Illinois is teetering on bankruptcy and other states are not far behind, largely due to unfunded pension liabilities; but there are solutions. The Federal Reserve could do a round of “QE for Munis.” Or the state could turn its sizable pension fund into a self-sustaining public bank.
Illinois is insolvent, unable to pay its bills. According to Moody’s, the state has $15 billion in unpaid bills and $251 billion in unfunded liabilities. Of these, $119 billion are tied to shortfalls in the state’s pension program. On July 6, 2017, for the first time in two years, the state finally passed a budget, after lawmakers overrode the governor’s veto on raising taxes. But they used massive tax hikes to do it – a 32% increase in state income taxes and 33% increase in state corporate taxes – and still Illinois’ new budget generates only $5 billion, not nearly enough to cover its $15 billion deficit.
Adding to its budget woes, the state is being considered by Moody’s for a credit downgrade, which means its borrowing costs could shoot up. Several other states are in nearly as bad shape, with Kentucky, New Jersey, Arizona and Connecticut topping the list. U.S. public pensions are underfunded by at least $1.8 trillion and probably more, according to expert estimates. They are paying out more than they are taking in, and they are falling short on their projected returns. Most funds aim for about a 7.5% return, but they barely made 1.5% last year.
If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route. The state could follow the lead of Detroit and cut its public pension funds, but Illinois has a constitutional provision forbidding that as well. It could follow Detroit in privatizing public utilities (notably water), but that would drive consumer utility prices through the roof. And taxes have been raised about as far as the legislature can be pushed to go.
The state cannot meet its budget because the tax base has shrunk. The economy has shrunk and so has the money supply, triggered by the 2008 banking crisis. Jobs were lost, homes were foreclosed on, and businesses and people quit borrowing, either because they were “all borrowed up” and could not go further into debt or, in the case of businesses, because they did not have sufficient customer demand to warrant business expansion. And today, virtually the entire circulating money supply is created when banks make loans When loans are paid down and new loans are not taken out, the money supply shrinks. What to do?
Saving Illinois: Getting More Bang for the State’s Bucks
Illinois is teetering on bankruptcy and other states are not far behind, largely due to unfunded pension liabilities; but there are solutions. The Federal Reserve could do a round of “QE for Munis.” Or the state could turn its sizable pension fund into a self-sustaining public bank.
Illinois is insolvent, unable to pay its bills. According to Moody’s, the state has $15 billion in unpaid bills and $251 billion in unfunded liabilities. Of these, $119 billion are tied to shortfalls in the state’s pension program. On July 6, 2017, for the first time in two years, the state finally passed a budget, after lawmakers overrode the governor’s veto on raising taxes. But they used massive tax hikes to do it – a 32% increase in state income taxes and 33% increase in state corporate taxes – and still Illinois’ new budget generates only $5 billion, not nearly enough to cover its $15 billion deficit.
Adding to its budget woes, the state is being considered by Moody’s for a credit downgrade, which means its borrowing costs could shoot up. Several other states are in nearly as bad shape, with Kentucky, New Jersey, Arizona and Connecticut topping the list. U.S. public pensions are underfunded by at least $1.8 trillion and probably more, according to expert estimates. They are paying out more than they are taking in, and they are falling short on their projected returns. Most funds aim for about a 7.5% return, but they barely made 1.5% last year.
If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route. The state could follow the lead of Detroit and cut its public pension funds, but Illinois has a constitutional provision forbidding that as well. It could follow Detroit in privatizing public utilities (notably water), but that would drive consumer utility prices through the roof. And taxes have been raised about as far as the legislature can be pushed to go.
The state cannot meet its budget because the tax base has shrunk. The economy has shrunk and so has the money supply, triggered by the 2008 banking crisis. Jobs were lost, homes were foreclosed on, and businesses and people quit borrowing, either because they were “all borrowed up” and could not go further into debt or, in the case of businesses, because they did not have sufficient customer demand to warrant business expansion. And today, virtually the entire circulating money supply is created when banks make loans When loans are paid down and new loans are not taken out, the money supply shrinks. What to do?
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