Oh for a rainy day fund for the depleted state of Illinois — a bit of insurance to help our fiscally living-on-the-edge government, should economic calamity strike. Such as a recession, brought on by the coronavirus epidemic.
The dangerous outbreak spreading worldwide is both a health emergency and a global economic crisis in the making because business activity is suddenly in slowdown or shutdown mode. Markets have tanked and oil prices have plummeted. Chinese factories are sidelined and Italy is quarantined. American businesses are canceling travel plans.
Just look at the anticipated hit to Chicago‘s meetings and convention industry: Nearly 100,000 visitors expected here this month aren’t coming after four major events were called off. The International Housewares Association trade show would have been worth an estimated $77 million in spending on hotels, restaurants and other costs, according to organizers. Because Chicago aggressively hits up visitors for taxes and fees, assume a revenue loss from that one event of $10 million or more.
Now zoom out to try to assess the potential impact of recession on Illinois. Some analysts Monday put the odds of recession at or above 60%. Any period of negative economic growth would mean job losses, spending cuts by business owners, a decline in tax revenue and increased demand for government services by those individuals and families in need.
How prepared for storm clouds is Illinois? Financially, you can guess. Illinois is one of three states without an emergency fund to help cover unexpected revenue shortfalls, according to a 2019 Moody’s Analytics report. The other two are New Jersey and Kentucky. Pennsylvania also lagged but it has set aside more than $300 million to provide a dose of security.
Here’s why rainy day funds matter: They make bad days better, not worse. If tax revenue suddenly dried up, Illinois likely would have to raise taxes and/or cut services. It’s much less painful to put away money for an emergency during good times than trying to pull funds out of the economy at the height of recession when people are struggling, Moody’s notes. “It is never too late to provide at least some cushion from the difficult decisions set to take place during the next downturn.” Well, never too late … until it is.
One of Illinois’ biggest problems is its $137 billion unfunded pension liability — funds guaranteed to state worker retirees, teachers outside Chicago and General Assembly retirees. That owed money is the fiscal python squeezing Illinois into submission. Last year, Gov. J.B. Pritzker was going to worsen state finances by extending the pension payment schedule by seven years. That kind of irresponsible pension shortcut is what got Illinois into trouble in the first place. Pritzker, though, was able to stand down due to the discovery of a windfall in tax revenue, thanks to a robust economy.
Part of the governor’s desired way forward is a constitutional amendment to allow graduated, or progressive, income tax rates. Pritzker says raising the tax rate on the wealthiest Illinoisans would help manage budgets and chip away at the pension liability. But Moody’s has a warning for Pritzker and Illinois voters: Counting on more income tax revenue from higher earners via graduated rates is risky because income tax revenue is more volatile than sale tax revenue. “By putting more of their eggs in one basket, states have made their tax bases more dependent on a smaller number of taxpayers with extremely volatile incomes, manifesting higher highs and lower lows for tax collectors.”
And what could cause a surprise “lower low”? A recession.
So now here we are in Illinois with a pension crisis, a backlog of government bills to pay, an epidemic and a potentially damaging economic downturn.
Cleaning up Illinois’ fiscal mess always was going to be painful. Having no rainy day fund makes going forward more challenging, in sickness and health.
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