Illinois now has a budget, the first in three fiscal years. An excellent writeup on The Stump entitled Illinois Financial Disaster: Even More Reactions to the Budget explains what passage of the budget does and does not do.

Here are some links mentioned by The Stump and a few additional links and comments by me.

The Budget Fixes Nothing

Mark Glennon at Wirepoints comments on the Many Ways Illinoisans Won’t Pay Higher Taxes

It’s not just that people are leaving because of taxes, though that’s probably the biggest problem. Long before last week’s tax increase over half of Illinoisans were telling pollsters they wanted to leave the state, citing taxes as the biggest reason.

Remember how the deniers a few years ago ridiculed what was then just anecdotal evidence of people leaving, especially big taxpayers? Census and tax data eventually backed it up. This is no different.

It’s happening within Illinois, too. People will shop where sales taxes are lower because those rates have become so meaningful to them. One reader told me about how busy the take out Peapod location is in Deerfield, Lake County. Cook County shoppers are going there, just across the county line, to take a couple points off their sales tax.

As for me, I’m writing this from a house in southeastern Wisconsin my wife and I bought recently. I figured we’d get ahead of the escape-from-Illinois crowd that’s increasingly feeding demand here. If Illinois doesn’t adopt the radical changes it needs by the time my youngest graduates from high school there, I’ll make this my permanent home — like so many Illinois ex-pats I’ve met here have done. In the meantime, we’ll buy our groceries here often, where they’re exempt from any sales tax.

Illinois’ tax collections have already been dropping. Last week the state released its report for the fiscal year that ended June 30. Tax receipts declined 3.2% — almost $1 billion from the preceding year.

I think we are well past the top of the curve — the point where higher rates result in less tax yield. Sure, tax receipts will surge for a few years. Maybe the state will get the $5 billion per year it claims — at first. It takes time to move or adapt in a way that reduces your taxes. But it won’t hold up. Too many people are too furious. They won’t pay, one way or another.

Not Even Balanced

Legislative Democrats boast that the $36 billion budget they approved is not only $1 billion less than Rauner himself proposed, but $3 billion less than the “autopilot” government spent annually. But Rauner’s administration complains the budget still is $1 billion or more out of balance.

So they’re spending $1 billion more than they expect to take in as revenue. That’s a 3% gap, which does sound small, until you realize that a bunch of these small, and not so small, annual gaps have accumulated as state debt. Which is a hell of a lot bigger than $1 billion.

It Doesn’t Fix Pensions

Joe Cahill at Crain’s Chicago says New Budget Threatens to Deepen Pension Debt

Lawmakers in Springfield appeared to face up to Illinois’ grim financial realities when they passed the first state budget in three years. The spending plan approved over Gov. Bruce Rauner’s veto does take a few steps to address deepening fiscal woes ignored during years of political stalemate between the governor and Illinois House Speaker Michael Madigan. It brings a measure of relief to state vendors owed $15 billion in unpaid bills, and might stave off a downgrade of Illinois bonds to junk status.

When it comes to the state’s gravest budgetary peril, however, the 2018 budget is another exercise in denial and can-kicking. Legislators did nothing about unfunded state employee pension obligations estimated at $130 billion, an albatross that will surely drag Illinois under unless aggressive action is taken to reduce the shortfall. In fact, the new budget could even enlarge the pension funding sinkhole.

State contributions to pension plans will decline $1.5 billion in fiscal 2018, by far the largest single spending cut in the budget. And some $900 million of that reduction reflects wishful thinking about future investment returns at state employee pension funds.

For years, Illinois failed to make contributions sufficient to fully fund obligations to future retirees. Only recently did the state step up contributions. But now Illinois is taking a step backward. Even in a best-case scenario, smaller contributions will slow the return to pension solvency. And the enormous pension shortfall will grow larger if the rosy return assumptions embraced by our political leaders don’t come true.

Got That?

The biggest budget cut is to pension funding. But Illinois has the worst-funded public pension system in the nation.

