide whether we should pay the bills now or later.
Vendors and contractors are passing on bidding for needed supplies and repairs to keep facilities open. State Police are being turned away from some establishments when they go to buy gas, and they are having difficulty finding vendors to sell them ammunition.
These are just a few items of many that will continue to grow as the State argues about it’s unpaid bills. What people don’t understand is that this will inpact them. It might be when their local DMV shuts down because there is a problem with the plumbing and no one will come and fix it. Or the local employment services building closes because their furnace goes out and no one will come to fix it. Local clinics and hospitals close because they are carrying too much debt. School Distrcts raise the local property tax because they have to keep the schools running and the State isn’t paying. To name a few examples.
So the question to ask yourself is: If I were making the decisions in my own household and I could pay off a high interest debt with a low interest loan, and keep the services I currently enjoy; Or keep the high interest debt, pay the high interest longer, and lose some of the services I need; What would I do?
Seems pretty simple to me.
Comment by Irish Tuesday, Feb 22, 11 @ 10:57 am
Irish, pay your bills and then cut off your cable? For example, with the DMV offices, why are so many needed? 20 in Cook County alone? 1 in both Rantoul and Champaign? Couldn’t these things be consolidated or combined with other government space (e.g. local employment services facility) even though the government bodies aren’t under the same head? It’s the same tax payers on the other end.
Comment by cermak_rd Tuesday, Feb 22, 11 @ 11:53 am
===Discuss===
The primary driver of government costs, and deficits, is health care. The costs are not mainly due to expanding programs, not due to new programs, just due to providing health care to employees, retirees and poor people. You might have read something about the skyrocketing cost of healthcare, it’s been in the papers. Since 1990.
How do you roll back healthcare inflation Cinci? If it was as simple as turning back the budget clock to 2005, don’t you think we’d have tackled it by now?
Comment by 47th Ward Tuesday, Feb 22, 11 @ 2:16 pm
While healthcare costs may be a primary driver, it is not the sole reason for state budget deficits. Leaving aside the poor for a minute (we can debate who should be eligible and what “poor” is at a later date), you point out two other major reasons for deficits: employee and retiree benefits. Plus there are any number of big ticket, high risk “investments” (Rich will see this coming: high-speed rail) that state government has undertaken
If all of these items are sacrosanct, the budget can never be balanced no matter what the tax rate.
Comment by Cincinnatus Tuesday, Feb 22, 11 @ 2:36 pm
Cinci, I love your example of high speed rail as the “big ticket, high risk” investment. It’s another standard GOP line, mocking the concept of hsr, despite the many real benefits. In fact, the overwhelming majority of capital invested in high speed rail will come from the feds, to support Amtrak, which doesn’t cost the state much in terms of our annual operating budget either. So cut the big ticket (but no-risk) program the feds are mostly paying for, save a few peanuts that won’t make a dent in the deficit, and lose the construction jobs that would be created and the taxes on the income that would follow. Yeah, that’s a good plan, and even better, we’ll lag further behind our global competitors while we increase our reliance on oil from unstable countries.
And another fav of the GOP is to repeal the national health insurance law, which if you are successful, will guarantee ever-escalating health care costs.
I’ve had my fill of “conservative” ideas. The market works for some of us and government is there for the rest of us. That’s America, that’s why we’re exceptional.
Get back to me when the lines on your graph merge and you have an idea that works in both theory and reality.
Comment by 47th Ward Tuesday, Feb 22, 11 @ 2:57 pm
C’mon 47th, liberals are always challenging conservative to outline some method of cutting expenses in government (at whatever level). I propose a serious way of looking at things: were the level of goods and services provided by government at the expense of the taxpayers adequate at levels of some past year. Maybe yes, maybe no. At least I provide a starting point to scope out the problem.
On the other hand, we have Pat Quinn and his supporters who think raising taxes 67%, borrowing $8.5B and raising spending $2B while still running a deficit with no plan to pay back the balloon payment on the loan as a serious, and perhaps only, defensible position.
Somehow methinks the solution lies somewhere in between.
