State of the State’s Fiscal Challenges Rick Mattoon Senior Economist and Policy Advisor Federal Reserve Bank of Chicago GIC Economic Outlook June 24, 2019 The views expressed in this presentation are my own and do not necessarily reflect those of the Federal Reserve Bank of Chicago or of the Federal Reserve System.
State Recovery Since the Great Recession • A new normal? – For most states, revenues have only recently returned to prerecession levels. – Revenue volatility has been pronounced. TCJA has led to several revenue surprises, but not clear that this is sustainable. – State tax systems seem stressed. For example sales taxes increasingly reach less of the economic base. Slow to tax services. Taxing on-line sales will help. – Evidence of the stress is that state’s have actively been pursuing all sorts of alternative revenues—marijuana, sports gambling and boosts in gasoline taxes to fund infrastructure
Turning to Illinois • “a cautionary tale or a fixable problem” • What makes Illinois special (and not in a good way) – Twin deficits—structural unbalanced general fund budget that generates billions in unpaid bills and a massive, roughly $140 billion pension liability
Illinois ran deficits since 2000 “Legacy Costs� in their projections: Liability = $159 billion
4
How did this happen? • Budget practice and less than transparent accounting. – The true tax cost of providing government services was never identified. This meant that the taxes paid were insufficient to cover the cost of government services.
Is there a plan to get out of this hole? • Change the state Constitution to permit a graduated income tax. • Change the Constitution to permit cuts to pension payments. • Issue pension bonds. • Public finance economists have preferred broadening the tax base for income (taxing retiree income) or sales (tax services akin to Wisconsin and Iowa). • The fly in the ointment—higher taxes won’t buy new government services…they will pay for services already consumed.
If you aren’t depressed yet… • When Warren Buffet was asked about Illinois he responded— • "In the public sector, you know, it's a disaster. ... If I were relocating into some state that had a huge unfunded pension plan, I'm walking into liabilities," "And those are big numbers, really big numbers. ... And when you see what they would have to do — I say to myself, 'Why do I want to build a plant there that has to sit there for 30 or 40 years?'"