It Doesn’t Fix Workers’ Comp

Forbes explains How Illinois Courts Are Bankrupting The State

Like every other state, Illinois has a system of employer-funded insurance for workplace injuries. This is a safety net that every worker—in the private and public sectors alike—receives. Under workers’ compensation laws employees give up their right to sue and potentially win large awards in exchange for more modest but speedy compensation; and employers are liable no matter whose fault caused the injury, in exchange for limits on their liabilities. For the last 100 years, this regime has been working nicely in most states.

But not in Illinois. The commission handling workers’ claims and the courts that supervise it have endlessly expanded the liability of employers, forgetting that the system was supposed to cover only employment-related injuries. One Illinois court held, for example, that a worker was entitled to benefits when he was injured throwing himself up against a vending machine in an attempt to dislodge a stubborn bag of potato chips. The court said that the injured employee was a deserving “Good Samaritan” on a rescue mission to help a fellow co-worker who had deposited the coins. The court thought that the defect in the vending machine “created a need for action to dislodge the bag of Fritos.” (I am not making this up!)

Illinois courts are generous to workers even when it defies common sense. A firefighter that was injured when he was out of town for a seminar and engaged in “horseplay” with a fellow worker in their hotel room (“wrestling like two oversized kids”) succeeded in persuading a court that the injury is work-related. Numerous employees have had great success receiving lifetime benefits for degenerative injuries like carpal tunnel syndrome, even when it was proven highly unlikely that they were caused on the job. Ex-workers often continue to receive lost wages awards after returning to work elsewhere!

Illinois’ bottomless workers’ compensation system has contributed to the state ranking as one of the most labor-expensive states. In the construction industry, for example, $20 of every $100 of wages goes to workers’ compensation (in neighboring Indiana it’s less than $5). It is perhaps one more reason why the state has lost 300,000 manufacturing jobs since 2000, and why, unlike its Midwest neighbors, it has not enjoyed any manufacturing job growth since the Great Recession.

It Doesn’t Fix Medicaid

During the two-year budget battle, Illinois added to its total of unpaid bills. That total is now $15 billion including $2 billion in unpaid bills owed to Medicaid doctors and hospitals. A federal court in 2015 ordered the state to pay the Medicaid bills, but cash-flow problems have made it difficult for the comptroller’s office to find the cash to make the payments.

In June, the Chicago Tribune reported Medicaid patients to ask judge to make Illinois pay its bills faster.

If the Republican version of Obamacare reform actually does pass, Illinois Could Lose $40 Billion in Federal Medicaid Support over the next ten years.

Illinois Health and Hospital Association spokesman David Gross testified that Illinois would lose at least $40 billion in federal Medicaid funding over the act’s 10-year lifespan. The association arrived at this figure by taking Illinois’ share of the nation’s Medicaid expansion population and multiplying it by the $880 billion in reductions estimated by the nonpartisan Congressional Budget Office under the Republican plan. Gross said the cuts would jeopardize patient care.

Illinois currently devotes $10 billion in state funds each year to Medicaid, or about one-quarter of the state’s general fund. The federal government currently matches that amount.

Mish note: The one-quarter spent on Medicaid does include matching federal funds.

Medicaid Spending Up 141% Since 2000

The Illinois Policy Institute reports Health Care Costs Consume 25 Percent of Budget.

Illinois state-worker pension costs get well-deserved attention for crowding out spending for much of the state’s other services. With pension costs now consuming more than 25 percent of the budget, they compromise spending on everything from social service providers to in-state college scholarships for low-income students.

But there’s another budget item that deserves similar attention for the squeeze it’s putting on other government services: Medicaid. Health care costs largely made up of Medicaid expenses consume 25 percent of Illinois’ general fund budget. The governor’s recommended 2017 budget appropriated $8.2 billion to health care out of an expected $32.1 billion in general fund revenues. Without serious Medicaid reforms, spending will continue to compromise other programs that help the needy.

Medicaid, a state-federal partnership originally meant to be the health care safety net for the poor and disadvantaged, has ballooned to cover more than a quarter of Illinois’ population. It’s no longer just a safety net.

In 2000, just 1.37 million, or 11 percent, of all Illinoisans were enrolled in Medicaid. Today, enrollment has swelled to 3.22 million – a 135 percent increase.

