Tuesday, January 21, 2014

Structural Deficit: What It Means in Illinois

Structural Deficit:  Illinois’ Forever Problem

Structural Deficit:  According to the Financial Times, a structural deficit is a budget deficit that results from a fundamental imbalance in government receipts and expenditures, as opposed to one based on one-off or short-term factor (http://lexicon.ft.com/Term?term=structural-deficit).   

While a government budget deficit occurs when a government like Illinois spends more than it receives in tax revenue, a structural deficit occurs when a budget deficit persists over the very long term.  When fiscally appropriate adjustments are not made – in the case of Illinois, for decades – serious problems will arise. 

Of course a short term response employed by Illinois has been the borrowing of money to provide financing for services, but this has lead to increasing and mounting debt for the state.  As this ever-increasing debt has grown over the years, various investors and bond rating companies have looked warily at Illinois as a not-so-safe place in which to invest, as the state may face such insurmountable debt that it may find itself defaulting on payments.

Augmenting this constant borrowing is the history of thievery from the funding expected set aside for the contractual promises made to the public employees of the State of Illinois.  Note: The money taken from promised payment to public employees, like the money borrowed in bond purchases, cannot be avoided.  That is, if the debt of $100 billion is owed to the pension funds, the State of Illinois cannot walk away from the bill they created anymore than the state can walk away from its bond debt – regardless of SB1 or an SB2404 or an SBXXX. 

SB1 accomplishes only a means to cut off future expenses by cutting off future promises.  Eliminating cost of living expenditures for current workers and retirees will provide the greater bulk of savings.  This course of action is undoubtedly legally arguable, and the results will be telling.  Nevertheless, the State will owe what it has already taken, and a recent study suggests that Illinois may be so deeply in debt that even the self-appointed savior/Governor’s hope for legal constitutional acceptance will do little now.

In a very recent study by University of Illinois Futures Project, the authors – Richard Dye, Nancy Hudspeth, & David Merriman – propose that “Illinois has a chronic, structural fiscal problem so huge that it cannot be eliminated by increases in economic growth alone, increases in taxes alone, or – alas – aggressive pension changes alone” (http://igpa.uillinois.edu/system/files/Pension-Reform-Will-Not-Fix-Deficit.pdf). 

Projections by the authors of the study entitled “Illinois Still Has Serious Fiscal Problems After December 2013 Pension Law Changes” warn that the structural budget deficit issues will not close a predicted gap of nearly $14 billion by 2025 by any more than $1 billion.  In other words, a structural deficit of $13 billion will remain in place and in effect in 2025 – despite the promises being floated about actuarially by Speakers and Governors that SB1 will be the answer to the budgetary crises.

In fact, the authors suggest that no single response will be sufficient. 

One answer in several, according to the study, is to maintain the current tax rate in Illinois; in other words, ignoring the sun setting of current tax rates - as proposed by all Republican candidates for Governor.  According to the study, the maintenance of current taxation levels (and the big IF of SB1 being declared constitutionally legal) would result in a structural deficit of $5.5 billion by 2025.    That still renders the state unable to meet its bills.    

In essence, the answers to Illinois’ fiscal woes are not going to be found in the preservation of the tax rate, the possible court acceptance of any part or all of SB1, or any other single factor.  It certainly will not be ameliorated by the fence-sitters in the General Assembly who hope to return to SB1 to find ways to augment what is constitutionally acceptable and discard what is not.  A patchwork plan is to return to the old ways of dealing with Illinois’ haphazard and less-than-honest fiscal governance. 

It will take real thinking about what might move Illinois into the future, not just the same old tax loopholes, TIF’s, Tax giveaways, etc.  It might just be the time for someone looking for a real way out of our structural deficit to consider a graduated tax system, a transaction tax, an elimination of corporate welfare, etc.

Anybody come to mind?

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