A Study in Contrasts
Jeffrey Singer
Conservatives and Republicans in Illinois have long looked longingly to our neighbors to the east in Indiana where that State has been governed by the steady head of Mitch Daniels for the past eight years. Daniels has successfully balanced his budgets without borrowing and has implemented other government reforms, including reforming education and promoting a favorable business climate. But now we look longingly to the north to the more controversial Governor Walker who famously passed last year a comprehensive government reform bill that forced public employees of the State to contribute payments toward their retirement pensions for the first time since they were unionized in 1959 and to increase their contributions toward their medical care. These two reforms alone saved the State approximately $724 million annually, which went a long way to help Wisconsin solve its $3.6 billion biennial deficit. There were other reforms as well, having to do with the rights of State employees to bargain collectively and to have the State automatically collect and deliver union dues to the union. What they all had in common was the relentless focus on the main drivers of costs for the State – medical and retirement costs for public employees, whether those employees are teachers, truck drivers, State troopers, or bureaucrats.
Meanwhile, what does our own Governor propose for Illinois? More spending of course (on top of the massive tax hikes he passed last year)! Like most Democrats, Governor Quinn euphemistically calls this spending “investment.”
Cuts alone will not get us to a better budget. We must build and grow our Illinois economy like never before to keep Illinois moving forward…But we’ve not just made Illinois a better place to do business, we’ve also invested in our public works – our highways, our bridges, our railroads and our schools – to make Illinois stronger…We started Illinois’ first venture fund to encourage investors to jump into cutting-edge technologies…We’re going to continue to think big in Illinois…Today, I’m announcing a $2.3 million dollar investment in “1871,” a new technology center at the Merchandise Mart in Chicago to foster and launch digital start-ups…Today, I’m also announcing a $6 million dollar statewide competition to build ultra-high speed broadband in neighborhoods across Illinois. Through this challenge, we want our neighborhoods to become Gigabit communities with Internet connections more than 100 times faster than today! Our goal is to build smart communities that will foster the job engines of the future.Etc. Etc. The quotes are from his recent State of the State speech which was received with all the excitement of a scheduled root canal. My local paper quoted my State Senator (John Mulroe, Democrat) saying the Governor’s “proposals are sound” but there “is no money to fund them.” “We don’t have a healthy environment in this state, but the worse things get the more it is necessary to get results, and you need to make tough decisions because you can’t kick the can down the road any more.”
Well, Senator Mulroe got one thing right. Illinois does face a very unhealthy environment. While most of the nation has experienced some improvement in the unemployment picture, Illinois placed more people on the unemployment rolls in 2011 than any other state in the nation. Back in early 2010 our unemployment rate was coming down from a high of 11% to 8.7% a year later, soon after the tax hike was implemented. Then, slowly but surely, our unemployment started to climb (up to 10% as of this writing) as the business climate in the state deteriorated. As the Illinois Policy Institute explained:
The tax hike spurred a number of companies to leave or threaten to leave. The state resorted to handing out tax incentives to keep large businesses from leaving. This reinforced Illinois’ reputation of favoring the powerful and connected at the expense of everyone else. It is this perception – grounded in reality – that keeps many entrepreneurs from even considering Illinois as a place to found or grow their business.Meanwhile, the ostensible reason for raising taxes, to get our fiscal house in order, remains a distant goal. At the beginning of this year Illinois faced $7 billion of unpaid bills which led to a downgrade from Moody’s rating agency from A1 to A2 which is now the lowest rating among all 50 states (although for the moment, we are currently rated slightly higher than California by Fitch and Standard and Poor’s). By the end of the fiscal year, the unpaid bills are expected to grow to $9.2 billion at the end of the next fiscal year and one local fiscal watchdog organization predicts that if serious reform is not implemented soon, the bills could grow to $34.8 billion – which is simply unsustainable as no one will be willing to do business with the state if they can’t expect to be paid in a timely manner.Illinois’ poor business environment is reflected in the Tax Foundation’s respected State Business Tax Climate Index. A forthcoming 2012 edition will show a precipitous fall for Illinois, thanks almost entirely to the personal income and corporate income tax hikes. Overall, Illinois fell to 28th place in 2012, from 16th place in 2011 (revised). In particular, Illinois fell 16 places in the corporate sub-index, dropping to 45th in the nation, from 29th prior to the tax hike.
