The state of Illinois is in big trouble. In fact, they’re facing an economic collapse. Some pundits are calling them “The Venezuela of the United States.”
They owe $14,711,351,943.90 in overdue bills. This does not count their day-to-day operating expenses – this is money that should have already been paid out, but wasn’t. Nearly 15 BILLION DOLLARS.
Like every person who has ever spent more than they’re making with no regard for budget, things are starting to go downhill in an ever-growing avalanche of disasters. Here are 7 things you need to know about what’s going on in Illinois and how they got to this crisis point.
1) Illinois is about to be the first state ever to have their credit downgraded to “junk.”
They’re about to become the first state ever to see their credit downgraded by Standard & Poor to “junk status,” which means they are a terrible credit risk. If they’re even able to borrow money, it will be at much higher interest rates than ever before. This means that anything they spend on infrastructure (or refinancing their existing debt) will cost much more. And guess who will foot the bill for that? The taxpayers.
To put this in perspective, even Michigan, with all of the issues in Detroit, has not been downgraded to junk status. That’s how much worse things are in Illinois.
Illinois has a tab of unpaid bills worth $15 billion, equivalent to 40% of its operating budget. The state’s backlog of financial obligations will skyrocket to $28 billion by June 2019 without a deal, Moody’s predicted, which would rack up even more interest and penalties than what is already owed. Even if a deal is reached, state debt and taxpayer dues will both likely increase. (source)
2) They haven’t had a state budget in 3 years.
Let me compare this to a household again, yet, of course on a far grander scale. To figure out how to pay off crippling debt, you have to have a strict budget in place. You’ll need to slash expenditures where you can, increase income where you can, and do without some of the finer things. Pennies turn into dollars.
The trouble is, Illinois legislators haven’t passed a state budget in 3 years now.
Part of the issue is that the Democrat-led state Congress can’t come to an agreement with the Republican governor. (Something I think we can all relate to on a national level. Can we please look at this and figure out a way to get along in DC?) The July 1 fiscal year-end deadline has come and gone with no deal in place.
They’ve just been muddling along, not thinking about the big picture.
Without a budget, the state has continued to spend more than it brings in. That’s forced it to cover “core priority” payments first, including payroll, debt service and pensions that total about $1.85 billion a month. While those bills include some Medicaid-covered payments like health services for children and adults, the state has said there aren’t enough funds to include general payments to managed-care organizations as a top priority. (source)
Diana Rickert and Ted Dabrowski of the Illinois Policy Institute have some harsh criticism:
“Just because you don’t do something for two years doesn’t put you at a junk bond rating. That’s not the issue. The last two years are really a culmination of about three decades of mess,” Dabrowski says.
Dabrowski and Rickert place the blame at the feet of a Democratic party that at times in recent decades ran “unchecked” with a supermajority in the Illinois House and Senate. Legislation wasn’t passed when Democrats called all of the shots that would have alleviated the state’s growing pension problem or rein in escalating debt – aside from a temporary tax increase passed in 2010 that did not fully resolve the state’s problems.
And now that the supermajority is gone and Republican Gov. Bruce Rauner is in place to oppose Democratic House Speaker Michael Madigan, the negotiation of bills that could help the state’s debt situation has become complicated.
“[W]hen [Rauner] came in, he refused to sign on to what Madigan wanted, and it was really the first time someone had taken him on in decades, so that’s where this gridlock really started,” says Dabrowski. “So now, you get to where we are today, and you’ve got a pension system that’s eating up a quarter of the budget now. It’s eating into everything, from education to social services to higher ed to roads. And you have these unpaid bills that keep going up.” (source)
And despite this all, the state’s government still couldn’t come to an agreement.
3) A federal court ruling on Friday will force them to make payments of $600 million a month to catch up.
When no deal was struck, a federal judge in Chicago ordered the state to begin tackling the billions owed to Medicaid.
To take the situation from “horrific to catastrophic,” the state has been ordered to begin making payments of almost $600 million per month to catch up.
Judge Lefkow ordered the state to make $586 million in monthly payments (from the current $160 million) as well as another $2 billion toward a $3 billion backlog of payments – a $167 million increase in monthly outlays – the state owes to managed care organizations that process payments to providers.
While it is no secret that as part of its collapse into the financial abyss, Illinois has accumulated $15 billion in unpaid bills, the state’s Medicaid recipients had had enough, and went to court asking a judge to order the state to speed up its payments. On Friday, the court ruled in their favor (source)
Incidentally, states cannot file for bankruptcy.
4) So instead of a budget, state Congress approved a 32% income tax increase.
