Tuesday, June 8, 2010

Illinois Has No Political Will; Fiscally and Ethically Bankrupt

Moody's downgraded the State of Illinois credit rating for its General Obligation bonds from AA3 to A1 citing the State's continued inability over years to confront mounting debt with a balanced budget as required by Illinois Constitution.  This is one in a series of debt downgrades which will undoubtedly continue.  Moody's observed that Illinois is making only stop gap steps by borrowing against the tobacco settlement funds, an economically questionable tax amnesty program, and dependence on Federal stimulus funds which are running out.  Moody's also stated the economic recovery in Illinois will lag the Nation.  The Illinois political leadership in the House, Senate, and Executive has failed to solve large unfunded pension liabilities, exceptional retiree health benefits, and a chronic disparity between revenue and spending.  Moody's commented that the larger the deferral of action lasts the harder implementation of a solution will become.  Conservatively, the FY 2010 budget deficit will be approximately $13 billion, although I have long maintained it may be closer to $15 billion after all non-recurring funds are considered.  Illinois is fiscally bankrupt.

The primary response of the State of Illinois to the budget problems has been to not pay its bills to vendors, universities, local government, private social service agencies, and school systems.  Some have not been paid for over a year.  In fact, there are at least $5 billion in unpaid bills, which is twice the amount one year ago and almost ten (10) times the amount of unpaid bills in 2008 ($512 million).

The primary and absolute cause of this fiasco is the failure of the Democrat and Republican elected representatives and senators to work together and perform their governmental duties in the best interest of the people rather than political posturing and partisan combativeness aimed at no results.  Results, decisive political leadership, would require acceptance of votes.

The Governor submitted a budget which attempted to show the value of a 1% income tax increase for education with significant education cuts if not passed, examples of what 10% agency cuts might mean, and more borrowing to make pension fund payments as well as massive fund sweeps of dedicated funds.  All of this was artfully constructed for political effect, but in no way adequate in resolving the debt problems of Illinois government.  A prior proposal for a 2% income tax increase to a flat 5% was never seriously considered in 2009.  The Republican party has been adamant that operational cuts must be made but have failed to provide concrete cuts for consideration.  The opposing candidate for Governor has proposed, in the past, across the board 10% cuts but has equivocated recently as it is widely acknowledged such cuts would not be enough to solve the debt problem and could be destructive of the services government is expected to provide its citizens.  The current Governor has spoken of making cuts and cost savings but they have yet to materialize beyond words.

One bill passed in 2010 would raise judicial retirement ages from 55 to 67 after January 1 and reduce annual pensions from 85% of ending salary to 60% of social security wage base.  This is a significant cut, yet, the General Assembly was unable to make other pension reforms or increase retiree health premiums to levels still below the private sector.  The president of the Illinois Judges Association objected to the pension changes for judges appointed after January 1, 2011 and said judges need to provide for their families and educate their children.  Does this logically mean other, average, people do not need to provide for their families and educate their children?  The annual pension of a current associate judge making $165,588 would be $140,750.  If appointed after January 1, 2011 the annual pension at current salaries would drop to $64,080.  The average State employee (the regular joe --- not the special, politically connected elite) pension is approximately $20,000 according to AFSCME. 

Democrats control both houses of the General Assembly but refuse to take action by their majority only.  Republicans demand cuts but refuse to be associated with cuts affecting public services.  There have been demands for a forensic audit despite the estimate of a cost in excess of $60 million and the existence of State Auditor reports on all State agencies, departments, and boards.

Illinois pension systems are the most under funded state pensions in the United States in excess of 50% (almost 60%)  under funded.

Over 3000 State employees are exempt from the civil service and there has been an absolute refusal to assure these employees positions are evaluated for cost effectiveness and individual performance as any competent organization would do annually.

The sad fact is that, after so many years of incompetent and corrupt political administration have transpired, the debt problem cannot be resolved by cost savings, efficiencies, and spending cuts alone but also require tax increases.  This creates a situation which is unpalatable to both political parties as well as unions, local governments, public employees, retirees, and diverse public interest groups of all political spectrums.

