CHICAGO – Resolution of the Illinois budget crisis likely requires new revenue and spending curbs with natural economic growth alone unable to tackle the state's massive debts, a Chicago Federal Reserve economist told lawmakers.
"It's quite unlikely Illinois could grow itself out" of its fiscal problems, business economist Thomas Walstrum testified at a Senate hearing Wednesday about the Illinois economy, deficit, and fiscal 2018 budget.
When asked for his opinions on solutions, Walstrum said he thinks it will take action on both the revenue and spending sides "before the problem can be solved" and state debts are paid down, given the state's massive obligations.
Walstrum recapped his
"Such techniques can work for only so long, and Illinois is now coming to terms with over 20 years of poor fiscal performance," the report said.
The state is grappling with a more than $5 billion operating deficit, $12.8 billion of unpaid bills, and $126.5 billion of unfunded pension liabilities. The bill backlog is swelling as the state budget impasse has dragged on for 21 months.
Illinois was once a low-expenditure, low revenue state but spending more than it took in has persisted since the late 1980s, and has outpaced the national average since the mid-1990s. Pension liabilities and employee retirement expenses led the rise.
During questioning, Democrats failed to pin Walstrum down on whether Gov. Bruce Rauner's policy agenda items – like worker's compensation reforms, a local property tax freeze, and term limits – would help the state's economic growth.
The Republican governor has insisted that policy reforms be part of the budget process in exchange for his support for a tax hike. Rauner believes they are needed to improve the state's long-term economic climate. The legislature's Democratic majorities argue they are too friendly to business.
The bipartisan Senate fix known as the "Grand Bargain" includes tax hikes and some policy reforms but it has stalled due to some remaining sticking points, underscoring the depth of the political divide.
Walstrum said it's difficult to gage the impact of the state's fiscal mess on business decisions that impact economic growth because they must be reviewed on a sector-specific basis that takes into consideration other factors.
The state does stand to benefit if it solves its debt woes because of the "certainty" it would provide businesses as they weigh their futures, Walstrum said.
The Chicago Civic Federation's president Laurence Msall echoed that position during his testimony, recapping the organization's recommendations on solving the state's fiscal crisis in its "roadmap" released last month.
The uncertainty of the state's tax and fiscal policies to business, residents, and students is "corrosive" and pose a far greater a burden than potential tax hikes, Msall said.
Asked what the federation's roadmap might look like if the budget impasse isn't resolved until after the November 2018 gubernatorial election, Msall warned of the "uncharted territory" the state would find itself in with a bill backlog that tops $20 billion. By then, extensive damage would have been done to education, social services, and the state's bond ratings that are now "dangerously close" to junk, Msall added.
The state is rated at the BBB/Baa2 level with negative outlooks and a negative watch.
"Not having a budget is the most expensive thing we've ever experienced in Illinois," Msall warned. "Even the worst budget we could think of….would be far better and less costly to the state of Illinois."
Msall reiterated the federation's opposition to pension obligation bonding and support for targeting a 100% funded ratio of the retirement system. The group supports up to $9 billion of cash flow borrowing to pay down the backlog but only if it's part of a comprehensive budget resolution that includes spending cuts and its repayment term is limited to about five years.
