Illinois Death Spiral

The Illinois pension fiasco continues to plague the state with embarrassment and near-fatal fiscal consequences. Late Monday, January 24, Governor Quinn confirmed that the Illinois State Pension System and state officials connected with it are subject to an SEC investigation.  According to Moody's Investor Service, the pension system is funded to only approximately 50% of the $136-billion liability.  Even that shortfall is likely understated; it is believed to be closer to $150 billion.  Furthermore, Moody's states that the underfunding is among the worst of states, resulting from frequently skipping contributions to the fund that were recommended by the actuaries.  

According to the Wall Street Journal, the SEC inquiry focuses on statements concerning an overhaul measure passed in 2010 meant to shore up the system, but which thus far has failed to achieve the objective.  Moody's went on to state that one issue being examined is the practice of taking future savings and treating them as current reductions in cost of the pension fund.  The factor that initially drove SEC involvement was the $3.7-billion bond fund due to be issued in the next few weeks.

So now, following the eleventh-hour stunning, stifling, and job-killing personal and business tax increases from the lame duck legislators, we learn of likely, but not at all surprising, improprieties from those in the state who manage the pension system.  What is even worse, we have a temporary tax increase plus a bond issue, defined as more debt obligations, that places only a Band-Aid on a gaping financial wound, deferring real reform of the underfunded and unsustainable state pension plan.  If 2011 showed a $13-billion budget shortfall, imagine what 2015 will look like.  With no reform of the pension plan such as lower benefits, later age of retirement, more working years, and increased employee contributions, the plan and the state will be further immersed in an ocean of red ink.

Speaking of job-killing measures, an obscure and unreported aspect of the lame duck tax hike on businesses in Illinois is the four-year moratorium on tax loss carry forwards.  Tax loss carry forwards have long been part of the accepted tax policy at both the federal and state level, and they contribute to the improvement in the business outlook for any company exiting a period of financial losses of the past.  This concept is an effort to level the cash flow and earnings of a company over the long term and encourage a business to grow and expand the workforce following a recession and past business losses.  Placing this tax relief on hold is not the way to grow private employment as we creep away from a recession.

In addition to the highly visible pension liabilities owing to underfunding, the state continues to spend on questionable programs that are seemingly cast in stone and not subject to critical evaluation, much like most government programs, and base line budgeting, where present spending levels become the holy and untouchable grail and the starting point for future allocations.  This Alfred E. Newman (of Mad Comics fame) "What, me worry?" mentality is responsible for the other $7.0-billion shortfall in the budget.

Imagine an enterprise that spends nearly 50% more than its revenue.  Well, that enterprise is Illinois, and the price we pay for irresponsible legislators is high business and personal income taxes, a diminishing population, unacceptably high unemployment and underemployment, and businesses either moving out or investing elsewhere -- and most certainly avoiding new investments in the state.  This scenario is actually a death spiral, and we are witnessing the same in New York, California, and, until the fresh thinking and reform from newly minted Governor Chris Christie, New Jersey.  When we add the irresponsible behavior of the legislators to the systemic corruption of the political leaders in the house and senate, an Illinois recovery is mythical and unachievable.

Unless a top-to-bottom reform of major state spending and commitments is called for and imposed, there is no hope -- not even from a gradual national economic recovery.  The damage inflicted from years of abuse, corruption, and irresponsible acts of past governors and legislative bodies is too severe and nearly irreversible.  Elections have not done the trick, as we continue to receive the government we vote for.  Therefore, let's end the misery now with a form of bankruptcy or court-supervised reorganization.  For years, we have elected and sent in the clowns who are responsible for our miserable status.  Now it is time for adult supervision.