In short, there is debt and unsustainable spending as far as the eye can see with Governor Quinn, although, to be fair, according to his recent budget address delivered in February, a pension reform working group is to deliver recommendations to the Governor on how to reform the pension system in April. (Quinn has also proposed a Medicaid “roadmap” which the Governor says he will use to work with our state legislature “to find a combination of liability reductions, modernized eligibility standards, utilization controls, rate reduction and reform, acceleration of integrated managed care, and coordination of long-term care programs to manage Medicaid spending.”)
So in one state you have a Governor who faced the problem of out-of-control spending and attacked it at its roots – by reducing the spending and by implementing structural reforms to help the state and its local government partners deliver services more efficiently and effectively. In another state you have a Governor who faced the problem of out-of-control spending and attacked the problem by raising taxes, by talking about reform, and by spending money like the problems he faced weren’t that serious. Is it any wonder that Wisconsin thrives while Illinois struggles?
Jeffrey Singer is a public policy observer who lives (and suffers) in the city of Chicago.
Comments (12)
$6m is a rounding error in the budget that Verizon had to use on its last major build out (FiOS)
Posted by Mike T | March 5, 2012 12:32 PM
If you can't afford to care for police,firefighters, and paramedics, it'd be more honest to do without.
Posted by Hezekiah Garrett | March 5, 2012 1:50 PM
Hezekiah, if your premise is true, then yes. But there are also tons of (and many retired) teachers, administrators, public works crews and regulators that could be laid off before emergency services.
Posted by jvangeld | March 5, 2012 2:19 PM
Similar close-by state pairs can be highly contrasted. My state of VA is usually conservative leaning, but Maryland is quite different. It is sometimes referred to as the "communist state of Maryland" in certain circles. It does seem odd that there should be as much distinctiveness as there is, (given nearly 150 years of federalism being beaten down in favor of nationalism), but I think that this is a good thing. States should each have the own distinct character, their own flavor, which should be recognizable and promoted as something they are proud about being different.
The difference Jeff points about about tax and budget policy is also recapitulated in differences between VA and MD. Right now VA is running a sort of budget surplus of 300M, (although critics suggest that it is really a 320M deficit, covered over with a loan from the pension fund). MD is currently running about 1B in the red, or thereabouts, with similar problems projected for next year.
Many state constitutions say that they have to have balanced budgets - I suppose that this means that they have to cook their books in such a way as to call a long-term loan a balancing mechanism (this applies on all sides of the aisle, I think, they all engage in budgetary name changing). The reality is something a little different from what you would expect from these constitutional amendments, so one wonders whether they are doing any good.
Posted by Tony | March 6, 2012 5:07 PM
Typical Keynesian nonsense - "we have to spend (re: steal) more taxpayer money to get the economy moving".
When will that school of economics finally die?
Posted by Chucky Darwin | March 6, 2012 7:44 PM
Tony,
A great point and I think it suggests the broader wisdom of our federal system. When such contrast exist, then it makes it easier for voters and businesses to flee to states that are run more efficiently, have lower tax burdens, lower levels of debt, etc. In short, folks can vote with their feet and so if Maryland continues to tax and spend their state into ruin, Virginia (and perhaps other neighboring states) will gain from the out-migration that is inevitable when folks get fed up with Maryland government. But then that leads to an opportunity for an enterprising Maryland politician to make a case to his state's voters that "it doesn't have to be this way" and "the state can be run better -- look at how they do things in neighboring Virginia" and then hopefully he gets elected and implements reforms. This is my hope for 2014 in Illinois.
So the laboratories of democracy in action can be effective in promoting good governance thanks to the power of exit.
Posted by Jeff Singer | March 6, 2012 9:09 PM
Chucky, I suspect this is one place where you and I are in agreement. And I fear that the grim answer to your question is this: That government-spending-to-prosperity economic school of thought is like a destructive parasite. It will die only when it takes its host down with it.
