Monday, January 5, 2015

Too Much Spending and Too Little Saving in the Present Mean Big Problems in the Future .... Illinois and the U.S. are Between a Financial Rock and a Hard Place .... Are You?

Individuals and governments have much in common when it comes to spending more than we make and saving too little for the commitments related to the future.

As an example, we'll use Illinois, a very financially troubled state, to examine how spending more than we 'earn' while setting aside too little for our future obligations will create seemingly insoluble financial issues in the present. And how, once we're in that situation, there are no easy solutions. Thus, acting in a financially responsible manner from day one is the only legitimate road to financial independence, security and not unduly burdening future generations.

Illinois is in the worst financial condition of all 50 states. While that's not a great achievement, it is definitely noteworthy. And it  took decades of mismanagement and neglect to accomplish. Thus, fixing the state's longstanding financial mess will take a long time as well.

But even more noteworthy and of interest will be how the politicians go about addressing the various issues. More taxes, lower spending, lower public sector pensions, less money for education and other political hot potatoes are all going to be part of the mix, assuming there is a serious attempt to deal with the state's financial shortcomings. Doing everything for everybody and trying to be all things to all people on the cheap simply won't work, as the citizens of Illinois have learned.

Just how bad is it? Illinois Faces Big Revenue Hit in 2015 is subtitled 'Expiration of Tax Increase Comes as State Grapples With Budget Crunch, Unpaid Bills and Pension Woes:'

"As fiscal prospects rebound for most states, Illinois has continued to struggle—and things are about to get worse.

Thanks to the expiration of a four-year tax increase put in place because of fallout from the 2007-09 recession, the state with the nation’s most dire fiscal outlook will see income-tax rates fall by 25% in coming days even as it faces a budget shortfall, a deeply underfunded retirement system and billions of dollars in unpaid bills. . . .

State forecasters have projected that tax revenues will decline because of the falling rates by $2.1 billion in the current fiscal year and an additional $2.7 billion in the new fiscal year starting July 1.

The state spends around $36 billion annually on services such as schools and health care, pension costs, and other operating expenses.

Illinois’s budget challenges come as other states see their fiscal positions continue to stabilize and reserves build after weathering the deep recession at the end of last decade that fueled sizable drops in tax revenue. Illinois ... has one of the most deeply underfunded employee pension systems in the nation.

“Illinois is an outlier obviously in many respects,” said Nick Samuels, a vice president at Moody’s Investors Service, which has a negative outlook assigned to the state. . . .

The governor-elect, who takes office Jan. 12, has talked broadly about stimulating economic growth by holding down taxes and curbing government spending but has provided few details. During his campaign, Mr. Rauner talked about having the income tax at 3% for individuals by the end of his first term, but he hasn’t spelled out what rates he favors over the next four years to get there.

The individual income tax rate in Illinois is currently 5% and will fall to 3.75% on Jan. 1. It was at 3% before Mr. Quinn and lawmakers approved the temporary increase. Illinois doesn’t have tax brackets; residents pay the same rate on all of their income.

Mr. Rauner also has discussed broadening the state’s sales tax. Illinois’s sales tax is largely applied to just goods and not services."

Summing Up

Whatever else he may be, the new Illinois Governor Bruce Rauner is not a magician.

Accordingly, since it took a long time for Illinois politicians to create the worst financial problems of any of the 50 states, it will also take a long time to solve those issues, even if a serious bipartisan effort is made. And common sense bipartisanship has never been a strength of Illinois politics, or the U.S. either, to say the least.

One good sign from the recent election of businessman Rauner (and the recent U.S. elections as well) is that the citizens of Illinois (and the U.S. as well) seem to be ready for some legitimate truth telling and dealing with the state's (and nation's) financial train wreck.

That said, taxes, government spending, educational reform (including public sector pensions), creating more private sector jobs, eliminating unnecessary government jobs and spending, and working to achieve long term sustainable economic growth in the private sector will all have to be part of the solution. How that all happens is the big question that must be answered by Republicans, including Governor Rauner, and Democrats in the state's (and nation's) legislature.

The fixes are definitely possible over the long haul, but politics as usual won't make it happen.

So let's all stay tuned, wish Governor Rauner bipartisan success, and hope for the best for Illinois (and our nation).

Thanks. Bob.          

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