Illinois Dems submit another fantasy budget amid talk of federal bailout

Democrats in the Illinois House have introduced a budget outline as the clock ticks toward fiscal Armageddon for the state.

The Dem budget left out just one tiny detail: they didn't include any specific proposals to pay for their $36.5-billion plan.

But the Democratic legislature is expected to vote today on proposals by Republican governor Bruce Rauner that he insists must be passed before he entertains any plans by the Democrats.  They include pension and unemployment compensation reform and property tax relief.

State Journal Register:

The House Democratic spending proposal falls between the $36 billion budget outlined by Republicans and the $37.3 billion version passed by Senate Democrats but not taken up in the House. It is substantially less than the estimated $39 billion the state is spending now without a budget because of court orders and automatic payments required by law.

"I'm not saying that this is perfect," Madigan said. "I think it goes a long way toward giving the state of Illinois a real solid spending plan that responds to the real needs of the state."

Rep. Greg Harris, D-Chicago, said the goal was to take into consideration ideas from the Senate Democrats, as well as Republicans, and "to accommodate requests by the governor." That meant, he said, living within the $37.3 billion spending limits Rauner had in his budget proposal.

The House Democratic plan calls for a 5 percent cut in state agency operations along with a 5 percent cut to higher education. The Republican plan cut higher education by 10 percent. Harris said there are no new programs in the House Democratic budget.

The plan will also allocate $1.85 billion to fully cover estimated state employee health insurance claims for the upcoming year. Unpaid claims from previous years would be addressed when a decision is made about dealing with a bill backlog surpassing $15 billion.

The House Democrats' plan fully funds pension and debt service payments. K-12 education would get a $350 million increase that would be funneled through a revamped school aid formula that Madigan wants Rauner to sign and that Rauner has said he will veto.

The plan would allocate another $65 million in additional money for school transportation reimbursements.

Harris said the House Democratic budget includes full funding for the Community Care Program that helps seniors stay in their homes and authorizes continued spending on road and other state construction projects that are in danger of shutting down if a budget isn't approved by Friday.

Harris would not discuss specifics of a tax hike to help balance the budget outside of saying it will "live within the confines of the Senate numbers." The Senate approved a $5.4 billion tax package, including a 35 percent increase in the personal income tax. Rauner wants that tax hike limited to four years. The Senate plan makes it permanent.

The Democrat budget does nothing to address the structural deficiencies that have placed the state in such dire fiscal straits.  Even if there had been a budget agreement the last two years, the state's fiscal situation would have continued to worsen, albeit less drastically than lawmakers find today. 

No matter how Democrats and Republicans crunch the numbers, the bottom line is that there isn't enough cash to pay for the state's obligations, much less discretionary spending on roads and schools.

With the two sides still far apart, talk is increasing that a federal bailout of the state will be necessary to avoid disaster.  Ike Brannon of the Weekly Standard shows why that would be a horrible idea, using the example of the Puerto Rican bankruptcy:

Puerto Rico's constitution explicitly declares that its general-obligation bondholders are to be paid ahead of all other obligations. This seemingly iron-clad promise was one reason why it could borrow money for so long at such low rates despite its deteriorating fiscal health. However, more than $2 billion in annual interest payments – 80 percent of what's due in 2017 – will now be forgone for at least the next five years, constitution be damned.

Illinois' constitution does not have such a promise to its bondholders, presumably because there is no mechanism for a state to default on its bonds, and none has done so since the Depression. However, Illinois' constitution does expressly prohibit the state from impairing promised benefits to either current or future pensioners.

If the federal government were to intervene in an Illinois budget crisis, it's likely that its bondholders will take a hit, but it is also likely that its rigid state pension protections and prohibition of progressive taxation would be on the table as well – both of which the state constitution expressly protects.

Such a scenario may not be too far away: The next recession-cum-stock market correction will cause the state's tax revenues – as well as its pension fund value – to fall precipitously, the latter probably to a point where no achievable rate of return on the remaining pension funds could achieve solvency. Such a development could make it impossible for the state to borrow money at any rate, and the federal government would be forced to intervene. Should that occur, it's a safe bet that everyone will share in the pain – taxpayers, bondholders, and public pensioners alike.

The best case for current and former state workers in such a scenario would be the pension reform bill invalidated by the State Supreme Court in 2015, which ended automatic cost of living increases, increased the retirement age and changed the determination of a worker's final salary for determining pension benefits. But it is easy to see pension adjustments going much further – perhaps via an ex post reduction of benefits of those who spiked their final salaries to boost pensions or a diminution of benefits for those with two or more state pensions.

And once the feds jettison the prohibition on progressive tax rates, Illinois will doubtless come to resemble New Jersey, with top marginal income tax rates approaching 10 percent.

The constitutional quirk that prevents any fiddling with the pension system for government employees will doom Illinois to insolvency unless it can be overcome.  Governor Rauner has tried several times to address the problem, but the courts have struck his proposals down.  In effect, the public employee unions have the state over a barrel and will fight tooth and nail to prevent pension reform – even if there is a fiscal calamity.  If there is, the unions will be comforted by the fact that their pensions will get top priority.

Congress won't touch a bailout without clear evidence that there is no other way to solve the crisis.  Since the impasse between the two parties is man-made, that is not likely to happen.  The state would have to exhaust all avenues to fix their own problems before the federal government would even entertain proposals for a bailout. 

The Democratic budget proposal is not serious because it doesn't include any way to pay for it.  It is a political document designed to take pressure off Democratic lawmakers and place it on the shoulders of the governor.  Until both sides cut out the posturing and get serious, nothing will be done to avert disaster.

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