As the number of Medicaid enrollees has increased, costs have increased as well. Since 2000, total general revenue fund, or GRF, and GRF-like Medicaid costs have increased by $7 billion. That increase alone is nearly what Illinois state government appropriates for K-12 education each year.

Chicago Sweetener

Greg Hintz at Crain’s Chicago Business explains State budget deal contains a junk-free sweetener for Chicago

The city of Chicago may be able to end junk status on much of its debt—potentially saving $100 million or more in interest charges each year—thanks to a clause that was quietly tucked into the state’s new budget.

The provision will allow home-rule entities such as Chicago to separate out money they get from the state from other receipts and use that dedicated revenue to pay for new debt, or to pay for retiring old debt.

The city now gets well over $1 billion from the state each year, including $630 million in sales taxes collected by the Illinois Department of Revenue on the city’s behalf, the $368 million city share of local income tax receipts, and $71 million in motor fuel taxes.

City officials hope the provision will allow them to save as much as 3 full percentage points—300 basis points—compared to what junk-level city general-obligation debt now costs. With more than $8 billion in outstanding general-obligation debt, the city would save $30 million a year on each $1 billion that could be refinanced, assuming it indeed can sell such “statutory lien” debt at the lower rates.

Saving $100 million a year would about equal the annual recent increase in the city’s property tax levy.

Bond experts and financial watchdogs say that while the scheme is not perfect and does not in itself reduce tens of billions of dollars in unfunded city pension liability, the clause has considerable potential.

The measure specifically allows home-rule municipalities to assign to debt repayment regular revenues received from the state, and obligates Illinois officials not to interfere in any such deals. But for the new plan to work, the state revenues involved must go directly to debt repayment and not into general city coffers.

Outrageous Giveaway to Muni Bond Holders

Mark Glennon at Wirepoints says Outrageous Giveaway to Muni Bond Buyers Hidden in Massive Budget Bill.

Guess what was hidden in the 756-page Budget Implementation Bill that just became law in Illinois?

It’s roughly the same as the “bill that must be stopped,” as we called it earlier. That was Senate Bill 10, the bill about which I wrote this:

When I practiced law I taught secured lending and bankruptcy as an adjunct at the University of Texas Law School. I can imagine giving an assignment like this: “Draft a bill to make bondholders supreme by stiffing the public and taxpayers.” If somebody handed in Senate Bill 10, they’d get an A+.

It’s a naked asset grab at the expense of citizens designed to allow municipalities to kick the can by borrowing more and giving first dibs to municipal bondholders on public assets.

It’s the ticket to an assets bankruptcy, which is the worst of all conceivable outcomes for broke Illinois towns and cities, including Chicago.

Stump Response

My first reaction: yes, bondholders do want to get paid.

Otherwise, they wouldn’t buy the bonds. Duh.

But my second reaction was to wonder just how strong this particular legal protection is.

We’re already seeing in Puerto Rico that they’ve been trying to get out of various guarantees that were supposed to make newly-issued bonds bankruptcy remote. But now that they’re in their morass, seems that the political actors are trying their damnedest to make sure the politicians, employees, and retirees get the money, and not the bondholders (though, of course, some bondholders are also retirees. Who exactly are buying these bonds, I wonder.)

My third reaction was: exactly how difficult would it be to enforce that “non-impairment” rule against the state?

As noted in Hinz’s piece, we’ll see if Chicago takes this particular lifeline.

But here’s the real deal: paying for pensions and debt isn’t as sexy as paying for shiny new toys. I assume a lot of shiny new toys will be bought if the debt pressure is lightened. I do not trust one whit that there will be any fiscal sanity from Chicago or Illinois.

And I agree with Glennon that this is an awful idea because it doesn’t do anything for the structural financial problems for the cities or state. It makes the ultimate crash that much worse when it does come.

Expect Lawsuits

It’s difficult to project precisely where this goes other than to the courts.

When some of these bond and pension schemes implode, which they are guaranteed to do, a cascade of lawsuits over the precise meaning of every word in the legislation will ensue. Questions also arise over older bonds vs newer bonds.

In the end, when cities default, the bondholders will expect to get paid and the pensioners will expect to get paid. Both will not happen.

I expect the pension crisis to hit before 2020 so we may not have too long to wait.

Mike “Mish” Shedlock