Some civic organizations have proposed radically differing proposals.  The Center for Tax and Budget Accountability traditionally proposed a wide adoption of service taxes, because Illinois is a State which taxes few services, despite the disposable income regressive nature of sales and service taxes, but this year embraced a variety of income and sales taxes combined with some tax relief for lower income groups proposals.  The Illinois Policy Institute saw the solution in significant public sector labor and wage cuts and freezing spending for coming years.  The Civic Federation has consistently advocated the need for an income tax and significant pension system reform as well as full funding as well as detailing other budget proposals.
During the Democrat primary there was a good debate on flat rate income tax and a progressive income tax, but unfortunately most of it revolved around exemptions and taxing the "rich".  However, a progressive income tax would require a Constitutional amendment, which would mean a new Constitutional convention which would open up a wide variety of political controversies.  The flat rate increase was hobbled by high personal exemptions, an assumption of a four person family size, and no consideration of the regressive nature of sales taxes on disposable income.  Neither proposal would have generated enough money to solve pension funding or cover current spending.  When it comes to actual per capita taxation, Illinois is relatively low ranked compared to other states.

Illinois tax revenue is decreasing at serious levels during this period of financial crisis and fragile economic recovery.  Sales tax revenue alone is down $494 million for the year and all revenue is down $1.456 billion through May.

The budget as passed by the General Assembly is acknowledged to not be in balance.  Consequently, it is unconstitutional.  It does give the Governor authority to transfer funds, not restricted by Federal or State mandates, within the budget. 

And all of the politicians and the candidates want to wait until after the election.  Whoever wins will still face the same bureaucracy and fiscal problems.  How do you get qualified veterans hired with their legal preferences much less other qualified management personnel if all state job opening descriptions contain a requirement for specific knowledge and experience in specific department and program rules and regulations and statutes?  This limits hires to current state employees or the politically connected who get to bypass the process.  How can needed cuts be done if every special interest group with enough political campaign contribution clout and/or voting voices dissuade what needs to be professionally and reasonably done?

What needs to be done is obvious to any trained professional.  1) Make cuts based on top down evaluation of program spending and revenue efficiencies provided by an intergovernmental team which is independent of any department working out of the Governor's Office.  2) Make efficiency cuts based on cost savings and target possibilities to increase current revenue programs, such as uncollected or unenforced fines.  3) Professionally evaluate all exempt personnel and positions for competence, organizational necessity, and cost effectiveness.  4) Implement all State Auditor report recommendations and findings in past department, board, and agency audits and terminate those people who cannot get it done.  5)  Make a choice as to what programs are economically and socially safety net and growth necessary and which are not and prioritize each category and the programs within each category.  6) Increase the flat rate individual income tax to 5.5% from 3% with 1/2 percent directly deposited in the pension funds for an increase of $5.7 billion in general revenue and $1.425 billion for pensions; leave the personal exemptions unchanged but provide a sales tax credit for the 40 % lowest taxpayers.  7) Increase the corporate flat tax rate from 7.3% to 8.5% (same as Indiana) with 1/2% directly deposited in the pension funds.  8) Reform pension and retiree health benefits and ages consistent with actuarial needs and private sector costs; create a two tier system for current participants and new hires after reforms.  9) Create the necessary changes and review process to properly terminated or demote and reassign any civil service or union employee for documented inadequate job performance in an expeditious time frame.  10)  Reform legislative and elected official pensions to eliminate double dipping and limit pension amounts to no more than 60% of final social security wage base with service years prorated to state employee vesting period (if full vesting is 30 years for state employee and elected official has ten years in any state government elected office that would equal 1/3 of the 60 of final social security wage base as a pension).  11) Create a luxury sales/service tax which applies to luxury items starting at specified dollar amounts for each type of item adjusted for CPI (inflation) but not declining.

No wonder politicians prefer handpicked "experts" to professionals.  The ethical pursuit of serving the best interests of the people is obviously not as rewarding as not getting things done right or not done at all.

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