Pension Debt, Fiscal Mismanagement, And Why State/Local Bailout Requests Are So Maddening

Imagine, if you will, an alternate reality, in which all 50 states had an equivalent track record in terms of sound fiscal management. They paid their bills on time, they spent responsibly, workers received fair market wages for their services, corruption inflating spending was not an issue, or was evenly prevalent everywhere. To an equal degree in all 50 states, public-sector workers’ pay was level with, or exceeded the private sector due to generous union-campaign-donation-inspired agreements, or was inferior to the private sector by taking advantage of public-service-mindedness. States spent enough on human services programs such as aid for the disabled or employment programs, in order to run them effectively and meet the needs they are meant to meet, without wastefully overspending — or, if those programs were chock full of waste, they were so in equal measure everywhere.

Yes, I will now wait for you to pick yourself up off the floor.

But that’s the trouble, isn’t it?

Illinois was first out of the gate in seeking federal bailout money, and did so very inartfully, explicitly asking for money for pensions, among other requests. Governor J.B. Pritzker’s new message is that, as he said in an CBS “Face the Nation” interview last week, “We were on our way to a balanced budget for next year as well. So all we’ve asked for, and frankly the other 49 states too, as far as I know, is just help to replace those revenues that we all lost . . . as a result of this invisible killer.” (Locally, even back last summer, the Illinois Policy Institute disputed this claim, claiming that the if you strip out the gimmicks, the budget was out of balance by at least half a billion and possibly 1.3 billion dollars.)

Separately, on Thursday, California reported a $54.3 billion budget hole of its own. As the Mecury News reported,

“Newsom stressed that the state’s ability to patch the gaping budget holes will depend on federal aid, noting that unlike the federal government, states are required to balance their budgets and don’t have a ‘printing press for dollar bills’.”

And at the same time, it is becoming increasingly clear that states are adopting approaches toward re-opening that vary widely, in ways that are driven not merely by the severity of COVID-19 deaths, hospitalizations, or infections in their state.

Pritzker’s “Restore Illinois” plan limits gatherings to 10 people and keeps restaruants closed until a contact tracing program is not merely implemented but fully scaled up to include 90% of cases, and in any event no sooner than June 29; and limits gatherings to 50 people until “a vaccine or highly effective treatment [is] widely available or the elimination of any new cases over a sustained period.”

Across the border in Indiana, the “Back on Track Indiana Plan” has been permitting social gatherings of up to 25 people since May 4 (except for three counties), includes a capacity-limited re-opening of restaurants on May 11th, and increases the number of people in social gatherings to 100 or fewer on May 24, 250 or fewer on June 14, and without limit on July 4 contingent on following social distancing guidelines, with all dates subject to the meeting of benchmarks.

Pritzker critics accuse him of delaying re-opening in order to, by worsening the state’s economy, ensure that the federal government has no other choice than to provide bailout money, or, yet more extreme, that he wants the state to suffer in order to ensure Trump loses his re-election campaign in the fall. That’s preposterously conspiratorial, to be sure, but a marker of frustration and lack of trust in the governor and his decisions, especially among those downstate.

And, again, here are some numbers:

Illinois’s spending on its pension, merely with respect to the state-run systems for state employees, universities, and teachers outside of Chicago, totals $10 billion in 2020 (if the state makes all its scheduled contributions), including debt service for pension obligation bonds. Of this, roughly, $4 billion is for new pension accruals and $6 billion for debt service — out of a total budgeted general revenues of $40 billion.

Where’s the money coming from? Are Illinoisans being overtaxed in order to pay these contributions? Or is Illinois spending less on other needs than in other states?

Regular readers will recall that Illinois ranks 49th in Truth in Accounting’s Financial State of the States 2019, with a Taxpayer Burden of $52,600, primarily due to pension and retiree healthcare debt. New Jersey is dead last, at $65,100, and Connecticut third-worst, at $51,800.

And one might expect that these high levels of debt are due to refusal to tax residents sufficiently. But, according to one calculation, Illinois also has the highest tax burden, in terms of combined state and local taxes, at 14.96%, Connecticut ranks second at 14.64%, and New Jersey 12th, at 12.62%. According to another metric, New Jersey is 7th, Connecticut is 8th, and Illinois, 9th. (See, in the first instance, WalletHub’s 2020 rankings based on taxes paid by a median earner, and, second, their 2019 calcualations using total personal taxes divided by total personal income. Neither calculation takes into account business taxes, and, of course, differences are also driven by changes in tax laws over the year.)

But some high states are also fiscally-responsible: Minnesota clocks in at number 5 in the 2019 tax ranking, but ranks 11th in fiscal responsibility. Nebraska is 6th-highest in the 2020 tax ranking but still 8th in fiscal responsibility. Plotted in a scatter chart, there’s a definite correlation, but it’s not a slam-dunk strong correlation, in 2020:

and in 2019:

noting that the negative numbers are a surplus. Not surprisingly the outlier with the large surplus is Alaska.

If you pull out your half-remembered statistics knowledge, the correlation coefficient between the tax rates and the level of indebtedness is 0.5, a “moderate” relationship; remove Alaska and it’s about .4.

Where am I going with this?

It is likely that some sort of budget-hole-filling by the federal government will be necessary.

It is also maddening that the years-long, decades-long profligacy of states such as Illinois means this will be a bitter, bitter pill to swallow for those states which have attempted to be more responsible. This will be made all the worse by the differences in governors’ decisions now, especially when they explicitly or implicitly take the approach of delaying their actions even further to see what happens in the early-moving states, and cast themselves as better, more moral, more concerned about their states’ residents’ lives.

I’m not necessarily saying “no” to such a bailout, because, even though it is governors now, and legislatures in the past, making these decisions, it is the residents of these states who will suffer without it. But if it’s not done prudently, it will only increase the ire that residents of more prudent states feel.

As always, you’re invited to comment at JaneTheActuary.com!