Illinois Record Tax Increase Is Scant Help as $4 Billion Debt Swamps State

It’s a prairie puzzler in Illinois: What happened to all the money?

Ten months after the largest tax increase in its history, Illinois is unable to give scheduled raises to its workers. The backlog of unpaid bills is $4 billion and years from resolution. The current budget, despite $7 billion in new revenue, isn’t balanced. Businesses, even as they argue that government pension costs are unsustainable, will clamor for tax cuts during a legislative session that starts today in Springfield.

The Land of Lincoln now resembles that president’s “House Divided,” a cauldron of factions fighting over how to escape a financial crater years in the making. Unions fight Democrats, businesses threaten flight, and a poll shows that majorities of voters oppose cuts in education, public safety, the environment, aid to the poor and those with disabilities -- everything in the spending plan except pensions.

“It’s time for a rendezvous with reality,” Democratic Governor Pat Quinn promised in September, as he announced plans to dismiss more than 1,900 government employees because the state “clearly does not have enough money.”

The lack of money isn’t the only problem, according to the poll released Oct. 20 by the Paul Simon Public Policy Institute. Only 15 percent of those polled said the state is heading in the right direction, and 35 percent approved of Quinn’s performance.

Gazing Up

“Political leaders are held in such poor regard by the people of Illinois that they have no credibility when they say things” voters don’t want to hear, said David Yepsen, who directs the institute at Southern Illinois University in Carbondale. “Pat Quinn, like the state’s budget, is in a very deep hole.”

As receivership hangs over Harrisburg, Pennsylvania, and Rhode Island wrestles with the costs of public employee pensions, reality is pressing in on Illinois from several directions.

Three prominent businesses -- CME Group Inc., which operates the Chicago Mercantile Exchange and Board of Trade; Chicago Board Options Exchange; and Sears Holdings Corporation - - are threatening to leave the state unless their tax load is lightened.

Lawmakers return to the capital today and are scheduled to consider a 50 percent tax cut for CME Group and CBOE Holdings Inc. (CBOE) before concluding the session Nov. 10, according to John Patterson, a spokesman for Illinois Senate Democrats. A trim for Sears will be considered in a separate bill.

We’ve Had It

At the same time, a coalition of businessmen from the Commercial Club of Chicago’s Civic Committee called Illinois is Broke is pushing lawmakers to cut pension benefits for state employees. Members of the Civic Committee’s board include executives of companies seeking tax cuts.

“The state is on the brink of insolvency,” the group says on its website. “Enough is enough!”

The state’s unfunded pension liability is $85 billion, and the retirement system has assets to pay 45 percent of promised benefits, according to data compiled by Bloomberg. It is the lowest so-called funded ratio of any U.S. state.

While the Illinois Constitution says pension benefits “shall not be diminished or impaired,” some legal scholars argue there are grounds to reduce them. The poll from the Simon Institute said 45 percent of respondents support cuts while 48 percent oppose them. Union leaders say they’re on the defensive.

What About 9/11?

“Politicians have found us to be convenient targets,” said Henry Bayer, executive director of AFSCME Council 31, the largest public-employee union in Illinois. “They were very happy when all those public employees went into the World Trade Center 10 years ago to rescue people in the private sector who were running away from the building to save themselves.”

Illinois’s general-obligation debt is tied with that of California as the lowest rated in the estimation of Moody’s Investors Service, at A1. Standard & Poor’s has it at A+, two levels above California.

The state is selling $300 million of sales-tax bonds this week under the Build Illinois program, created in 1985 to fund infrastructure. Those bonds are to be paid by a specific revenue stream that S&P has said is adequate and so rates AAA, the highest level.

The January tax increases -- a 67 percent hike in the personal income tax and a 46 percent boost in the corporate rate -- helped the state make its scheduled pension payment, rather than borrow money to do so. The taxes, however, didn’t produce enough to cover a budget hole of about $8 billion.

Coddling Corporations

“To give tax cuts to huge groups like that is only hurting more people,” said Sara Schroeder, 22, of Des Plaines, a freelance photographer at the Occupy Wall Street protest in Chicago on Oct. 21. “I feel like the people who are defending acts like that know it doesn’t make any sense.”

While tax revenue is up, federal revenue payments to the state declined by 62 percent, or $905 million, in the first quarter of the fiscal year, according to a report from Comptroller Judy Baar Topinka. Unemployment rose in September for the fifth consecutive month, to 10 percent, compared with 9.1 percent nationally.

Pensions “are the albatross” around the state’s neck, said Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management in Oak Brook.

One thing Illinois has going for it is greater public appreciation of the crisis.

“The good news is there is an awareness that the state has a problem and they are trying to figure out ways to fix it,” Yepsen said. “It’s just very difficult, given the political realities.”

To contact the reporter on this story: Tim Jones in Chicago at Tjones58@@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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