By: Ted Dabrowski
Government officials across the globe are taking steps to confront the spread of coronavirus. Here at home, Illinois state officials are rapidly preparing for the virus and plan to expand testing with the World Health Organization.
But governments internationally are also taking major steps to limit the financial and economic impact of the virus. The chances for a recession have jumped and the potential hit to jobs and wages is now real. The world’s top central banks are preparing for coordinated stimulus moves and rate cuts, and in the U.S., top officials are mulling tax cuts to cushion any blow to the economy.
And what’s Illinois doing? Even before the virus, lawmakers had no real plan to stop the state’s rapid fiscal decline and they have no plans now. The state is just one notch away from a junk rating. Illinois has zero reserves to weather a recession and the only thing in the hopper is a proposed multi-billion dollar tax hike.
The proposed progressive tax, which will inflict even more pain on an economy where home values are falling, out-migration is at record levels and cities are being hollowed out, was a bad idea even before the appearance of the coronavirus. Any impact of a recession – whenever one comes – will only magnify the failures of that tax.
We’ve already reported over the past two years that Illinois is the least prepared state in the country, along with New Jersey, for a recession. That’s based on an analysis done by Moody’s Investors Service last year.
‘While current economic conditions are strong, states are aware that a downturn will come eventually and are building reserves to prepare,’ said Emily Raimes, Vice President and Senior Credit Officer at Moody’s. ‘While most states have healthy reserves and inherently strong fiscal flexibility, Illinois and New Jersey both have low levels of reserves relative to the potential revenue decline in our recession scenario. In addition, they both show weakness in their pension risk scores.’”
The rating agency also said that of the nation’s 25 largest cities, two aren’t ready. They are Detroit and Chicago. Both cities are junk-rated by Moody’s.
“…both direct city obligations and those of overlapping units of government – continue to weigh heavily on its credit profile. In this scenario analysis, Chicago’s extraordinarily high fixed costs, coupled with its escalating pension liabilities, make it one of the cities least prepared for a near-term recession.”
What should be most frightening to Illinois lawmakers is how poorly Illinois has done during this 10-year-plus bull market. Despite the massive jump in the stock markets, Illinois’ debts have skyrocketed. When the markets began their rally in 2009, the Illinois’ official pension shortfall for its five state-run funds totaled $78 billion. Today, the shortfall is nearly $140 billion.
It’s hard to think about what the debts will look like when the markets eventually correct.
A recession would further expose the fundamental problem with our pension system. Benefit payments are absolute guarantees, but the assets set aside to pay them are unreliable. Who pays when the assets aren’t sufficient? Taxpayers.
You’d hope the coronavirus and the threat it poses to Illinois’ economy would be a wake up call for Gov. Pritzker to dump his tax proposal. It was never the right idea for Illinois and a potential recession only makes that more obvious. Instead, Illinois needs structural reforms that pull the state out of its downward spiral.
It’s impossible to know how the impact of the virus will play out and whether a recession is imminent or not. But one thing we do know. Illinoisans are totally exposed to the risks.
More on why Illinois’ budget, economy and pension funds are unprepared for a recession:
- Illinoisans will be among nation’s hardest hit in next recession
- Chicago, Detroit “least-prepared” for a recession, says new Moody’s report
- US stock markets up 200%, yet Illinois pension hole deepens 75%
- Pritzker’s 2021 Illinois budget: Unbalanced. No reforms. More spending. And of course, more tax hikes
- Yes, the rich are fleeing Illinois and they’re taking billions with them