Tuesday, January 24, 2012

Federalism and Interdependency... Illinois, Wisconsin and Greece

Individual states have to balance their budgets each year, according to popular belief.

But do they really, how hard do they try, and what does it really mean when we say that states are required to have balanced budgets? Not much, it seems.

Similar to the national government, when balancing their budgets, states usually ignore their future underfunded pension and related retiree financial obligations. They also ignore the funds forwarded to them by the federal government. Often that's still insufficient for them to make ends meet.

So when economic times get even more difficult, what do they do? In the case of Illinois, they raised taxes and made a very bad situation even worse.

Then when tax receipts slowed down further and companies and individuals threatened to head for greener pastures, such as Indiana, Wisconsin or elsewhere, Illinois took on more debt, and as a result their borrowing costs have gone up even more.

Here's the truth of the matter. Many states, like Illinois, don't make a realistic effort to balance their annual operating budget. They just pretend that they do. We can call it pretend balanced budgeting.

And in this pretend vein, here's another perhaps little known fact about individual states and their balanced budget requirements. About 25% of a typical state's funding comes from the federal government.

Of course, the federal government runs a deficit and therefore doesn't have any money of its own to lend. Still, it pretends that it does and grants money to a state so the state in turn can pretend to balance its annual operating budget.

Despite all the happy talk, and even after all that pretending, Illinois still can't limit expenses to receipts. So it doesn't pay its bills.

Of course, this pretend budgeting can't go on indefinitely in Illinois. So it won't. But how will that state be rescued, and by whom?

So here's the question du jour. In our federal system of government, should financially strong states be responsible to come to the rescue of financially weak states? In my opinion, the answer should be maybe. It should depend on whether the needy state's weakened condition is deemed to be temporary or permanent?

Does the needy state have its act together, both politically and financially? Does the state have a genuine and realistic action plan to clean up its act? If not, what's the point?

In the case of Illinois and states similarly situated, it's time for unions and politicians to act as fiscally responsible adults. A good start would be by "getting a better reality" about Illinois' dire financial condition and then communicating that reality directly, openly and candidly to its taxpayers.

Now let's contrast our individual state fiscal issues to those in various European countries today.

German taxpayers properly have decided not to give Greek taxpayers a blank check. Nor will they stand behind Italy, Spain or Portugal and others unless and until the creditworthiness of these sovereigns is demonstrated.

To establish credit worthy credentials means changing the ways of Illinois, Greece and others. It means that they credibly resolve, plan and act to live within their means. And to meet their individual obligations with respect to existing debt and deficits.

Otherwise those strong states and countries who are charged with doing the bailing out of the weak would become weak states and countries themselves. Then who would be left to bail out anyone? Nobody, that's who.

As with Europe, the same is true for our federal system of individual states and national government. States shouldn't receive bailout or budget money from a national government that has no money of its own to lend.

And states and cities must not continue to make pension promises to retirees without setting the funds aside to make good on their promises. And regardless of what they choose to do, taxpayers need to be brought into the picture early in the game.

Transparency and honesty are owed to those taxpayers footing the bill. Not like today where too often politicians promise what the taxpayers only later learn what they are obligated to pay.

Now let's introduce some simple logic. There is a vast difference between independent and dependent individual components which in the aggregate consolidate into entities, including cities, states and sovereign states. People and households, too.

And to enter into a legitimate and effective system of federalism means that formerly independent states will become stronger through that association as they become interdependent with other previously independent states. So there's no room for dependent states in an interdependent federation of independent states. Nor for dependents elsewhere in a collaborative system of governance. We have to be able to stand on our own two feet before we can help others stand up straight themselves.

If a state can't or won't responsibly govern itself, it should be separated from the healthy states. There's no other fair way. Just like Greece, Germany and the other European countries.

Temporary assistance is fine, but total dependency without a workable and realistic plan for getting back to health is a dead end.

Let's recap.

Unlike the U.S., Europe is made up of independent sovereign countries.

The U.S. is a republic comprised of fifty individual and interdependent states.

The Greece Next Door tells us about Illinois' debt downgrade, how it compares to neighboring Wisconsin and what this has to do with Greece and European states.

Here's what it says:

"Run up spending and debt, raise taxes in the naming of balancing the budget, but then watch as deficits rise and your credit-rating falls anyway. That's been the sad pattern in Europe, and now it's hitting that mecca of tax-and-spend government known as Illinois.

Though too few noticed, this month Moody's downgraded Illinois state debt to A2 from A1, the lowest among the 50 states. That's worse even than California. The state's cost of borrowing for $800 million of new 10-year general obligation bonds rose to 3.1%—which is 110 basis points higher than the 2% on top-rated 10-year bonds of more financially secure states.

This wasn't supposed to happen. Only a year ago, Governor Pat Quinn and his fellow Democrats raised individual income taxes by 67% and the corporate tax rate by 46%. They did it to raise $7 billion in revenue, as the Governor put it, to "get Illinois back on fiscal sound footing" and improve the state's credit rating.

So much for that. In its downgrade statement, Moody's panned Illinois lawmakers for "a legislative session in which the state took no steps to implement lasting solutions to its severe pension underfunding or to its chronic bill payment delays." An analysis by Bloomberg finds that the assets in the pension fund will only cover "45% of projected liabilities, the least of any state." And—no surprise—in part because the tax increases have caused companies to leave Illinois, the state budget office confesses that as of this month the state still has $6.8 billion in unpaid bills and unaddressed obligations.

It's worth contrasting this grim picture with that of Wisconsin north of the border. Last winter Madison was occupied by thousands of union protesters trying to bully legislators to defeat Republican Governor Scott Walker's plan to require government workers to pay a larger share of their health-plan costs, and to shore up the pension system by trimming future retirement liabilities. The reforms passed anyway.

In contrast to the Illinois downgrade, Moody's has praised Mr. Walker's budget as "credit positive for Wisconsin," adding that the money-saving reforms bring "the state's finances closer to a structural budgetary balance." As a result, Wisconsin jumped in Chief Executive magazine's 2011 ranking of each state's business climate—moving to 17th from 41st. Illinois dropped to 48th from 45th as ranked by the nation's top CEOs.

Yet Mr. Walker, who balanced the budget without new taxes, is the governor facing a union-financed attempt to recall him from office this year. If Wisconsin voters want to see where a state ends up without the kind of reforms that Mr. Walker made, they need only look to the Greece next door."

In sum, the union and political leaders of Illinois, Wisconsin, Greece and all others similarly situated must start telling the truth about their financial status and obligations.

Then they need to ask the taxpayers to decide what to do about it.

After all, it's their money that's being spent.

Thanks. Bob.

No comments:

Post a Comment