By: Mark Glennon*
From news reports about the “grand bargain” budget solution on the table in Illinois you might be thinking, “Well, I don’t like these tax increases, but it looks like this deal would fix our state budget problems by covering the budget hole with new taxes. Let’s do it and get this over with.”
Huge mistake. The real numbers don’t come remotely close to a solution.
Government ‘budgets’ have been long been misinforming citizens in Chicago and Illinois. They provide little to no indication of true losses being sustained. They count borrowed money as if it is income, ignore big loss items like growing pension liabilities, and are filled with other gimmicks that hide deficits. They are supposed to be about effective management and control. But sadly, they have become rhetorical tools for public consumption and deception.
One way to illustrate how far off budgets can be is to look back and compare one to the actual financial statements prepared after completion of the year. Let’s do that for the State of Illinois.
The most recent financial statements for the state are for the 2015 fiscal year. They are in the “CAFR” (Comprehensive Annual Financial Report, which all units of government prepare.)
The 2015 budget was roughly balanced on paper, which is constitutionally required in Illinois. A mid-year adjustment was also made to plug a hole that became evident, again supposedly balancing the budget (all of which is described in a report by The Civic Federation).
But what were the actual results for 2015 shown in the CAFR after the year ended? A loss of (brace yourself and wait for it) $76 billion! That loss is about the size of the entire budget. (See page 18 of the CAFR. Bottom line losses or gains, in government accounting are called “changes in Net Position.”)
Now, most of that loss ($72.4 billion) was due to a change to more realistic accounting standard for pensions. But that’s really the point here. Government accounting ultimately gets trumped by reality. Facts eventually force government accountants to change their story, either through new accounting standards or different pension assumptions, which are all-important for governments like Illinois’ that are overwhelmed by pension obligations. All the losses from earlier years that weren’t recorded ultimately have to get dumped in, which is what happened in 2015.
And even if you ignore the change to the new accounting method, the state still lost over $3.5 billion according to the CAFR.
In short, the balanced budget for 2015 – and for many years preceding — ended up meaning nothing.
Chicago has the same sort of history, which has allowed Mayor Emanuel to continually claim to have balanced the budget even while the city has been losing about $1 billion per year.
Let’s return to Illinois to see how how far off the numbers are being commonly reported in the news.
The annual budget hole to be filled is $5.3 billion, according to many stories. In particular, that’s the number in an Associated Press story widely reprinted in many papers across Illinois titled “Key numbers in the Illinois budget stalemate.”
Other reports on the budget “grand bargain” now on the table say roughly $4.5 to $5 billion would be raised from the income tax increased proposed in that deal. Another $700 million would come from a new sugar tax. (Those numbers are suspect, too, but that’s a story for later.)
That’s why people across the state might be thinking, “problem solved” — the new taxes would cover the budget deficit.
No. That reported $5.3 billion budget deficit is horribly understated for the reasons mentioned by Bergman in that quote above. For example, it doesn’t include further losses in the pensions, which Illinois continues to grossly underfund (even though they already consume 25% of the budget). It doesn’t address the $11 billion of unpaid bills the state is sitting on. The grand bargain solution is to borrow $7 billion to pay down some of those bills through a bond offering to be repaid over 7 years. That’s another billion per year plus interest. (The remaining $4 billion evidently would be left unpaid.) Finally, the $5.3 billion deficit estimate was made in the first half of last year and was rapidly contradicted by higher estimates as the year unfolded.
Make adjustments for those errors and others in the budget estimate and you find a hole of at least $13 billion, not $5.3 billion. Two economists at the University of Illinois who took a close look put it at $13 billion. Jim Nowlan, an aide to three former Illinois governors, wrote yesterday saying he’d put the number somewhat higher. I’d put the number higher, too, but why quibble? The budget numbers being commonly reported clearly are junk.
Two morals to this story: 1) As the budget debate proceeds, be skeptical about the numbers you read and keep the real ones in mind. 2) Whenever you read about government budgets, think “bunk.” (There’s a better word than that but I’ll refrain.)
*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.