Hey, that money has to come from somewhere, right?
You’d think that all the revenue made from the excruciating toll roads through Chicago would help with this deficit, but you’ d be wrong. The tollway is owned by the city of Chicago but has been leased for 99 years to the Skyway Concession Company, a group of investors from Spain and Australia.
That’s right. The toll money doesn’t go to “build better roads” or help with the infrastructure. It is strictly for the profit of foreign countries, who are now apparently trying to sell the agreement to someone else. (source)
So, it will fall to the taxpayers to foot the bill. No surprises there.
In fact, the Illinois House of Representatives just voted to raise taxes by an astonishing 32% in the largest tax increase in history.
Democratic Rep. Larry Walsh Jr. of Joliet said the vote was a huge leap forward to putting the state on a track to financial stability, but it wasn’t easy, especially for his Republican colleagues who voted for the increase.
“It was a hard vote for each and every one of us,” Walsh said. “[But] it’s the fiscally responsible thing to do.” (source)
Actually, the fiscally responsible thing to do would have been to have passed a reasonable budget a few years back. But maybe I’m a stickler.
The governor has vowed to veto the increase unless it comes with a stipulation of a 4-year limit and a 4-year freeze on property taxes. Either way, it’s clear that the taxpayers are going to get screwed. We all know that temporary taxes are never actually temporary, and the income tax will affect people who don’t necessarily own property. So, thanks, but that isn’t really going to help much.
5) The workforce of Illinois is fleeing the state as fast as they can pack.
There are far fewer taxpayers to pay this extravagant increase, by the way. There appears to be a mass exodus as people flee.
And demographics aren’t exactly on the state’s side to bring in more government revenues. Temporary tax increases to help cover debt and pension payments expired at the end of 2014, and the number of workers employed throughout the state in May – contributing income taxes to the state’s coffers – was more than 125,000 smaller than it was 10 years ago.
“Illinois has shrunk three years in a row. We used to have 26 representatives in Congress. We’re predicted to have 16 in a couple of years. That’s what’s happening to the population,” says Ted Dabrowski, vice president of policy and a spokesman at the Illinois Policy Institute.
The institute found the size of the Illinois labor force has contracted by 230,000 since the Great Recession hit in 2007. And data from The Pew Charitable Trusts suggests personal income growth in Illinois has been among the worst in the nation in recent years. (source)
This means that they could increase the tax burden to 50% and still get less money than they would have back when fixing this deficit was still a possibility.
A study by Atlas, the moving company, summed it up:
… 60 percent of moves in Illinois were among people headed out of a state wracked by billions in unpaid bills, no approved state budget, a sluggish employment environment and, in the case of Chicago, soaring crime rates. (source)
Incidentally, the population of Chicago shrunk last year more than any other city in the United States. (source)
Even before this current tax hike, people were fleeing as fast as they could. In May, Michael Lucci, Vice President of Policy, wrote:
According to a Paul Simon Public Policy Institute poll released in October 2016, 47 percent of Illinoisans surveyed said they want to leave the state. And taxes were the most commonly cited reason people gave for their desire to move.
And according to a recent poll commissioned by the Illinois Policy Institute, fewer than 1 in 3 likely Illinois voters support raising taxes to balance the state’s books. Yet the General Assembly continues to insist on tax hikes as the way to close the budget deficit.
Illinoisans are taxed enough already, and the state will continue to lose residents until it reins in taxes and adopts policies to support more jobs growth.
The General Assembly has run a losing strategy for years: raising taxes and failing to reform spending drivers. This has not brought prosperity or opportunity to the state, and will not do so over the longer term, either.
Illinois will not become sustainable again until the state implements reforms so that the government, its bureaucracies and special interests serve the people rather than the other way around. (source)
6) There’s more. A quarter of a trillion dollars in pensions will be due SOON.
You read that right. A quarter of a trillion dollars. $251 billion in pension payments.
First let me clarify that the people expecting their pension payments aren’t the bad guys here. They are expecting money that was promised to them as a perk of whatever job they happened to be working. The issue is that far more was promised than could be delivered in an unstructured, pie-in-the-sky system.
Eileen Norcross, a senior research fellow at George Mason University’s Mercatus Center explains why this is so bad for the state (beyond the obvious.)
…the situation in Illinois is further complicated by a provision in its state constitution that essentially prevents the government from doing anything that would result in “diminished or impaired” pensions.
“That pretty much ties their hands. They can’t change benefit formulas going forward for their employees,” she says. “They’ve built a house that is so rigid on very weak foundation, so there’s no give. It’s been built by politics and fiscal institutions that are really poor.” (source)
The pension issue has been building for decades.