BUT…
Every time someone says how would Republicans balance the budget, I say that the DEMOCRATS are in charge of all levels of state government (and until very recently the Federal government). You’re in charge. How are YOU going to fix it?
Comment by Cincinnatus Tuesday, Feb 22, 11 @ 3:09 pm
You mention retiree benefits. I’d be curious as to how much this is and how it is we paid for it in the past. Even though people are living longer now, they change jobs a lot more so I would imagine that there are people who have paid in to the pension fund but never actually become eligible to receive anything. Unless the public sector has a lot lower incidence of job mobility, and if that is true then that alone is a fantastic cost saver. Training and retraining workers is an expensive part of having employees.
Comment by cermak_rd Tuesday, Feb 22, 11 @ 3:15 pm
We’ve raised the income tax, showing the courage that has been lacking in Illinois for more than a decade. We capped spending. We’re going to prudently borrow at a lower interest to pay the past due bills. As soon as Cross and Radogno tell us what they want in exchange for borrowing of course.
And we’re going to fully fund the capital bill to keep Illinoisans employed and contributing to the tax base. And we’re going to invest in education, which is the smartest, safest long-term investment a state can make since an educated workforce is the number one factor in economic development and educated workers pay more in taxes.
Again, open a newspaper or check out a blog sometime. These aren’t secret ideas, and they certainly aren’t the greatest ideas in the world. But the simple fact remains, the Democrats have put forward a solution to Illinois’s fiscal disaster and passed most of it. We’re still waiting for the IL GOP to tell us what they want in exchange for a couple of votes to borrow at less cost to taxpayers than simply doing nothing.
Comment by 47th Ward Tuesday, Feb 22, 11 @ 3:18 pm
Maybe, 47th, the GOP should just walk out and live in WI the next time the dems come up with some hairbrained scheme to massage our budget horror. From what I hear in this blog that is a reasonable way to protect our minority rights here in the Illinois.
They would swap houses with the dems from Madison.
Comment by dupage dan Tuesday, Feb 22, 11 @ 3:33 pm
47th,
What is the current overall fiscal year deficit, and what are those deficit projections based on realistic revenue growth in the out years?
Comment by Cincinnatus Tuesday, Feb 22, 11 @ 3:44 pm
Dan, I suggested that last week.
Cinci, use the Google. Or just make up some numbers. You’re not persuaded by facts and reason, so why should I bother.
As far as making little cuts (which in two years the IL House Republicans have not offered any), if you search through the budget and can find a way to save $1 million, you’re off to a good start.
Now do it again 6,000 times and the problem is solved. Good luck. I’ll wait here while you try.
Comment by 47th Ward Tuesday, Feb 22, 11 @ 3:50 pm
Well, 47th, I can’t figure out if 2011 is $6B or $12B short. Seems to depend on your accounting method and what projections you use. Similar numbers for 2012. I believe these deficits are being created under DEMOCRAT control, what are they doing about it? Where does Quinn propose to get the money for the loan payment balloon payment?
Why should I or any Republican propose any budget. What practical and/or political purpose would be advanced. None. It’s the Democrat’s mess, and until sufficient Republicans are elected, the Democrats own it, breath it, and need to fix it.
Your anger at me is nothing more than a reflection of the failure of your party.
Comment by Cincinnatus Tuesday, Feb 22, 11 @ 4:07 pm
Cinci, I’m not angry with you, not in the least. I just find your arguments so tired and unconvincing that I am compelled to respond, perhaps in like fashion.
PS: The proper term is DEMOCRATIC control. A Democrat is a noun, Democratic is an adjective.
Comment by 47th Ward Tuesday, Feb 22, 11 @ 4:23 pm
“Why should I or any Republican propose any budget.”
This is getting hilariously funny.
Comment by MikeMacD Tuesday, Feb 22, 11 @ 4:37 pm
–”Why should I or any Republican propose any budget.”–
Apparently, in Illinois, that’s a long-term
GOP strategy. It wins elections (not that you would notice).
Better to leave it to the Whigs. Or No-Nothings. They’re much more relevant.
Comment by wordslinger Tuesday, Feb 22, 11 @ 7:25 pm