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Q&A: No easy fix for Illinois’ financial woes

Published: Saturday, Nov. 2, 2013 11:26 p.m. CDT • Updated: Saturday, Nov. 2, 2013 11:38 p.m. CDT
Caption
(AP photo)
Gov. Pat Quinn responds to a question about the ongoing legislative issues in Springfield after an Oct. 24 visit to a Wheeling high school.

CHICAGO – As Illinois lawmakers return to Springfield for the final week of the fall legislative session, it remains uncertain whether they’ll address the nearly $100 billion public pension shortfall – the worst in the nation.

Even if they do, Illinois won’t be out of the woods financially, according to a sobering report issued by the University of Illinois Institute of Government and Public Affairs Fiscal Futures Project.

The authors concluded Illinois’ finances are in such bad shape it will take a multipronged approach to fix it. They found that even if lawmakers make permanent the temporary income tax hike passed in 2011, the state is still on course to have a more than $7 billion budget gap by 2025. But if the tax increase is rolled back in 2015 as scheduled, the budget shortfall would be $14 billion by 2025.

Professor Richard Dye, one of the authors of the study, spoke to The Associated Press about how Illinois can repair things – and what will happen if it doesn’t. Here are edited excerpts of the interview:

Q: How bad is the state’s financial situation?

A: It’s serious. Illinois already has the lowest bond rating and highest borrowing costs of any state. Getting to the actual point where [the state is] illiquid, that may not happen for several years. But on the current path, it certainly would.

Q: Lawmakers are considering both a solution to the pension problem and alternatives to letting the tax increase sunset. Which is the more pressing issue?

A: The state has such a large problem that it is a tax problem and a spending problem and a pension obligation problem. In terms of immediate crisis, it’s an imbalance between tax and spending. If we look out 10 or 15 years, it’s the pension problem.

In my view, all three problems need to be solved.

Q: Do you feel like the public has not yet grasped the urgency of this?

A: Yes. People say “Oh they’re lying about the problem” or “They’re just overpaid.” Simplistic solutions abound. I do not think that even with swinging a two-by-four we’ve got the mule’s attention yet that this is a profound and multipronged problem.

Q: What has to happen on the spending side?

A: Cuts are necessary. ... It’s not clear that individual members of the General Assembly understand the magnitude of the problem. Or, it’s not in their interest to say just how tough it is. (Lawmakers) don’t like to say “I’m dealing different kinds of pain to different constituencies.” The problem is of such magnitude that most all constituencies of the state are going to have to pay, and pay significantly.

Q: What is the worst-case scenario?

A: One is that things will be cut – not on a planned basis using a responsible set of spending choices, but ad hoc. That means social services. Or we could keep going with what we did in 2010, 2011 and 2012 and that is not paying some of the bills or not paying some of them on time. So, places like home health care providers don’t get paid for six months and some of them go out of business.

On the pension side, the actual cash flow crisis won’t happen for 10 or 15 years.

Then I get to my worst-case scenario, and this comes from someone who knows bond markets and was heavily involved in New York’s near-default (in 1975). All it will take as a trigger in the financial markets is one manager of mutual funds that hold state and municipal bonds to say: “Even though Illinois is paying a nice return relative to its default risk, I don’t want to be signaling to would-be buyers that I’m stupid or imprudent for holding Illinois paper.” And there can be a snowball effect. If enough funds do that, then it comes crashing down. And this is the nightmare scenario.

Q: So at the end of the day, it’s a matter of making tough choices?

A: Exactly. Very tough choices.

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