Fiscal fantasy and fraud in Illinois

The Great State of Illinois is going to have to come up with $300 million it doesn't have in order to bail out a state program that made unrealistic promises based on fantasies.  But the budget that its governor has come up with to provide those funds is based on even more unrealistic fantasies.  Both moves would raise the prospect of prosecution for fraud, had they been advanced by a private corporation responsible to shareholders.  But we're talking about the state of Illinois, where imprisoned former governors are not at all uncommon, but fantasy predictions are never the reason.

Joe Cahill of Crain's Chicago Business explains the bailout:

It took a while, but Illinois legislators, who ought to know something about financial holes, seem prepared to apply that well-known principle the state's underfunded prepaid college tuition program.  College Illinois has $300 million less than it needs to pay future tuition at Illinois universities for students whose parents bought prepaid contracts in the mistaken belief they were guaranteed by the state.

In fact, the state has no legally enforceable obligation to cover the gap between College Illinois' promises and its cash.  Yet marketing materials from the Illinois Student Assistance Commission, which administers College Illinois, created the false impression that Illinois stands behind the contracts.

As my colleague Steve Daniels reported recently, bills pending before the Illinois House and Senate would oblige the state to honor College Illinois contracts.  Both bills provide that "the full faith and credit of the State of Illinois is pledged for the punctual payment of such obligations."

Another $300 million IOU is exactly what cash-strapped Illinois doesn't need.  Yet the moral case for covering the College Illinois contracts is indisputable.

A private entity selling an insurance policy, an annuity, or any other financial instrument that could not deliver its promised benefits would be in deep trouble if negligence in making its financial calculations could be proved.  If it created the impression that it was promising something that it actually was not guaranteeing, there might also be prosecution.

But the big-hearted legislators in Springfield are prepared to find the money to make good on those implied promises — from somewhere to be determined, because, as it turns out, the budget to be submitted to the Legislature is full of absurd assumptions, based on the tiny amount of information so far provided by the governor, Democrat Jay Pritzker.  The Illinois Policy Institute reports:

After a full week of withholding details about the math behind his graduated income tax plan, the Pritzker administration on March 15 sent some of their assumptions to the Illinois Policy Institute in a one-page summary.

While still refusing to release key details, Pritzker did reveal some of the politicized math he used to make his plan an easier sell.  Specifically, he relies on overly optimistic assumptions about the state's growth, which means the governor will have to enact higher taxes than he proposed in order to generate his desired revenue.

Pritzker's political math

Because Pritzker's income tax plan would not go into effect until 2021 at the earliest, his administration makes assumptions about how much Illinois incomes will grow between 2016 (the most recent year of publicly available income tax return data) and 2021.  If Pritzker assumes that growth is extraordinarily high, he can claim his tax plan raises more money than if he uses a more reasonable estimate and thus promise modest tax cuts.  He can also claim he'll have a smaller deficit to paper over.

The limited release from Pritzker's office shows that's exactly what he did.

Pritzker's plan assumes Illinois will see average annual income growth of 3.61 percent.  His administration claims this "conservative" estimate is both consistent with the state's recent performance and accounts for a one-year stagnation in income growth to account for a slowing economy.  But Pritzker is wrong on both counts.

According to the IRS, the average annual growth rate of Illinois' adjusted gross income over the past five years of available data has been 3.37 percent, meaning the administration fails to correctly account for the past.  The governor also alleges that a one-year stagnation of income growth in his assumption is "conservative" and accounts for an economic slowdown. But Illinois' total income has not only stagnated, but declined in two out of the past four years on record.

Not only are the governor's assumptions wrong given the state's recent performance (which he states are the basis for his claims), but they are wrong given the anticipated growth trajectory of Illinois and the U.S. economy as a whole.  The governor's estimates don't account for the possibility of a slowdown or even a recession, which two-thirds of business economists in the U.S. expect before 2021, according to polling from the National Association for Business Economics. In the likely event of a recession, the revenue generated by Pritzker's plan is bound to come up short, meaning the governor will have to raise rates to generate his desired revenue.

When he was governor of Arkansas, Bill Clinton used to joke that his state was grateful to Mississippi for preventing Arkansas from being in last place on lists of state performance for things like income and education.  As a Californian, I am similarly grateful that Illinois — at least in a few dimensions — can arguably be more irresponsible than the Sacramento cartel.

Hat tip: Peter von Buol