A new report says Illinois state government is at “elevated risk” in the event of an economic downturn.
Ten years after the global financial meltdown that would become known as the Great Recession, S&P Global has performed a “stress test” ($) on all 50 state governments.
Three factors were analyzed:
1) How sensitive are tax collections to a recession?
2) How high are fixed costs, like pensions, health care for retirees, and debt service?
3) How much money has the state budgeted for reserves?
S&P’s Gabriel Petek says Illinois is in the middle of the road when it comes to tax sensitivity, primarily because of its flat income tax.
Other states are more susceptible to economic forces like the stock market and energy prices. California's Silicon Valley millionaires keep the state comfortably in the black during bull markets, but can lead to significant deficits during recessions. In Alaska, the price of oil makes or breaks the state budget.
But on the other two factors, S&P says Illinois is at higher risk.
“When you look at all the states, the median level of fixed costs is 12 percent of a state’s budget,” Petek says. “But in Illinois, those three items” — pensions, retiree health care, and debt service — “come to 31 percent of the state’s budget. So that means they have less room, less discretionary budget capacity, to work with.”
It will also be no surprise to anyone with even a passing familiarity with recent Illinois budget-making that the state has no financial reserves. Earlier this year, politicians on both sides of the aisle rushed to declare the newly passed budget “balanced.” But a recent disclosure from the Governor’s Office of Management and Budget acknowledges a $1.2 billion deficit.
“In the event of a downturn the state has this combination of reduced budget flexibility because of the high fixed costs, and no budget reserves to cushion the impact,” Petek says.
He says while Illinois’ financial picture has improved since the budget stalemate, lawmakers haven’t done enough.
“There hasn’t really been a focus on it — among the policymakers that we’re aware of — to tackle what remains of the structural budget deficit or build a budget reserve or how to bring unpaid bills to a lower level,” he says.
Petek says federal money helped blunt the effects of the Great Recession in the states. But for a variety of reasons — including higher federal deficits and already-low interest rates — that kind of help will be less likely to materialize during the next downturn.