Is Illinois on the verge of a financial disaster, as its own treasurer has warned?
J. Fred Giertz is a University of Illinois professor of economics and member of the Institute of Government and Public Affairs at Illinois. He discusses the state's structural deficit in an interview with News Bureau Business and Law editor Phil Ciciora.
Should the state of Illinois "restructure" its existing debt through the sale of bonds, or should we heed Treasurer Dan Rutherford's call on a freeze in spending and an end to borrowing?
It all depends on how it's done. The real question is, what do you think the state of Illinois would do with that money?
If funds were borrowed to consolidate our debt with a clear plan to repay the debt over a relatively short period with the state's increased tax receipts, it would make a lot of sense.
I think many people rightly don't have a lot of trust in the state. But if we had a responsible state government that could commit itself to the long-term, it would make a lot of sense to borrow money.
We had a big increase in taxes this year and yet we still have a large backlog of bills. In fact, some businesses are a year or two behind in getting their money from the state. So if you had the discipline to make responsible long-term decisions, the best thing to do would be borrow money now, pay off the bills we owe, and then use future tax money to pay off the bonds over the next year or two and get up to date in the payment cycle.
The fear, though, is that the state will borrow money intending to address the unpaid bills and then spend the additional tax revenue on other things, and we'll have a situation where we've increased our spending but still have to pay off the bonds.
For the first time in many years, the General Assembly has determined how much they have to spend and then spent that amount. So the state has been a little bit more responsible since the passage of the tax increase. In the past, the General Assembly always spent what they wanted to, and then resorted to financial gimmickry to cover up the deficit. And for good or for ill, they seem to be interested in doing something about the pension problem.
Is it a good idea for the state treasurer to badmouth the state to the bond market?
It may help the treasurer's short-term credibility, but it will only hurt the state in the long-term. It's not the kind of threat that a reasonable person should be making.
When we borrow money, bondholders are the first persons to be repaid from tax money. Even though the state has been doing a lot of dubious things, bondholders still believe they're going to be paid. Right now, the state could borrow money at rates higher than the lowest rates but still at a very reasonable rate, so that means the bond market has some confidence in us.
Editorial pages throughout the state have suggested that Springfield drastically cut spending and reform pensions. Will that work?
If you had asked me a year ago, I would have said we have both a spending and a revenue problem. But since the big tax increase, we have some additional revenue, so now it's more a matter of dealing with the spending side, which means finding ways to reduce the rate of growth in spending. Part of that may be pensions, but it will mostly be finding ways to get all the revenue they can.
All of these problems exist because we've been underfunding the pension system to pay for other things. So we were spending more money than we should have been. Instead of borrowing money like the federal government does, we were underfunding the pensions.
Just like in the federal government, if you keep doing that for too long, it comes back to haunt you. Well, the state has done it for a long time now, making our pension problem very severe because we've lost what the payments would have been. We've also lost what we would have earned had we invested those payments over the years.
I've always argued that pensions should be separated out as a cause of the problem because they are more problematic with the constitutional obligations that they carry with them. So we can't focus too much on the problems with the pension system; we need to focus on overall spending.