The most glaring evidence is the enormous pension crisis. Rather than dealing with the problem, Illinois continued to reward the state’s powerful unions with more generous benefits.
The problem festered for so long that Moody’s estimates Illinois has unfunded pension liabilities totaling $251 billion. To put that into context, that’s more than the combined market value of four major Illinois companies: Boeing (), Caterpillar ( ), United Continental ( ) and Allstate ( ).
“The massive pension liability results from a chronic tendency to defer difficult decisions,” said Ted Hampton, who as a senior credit officer at Moody’s will help decide whether to downgrade Illinois into junk.
Hampton said Illinois treated the pension fund as a “financial cushion” that could be relied on to provide fiscal relief. He also pointed to a tendency to delay paying bills and chronically underestimate spending needs. (source)
There was one missed opportunity that could have averted this disaster.
Experts said the turning point may have been 1995. At that point, Illinois already had one of the worst-funded pension systems in the United States. State leaders took action by adopting a 50-year plan to get the pension plans 90% funded.
But that plan turned out to be badly flawed. The initial contributions were too modest, and Illinois didn’t make the politically difficult choices of tax hikes or spending cuts to get the budget on a sustainable path.
“It was one of the greatest pieces of chicanery ever pulled by a political system,” said Ralph Martire, executive director at the Center for Tax and Budget Accountability, a think tank that promotes social and economic justice.
Instead of reform, the compromise “codified the practice of underfunding the pension” and “intentionally” grew the shortfall by $45 billion, Martire said. (source)
During the most recent credit downgrade of the state, they were warned about this issue.
Moody’s issued a warning about the growth in the state’s massive pension debt. According to Moody’s calculations, Illinois owes over $250 billion in pension debt, far higher than the $130 billion the state says it owes. The agency stated:
“The downgrade to Baa3 for Illinois’ GO bonds is consistent with the state’s intensifying pressure from pension liabilities; by our calculation, the state’s unfunded pension liability (Moody’s adjusted net pension liability, or ANPL) for its five major plans in aggregate grew 25% in the year ended June 30, 2016, to $251 billion.” (source)
So, the condensed version is this: The government promised pensions to union members for decades, but the member’s contributions were too small to cover the payouts. Now that it’s time to start paying all of these people the monthly payments they were guaranteed for their retirement, the money must come out of the state budget because it was never put aside in the first place.
7) Here’s where the cuts are projected to happen.
Meanwhile, in what is arguably the most stressful job in Illinois, the state comptroller is trying to keep Illinois afloat.
Illinois Comptroller Susana Mendoza has described the state as being in “massive crisis mode” as she attempts to prioritize which bills get paid in absence of a budget plan. Earlier this month, she warned that a slew of recent court orders mandating that the state pay certain debt holders will completely exhaust the state’s discretionary spending, which includes tax dollars typically funneled to, among other things, domestic violence shelters and ambulance services. (source)
So let’s be perfectly clear:
At the current rate and with the new federal ruling, they’re going to run out of money in August. Next month.
Here are some of the cuts that have been mentioned:
- Ambulance services
- Domestic violence shelters
- State employee’s paychecks
Interestingly, no cuts to congressional salaries and perks were mentioned. I’m sure they’ll just volunteer to do that.
What should you do if you live in Illinois?
The obvious advice is to move out of the state if you can.
However, I completely understand that leaving the state isn’t an option for everyone. We get tied to places through homes that won’t sell, family members for whom we’re responsible, good jobs that are increasingly scarce, and a variety of other reasons. To say, “Just move” is to trivialize a massive issue. It’s like addressing only the toenail when an entire elephant is standing on top of you.
Here are some tips that could help you weather the storm if you’re stuck in a place with a crumbling economy:
- Work on reducing your fixed expenses.
- Build a stockpile of food and other preps.
- Work on self-reliant skills like gardening and preserving food.
- Put as much money back for a rainy day as you can.
- Do not depend on ANY pensions or promises made by the government. I’m sure at the time the promises were made that the intention to pay was there, but reality says you probably won’t get that money. Make a Plan B immediately.
- Embrace frugality like it’s your job.
- Make radical economic changes in your lifestyle now, while you can still manage to do so.
That disaster we’ve all been preparing for? In Illinois, it’s almost here.
Article posted with permission from Daisy LutherDon't forget to Like Freedom Outpost on Facebook, Google Plus, & Twitter. You can also get Freedom Outpost delivered to your Amazon Kindle device here.