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Even with Looming $5 Billion Tax Increase, Illinois Still Heading Toward Junk Rating

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Lawmakers in Illinois appear on the verge of passing the state’s first budget in two years. The measure includes a $5 billion tax increase on the good people of of the state. But the Illinois’ finances are in such a mess, even that may not be enough. It looks likely that even if the politicians get things done and finally pass a budget, the state still may find its credit rating downgraded to junk.

This shows just how bad things are in the Land of Lincoln. Let this sink in for a moment – the state is so far in debt that not even a $5 billion income tax increase can’t put its fiscal house in order.

Last month, we reported that S&P Global Ratings recently warned it will likely lower Illinois’ creditworthiness to below investment grade if feuding lawmakers fail to agree on a state budget for a third straight year. Most observers seemed to think passage of a budget deal would prevent Illinois from becoming the first US state to have its credit rating categorized as junk. But yesterday, Moody’s announced it had place the rating under review for a possible downgrade. Even a one notch downgrade from the current Baa3 rating would plunge the state into junk territory.

Moody’s said it decided to place the state on review despite expectations that the budget deal will ultimately pass and bring in increased revenue. The agency cited the state’s failure to “fully enact a timely budget” before the start of the fiscal year on July 1, and “its failure to achieve broad political consensus on how to move toward balanced financial operations” as reasons for the review.

The legislature finally passed a budget over the Fourth of July weekend, including the $5 billion income tax hike. But Gov. Bruce Rauner vetoed it. The Senate overrode the veto on July 5, and the House is expected to vote on the override today (July 6.)

Regardless, Moody’s isn’t impressed, as reported by Reuters.

The $36 billion fiscal 2018 budget and $5 billion income tax increase passed by lawmakers over the extended Fourth of July holiday weekend, may fall short in addressing the state’s financial woes, particularly its huge unfunded pension liability and $15 billion unpaid bill backlog, according to Moody’s. ‘On both those fronts, it’s not yet clear if the legislation being enacted will have a substantial and clear positive effect,’ said Moody’s analyst Ted Hampton.”

Moody’s specifically mentioned that it doesn’t think the tax increase will raise as much revenue as politicians project.

The state’s baseline tax collections declined in fiscal 2017, suggesting that any tax increase may yield less revenue than anticipated in coming months.”

The fact tax collections declined during the last year probably has something to do with the mass exodus out of the state. (Along with the expiration of some temporary hikes.) People are leaving – abandoning a sinking ship.

In 2011, the powers-that-be in Illinois jacked up taxes 67%. And in 2016, Illinois ranked as the state with the fastest shrinking population for the third straight year. According to the Chicago Tribune, Illinois’ population first began to drop in 2014, when it lost 11,961 people. The number more than doubled in 2015 to 28,497 people. It further multiplied in 2016 with a 37,508 net population loss.

All of these people leaving the state means less revenue. The folks at warned about the consequences of a mass exodus way back in the spring of 2014.

This [2011 tax hike] has hurt folks from all economic groups, and for folks who make their living making business decisions it has created one more incentive to leave Illinois. While it’s easy to shrug off the rich guy across town leaving, there is good reason for all of us to be concerned. Have you ever worked for a business person poorer than yourself? Me neither. Even those working in the public sector need to remember where taxes come from to pay for their jobs. And yet, Illinois is consistently pursuing policies that are pushing these job creators to more hospitable business climates. Where those jobs go, poor and middle-class Illinoisans are sure to follow as well.”

Typical of government, it looks like the people sticking it out in Illinois will get more of what ails them.

And what have the citizens of Illinois gotten for all of their tax dollars and budget deficits? Better roads? More services? A nicer state?

Seems unlikely.

Even without over-taxation and unrestrained spending by Illinois politicians, the state would be in a precarious position. The pension system in the Land of Lincoln is a mess. It currently has a shortfall of at least $130 billion. No wonder Moody’s isn’t impressed by a $5 billion tax increase. Can you say “drop in the bucket?”

Of course, Illinois isn’t alone. It is just the state that has walked furthest down the road. Several other US states are heading down the same path.

A report last year showed that teetering pension systems across the US are not only jeopardizing Americans’ retirement, they are also pulling a number of states down into a black hole with them. The states in the worst financial shape also share the problem of underfunded pensions. Along with Illinois, Connecticut, and Kentucky have less than half of their pension obligations funded.

Not to mention the US federal government and its $20-something trillion in debt and trillions more in unfunded liabilities.

So, what’s the takeaway here? Governments  can’t – or simply won’t – fix these problems. They’ve kicked the can down the road for so long that they’ve just about run out of road. At some point, the inevitable collapses will begin. Illinois isn’t far from the edge of the cliff, and many other governments are hot on its heels.

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