Our sorry state
Tuesday, Sep 18, 2018 - Posted by Rich Miller
* Both Moody’s and S&P Global Ratings have conducted “stress tests” of all 50 state budgets in the event of a recession. Here’s Brian Mackey’s report on the S&P test…
“When you look at all the states, the median level of fixed costs is 12 percent of a state’s budget,” [S&P’s Gabriel Petek] says. “But in Illinois, those three items” — pensions, retiree health care, and debt service — “come to 31 percent of the state’s budget. So that means they have less room, less discretionary budget capacity, to work with.” […[
“In the event of a downturn the state has this combination of reduced budget flexibility because of the high fixed costs, and no budget reserves to cushion the impact,” Petek says.
He says while Illinois’ financial picture has improved since the budget stalemate, lawmakers haven’t done enough.
“There hasn’t really been a focus on it — among the policymakers that we’re aware of — to tackle what remains of the structural budget deficit or build a budget reserve or how to bring unpaid bills to a lower level,” he says.
He got that right. Boy, did he ever.
The S&P report is here. According to its stress test, Illinois would have just 1 percent of budget reserves to deal with a downturn and a 9 percent revenue shortfall in a moderate recession (10 percent in a more serious recession) and a 3 percent increase in Medicaid expenses.
S&P did claim that Illinois’ flat tax insulated the state better than states with graduated tax rates, which is about the best argument for a flat tax I’ve seen.
* As I told subscribers today, the Moody’s report is more specific because it provides actual dollar amounts (click here). That 9.3 percent revenue shortfall in a moderate (or “normal”) recession translates into $3.35 billion. Moody’s projects an increase of $732 million (6 percent) in Medicaid spending, for a total shortfall of $4.1 billion.
Moody’s projects a 16.2 revenue shortfall during a “severe” recession scenario, or $5.8 billion. Medicaid spending will rise by $977 million for a total hit of $6.78 billion.
* Also from the Moody’s report…
There is also a greater number of states that are significantly unprepared for even a small downturn, with 17 states holding far less funds than they need, compared with 15 in 2017, Moody’s said.
Those states, in order of least-prepared, are Louisiana, Oklahoma, North Dakota, New Jersey, Montana, Kentucky, Virginia, Missouri, Arizona, Illinois, Pennsylvania, Wisconsin, Kansas, New Hampshire, Mississippi, Michigan and Arkansas.
* Meanwhile…
The number of people in Illinois with health insurance dropped last year for the first time since the Affordable Care Act took effect.
The uninsured rate for non-seniors grew to almost 8 percent and more than 841,000 children and adults are without coverage in Illinois.
[Katie Buitrago at the Heartland Alliance] says policy changes are to blame.
“This increase in the uninsured rate in Illinois shows how policy changes leading up to 2017 that cutoff payments to insurers and canceled Affordable Care Act marketing had a big impact on enrollment.”
* Related…
* Moody’s: New Illinois Laws Targeting $8 Billion Bill Backlog Will Help, But Won’t Solve, On-Time Payment Challenges: “To fully eliminate the backlog without resorting to non-recurring tactics such as further bonding, Illinois would have to do something the new laws do not require – achieve budget surpluses over the course of several years,” said Ted Hampton, Vice President of Moody’s and lead author of the report.
* States’ Reliance On Income Taxes Risky, S&P Says: The S&P report said even as the current economy continues to reach new heights and remains healthy on various fronts, states need to be wary of the fiscal effects of another recession on their coffers. With growing reliance on personal income tax, states are susceptible to swings in the markets
* S&P: Growing pension costs to force cities to raise taxes, cut services
- Lucky Pierre - Tuesday, Sep 18, 18 @ 11:42 am:
“There hasn’t really been a focus on it — among the policymakers that we’re aware of — to tackle what remains of the structural budget deficit or build a budget reserve or how to bring unpaid bills to a lower level,” he says.
Who would have thought just permanently raising income taxes 32% with zero reforms would not fix the problem?
- City Zen - Tuesday, Sep 18, 18 @ 11:44 am:
It would appear even the bulliest of bull markets cannot save us.
- Rich Miller - Tuesday, Sep 18, 18 @ 11:46 am:
LP, there’s not a word in there about “right to work.”
- VanillaMan - Tuesday, Sep 18, 18 @ 11:48 am:
Back in 2003 I noted that Illinois didn’t rebound after the Dotcom bust in 2000. We’ve never been positioned well to ride any economic wave since then. So the last thing we needed was Rauner setting Illinois back deliberately.
But he happened. The pension situation is a structural problem that will resolve itself when Boomers meet their maker. 20 years of big pension costs which needed to have been offramped back when Edgar created it. You can’t destroy contract law or our own constitution over it. Pay it and limp on.
But Illinois stopped growing at a pace to pay for the governments we have. Rauner wrecked our universities, preventing the next generation of Illinoisans from moving here, or even staying here. Our infrastructure is not good.
We need to rebuild. We need to dump the past. We need to get lean. Or we will keep limping along. We need to reform. We need a pro-business government.
But we got liberal single party governing so that’s not happening.
- Responsa - Tuesday, Sep 18, 18 @ 12:12 pm:
I hope that dealing realistically with this type of existential situation is the type economic education Mr. Biss’ Rust Belt Rising plans to focus on. Someone should ask him.
- wordslinger - Tuesday, Sep 18, 18 @ 12:18 pm:
—Those states, in order of least-prepared, are Louisiana, Oklahoma, North Dakota,…–
Someone bet on $100+ for a barrel of oil as far as the eye can see.
- thechampaignlife - Tuesday, Sep 18, 18 @ 1:15 pm:
Forget a progressive tax, just increase the flat rate and the personal exemptions. If you adopt the formula that is used for federal student loans (10% of income above 150% FPL), the tax for a 4 person household with median income would drop from $2500 to $2155.
- RNUG - Tuesday, Sep 18, 18 @ 1:57 pm:
Well, at least Illinois isn’t in last place; there are 9 others worse off.
- Sportscenter - Tuesday, Sep 18, 18 @ 2:46 pm:
“for a total shortfall of $4.1 billion”
“for a total hit of $6.78 billion”
Funny, that is only SOME of the damage to be caused by a recession. The pension funds will drop in value by 20-30% overnight meaning the state/county/city will have to dump billions more into the funds immediately.
So to rephrase Moody:
Case A: for a total shortfall of ~$6-7 billion
Case B: for a total hit of ~$9-10 billion
- California Guy - Tuesday, Sep 18, 18 @ 3:05 pm:
Going to be interesting to see how the next recession plays out. Lots of protests. That will really kick off the labor vs taxpayers battle.
- Anonymous - Tuesday, Sep 18, 18 @ 3:19 pm:
With all the doom and gloom reports of the financial state of ILlinois, I’d say it’s about time we stop whining and propose some remedy. We know the pension debt won’t disappear — it has to be paid. So after 8 years of hearing about the hysteria and numerous count decisions affirming the pension clause, what next?
It’s as if the state is paralyzed but keeps on whining about it.
- BlueDogDem - Tuesday, Sep 18, 18 @ 3:29 pm:
Rauner may win by losing.
- Ano - Tuesday, Sep 18, 18 @ 4:04 pm:
Labor vs taxpayers battle? What are you talking about? People paid with public funds pay the same taxes everyone else pays! Enough of that! I guess “labor” should get a discount off their taxes……their own taxes are paying their salaries.
- downstate hack - Tuesday, Sep 18, 18 @ 7:11 pm:
Economic disaster, yet the voters are going to elect the same tax raising democrats to fix the problems they created and exasperate.