J. Fred Giertz has been on the faculty of the Institute of Government and Public Affairs and a University of Illinois professor of economics since 1980. His major research interests are public finance and regional economic development. He specializes in state and local taxation and follows the Illinois economy closely as the monthly analyst of the U of I Flash Economic Index. He was interviewed by Business and Law Editor Mark Reutter.
Since the end of the 2001 national recession, the Illinois economy has slowly picked up momentum. How did 2005 stack up in terms of growth, and what do you forecast for the new year?
The Illinois economy performed well in 2005, making up some of the ground that was lost during the 2001 recession. While the 2001 recession was relatively mild nationally, Illinois was hit harder by the downturn. Illinois is still a prosperous state, but per capita income fell from 109 percent of the national average in the late 1990s to 104 percent in 2004. In 2005, Illinois made up some of the lost ground, but not all of it. The state unemployment rate is still above the national average. This suggests that the state still has much to do to regain its old margin of superiority. That said, 2006 will likely be a year of continued moderate, sustainable growth. Unfortunately, this growth will generate little satisfaction or sense of security for Illinois citizens, given their understandable concerns about high energy prices and the continuing decline of the manufacturing sector.
Does inflation pose a problem for the economy?
Inflation is always a concern, but it is a back-burner issue right now. There is widespread agreement that the Federal Reserve Bank has performed well, and there is every indication that this will continue when Ben Bernanke replaces Alan Greenspan as chairman of the Fed’s board of governors.
You have written that, despite an improving economy, “the Illinois state budget is still seriously out of balance.” What are the root causes of the state’s problems?
The state never responsibly addressed the problems created by the precipitous decline in revenues after the 2001 recession. The state experienced the largest percentage reduction in revenues since the Great Depression in fiscal years 2002 and 2003. This unprecedented problem called for a response of fiscal discipline involving some combination of permanent revenue increases and/or painful reductions in the rate of growth of state spending. The state did neither. Spending was not cut, while permanent revenues were not increased. Instead, the state has used a number of short-term expedients (such as borrowing, fund transfers, and pension underfunding) to stumble along, while not dealing with the underlying long-term fiscal imbalance.
If you could pass one piece of legislation in the General Assembly this year, what would it be?
There is no easy solution to the state’s fiscal problems, especially a solution that is politically viable. However, there is one piece of “low-hanging fruit” that should be investigated. Part of the so-called pension reform bill that was approved last year entailed a substantial underfunding of the state’s various pension systems in fiscal 2006 and 2007. This underfunding will cost the state billions of dollars in the long run. Given the underfunding, a better plan would be for the state to issue bonds to make up the shortfall in contributions. Paying interest on the bonds in the 5 percent range, while the pension fund portfolios earn an expected 8 percent return, is clearly a winner, although not without some risk. Expected savings in present-value terms of such a plan would be $1.5 to $2 billion. Such a borrowing plan, however, requires a 60 percent majority in the General Assembly, which means that Democrats and Republicans must cooperate in its passage.
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