Posted by Lydia | March 6, 2012 9:36 PM
Lydia:
I share your fear. Unfortunately we humans often don't learn a lesson until a disaster forces us to evaluate, in hindsight, its causes. It's going to be a catastrophic economic collapse I'm afraid, that teaches us the folly of Keynesianism.
Posted by Chucky Darwin | March 7, 2012 8:01 PM
jvangeld,
What you say may be so. If you feel so strongly, please correct Mr Singer. He seems in favor of otherwise, in light of paragraph 1, the ultimate line.
If you don't like subsidising my retirement and healthcare, why am I risking my neck, and more importantly, my back, for youse guys? If we're that great a burden, quit asking us to show up.
Posted by Hezekiah Garrett | March 8, 2012 12:01 AM
Mr. Garrett, you mean this?
You seem to have a skewed idea of what employment is in general, and what and government employment is in particular. Generally, when a customer buys (product or service) that pays an employee's benefits, he is engaging in exchange with the employer in such a way that the customer's benefit is comparable to the employer's benefit - including the employer's need to pay the employee a wage and other employee benefits. The employer isn't "subsidizing" the employee's health and retirement benefits out of some notional "employer's pocket" as if the employer were simply shelling out largess: the employer is remunerating the employee in an exchange, services from the employee, with corresponding profits to the employer, in exchange for wages, vacation, health, and retirement benefits to the employee. The employee provides something of economic value to the employer, and the employer provides something of comparable economic benefit to the employee. It isn't a subsidy, which implies one party providing a benefit to the other, WITHOUT any return of comparable value.
When the government employs individuals, the money it pays them in salary and other benefits stands in EXACTLY the same status, in terms of a theoretically equal exchange: the employer provides economic value to the employee, the employee provides services WORTH that economic value to the employer. It isn't a subsidy. The only difference is that in this case, the employer cannot gauge and estimate the economic value of the services the employee provides by way of the profits the employer enjoys - since the gov doesn't make a profit. That's why the exchange is more difficult to make truly proportionate, but it isn't supposed to represent any kind of subsidy.
When the government failed to properly estimate the economic benefit received by way of the employee's services, the government's package of wages and benefits got too high and should be scaled back. All Jeff is pointing out is that in some states government employees (in general, not in specific, because some individuals and some sub-classes of them may be different from the general description) have been granted economic benefits in terms of health and retirement packages that is out of line with (in excess of) what is paid in the same locations in the private world for the same employee services, where the private parties DO have to measure input with profits generated.
If you don't think that the new package of benefits is adequate exchange for your services, then quit and peddle your services to a private employer who can gauge your input of services by his profits. If you really are one of the gov employees who was not over-compensated, (and there are some, I know some of them), then you will be able to command equal or more than the adjusted government benefits. GO for it.
Posted by Tony | March 8, 2012 9:54 AM
Just as a note of actual facts and details supporting the irrationality of (some) government pensions: most gov pension plans had rules in place that said the employee pension was a percentage of average pay for the highest consecutive 3 years (called "high-3"). In some places, there got to be a standard practice in which an employee would be bumped into a wholly make-shift higher-salaried position for 3 years before retirement, and then allow him to work tons and tons of overtime, so that his "high-3" salary had virtually NOTHING to do with his career pay, and then his pension would actually EXCEED his normal (before last 3 years) salary had always been. One of the reforms is to require it be "high-5" instead of high-3, so that it is more difficult to game the system given the longer period of time.
Posted by Tony | March 8, 2012 10:03 AM
Tony,
You are quite right -- I couldn't have said it better myself. Of course, the second part of your comment doesn't even begin to scratch the surface of how ridiculously generous the State of Wisconsin was to its public employees. This is from the City Journal article I linked to above:
As you suggest, it is the height of arrogance to suggest that somehow we are putting well compensated "police, firefighters, and paramedics" in the poorhouse by requiring them to contribute something to their retirement and by requiring them to pay for their medical insurance in line with what employees in the private sector pay (although my guess is they still come out ahead at 12.4%).
Posted by Jeff Singer | March 8, 2012 12:37 PM