Train Wreck

Illinois is dying.  People are fleeing the state in droves.  It has lost 300,000 manufacturing jobs over the past 15 years.  The state cannot pay its bills.  Its corruption is a national joke.  4 of the state's last governors have done time.

In the bluest of blue states--the state that gave us Barack Obama--a miracle happened.  The voters elected to dump the status quo and vote for a successful private equity guy to try to straighten out the mess.


I attended a Turnaround Management Association breakfast at which Governor Rauner spoke.  It was a breath of fresh air.  He spoke like a businessperson--focused, energized, and cognizant of the dire task at hand.  He wasted no time laying out the challenge.  Illinois has high sales taxes and the highest property taxes in the country and it is a bureaucracy dying of its own weight.   "The core challenge," he said, "is that the government is run for the insiders' benefit, not the benefit of the taxpayers." The default strategy of "wealthy people paying more is simply not going to happen."

Rauner talked about two fundamental problems.  First is lack of good management talent.  The state is rife with mismanagement, conflicts of interest, and inefficiencies and is especially lacking in IT.  The 800 lb gorilla in the room is its pension, which is enormously underfunded. Unfortunately, the pension had automatic COLAs baked in and a Constitutional provision prohibits the state from changing it except in case of emergency.  Rauner's plan entails maintaining the current pension benefit for current retirees and accrued benefit but to change the plan on a go forward basis for unaccrued benefits, which seems eminently fair and sensible.  However, that will entail a Constitutional amendment that will certainly be fought tooth and nail by the unions.

He evidently is close to Mitch Daniels, who got Indiana out of its mess.  "Living next door to you is like living next to the Simpsons," he joked.  But in other respects, it's not so funny.  Daniels asserted, "Illinois's hostility to business is dragging down the whole region."

Rauner, like a good executive, distilled his turnaround plan into a one page set of easily understandable bullet points.  I left feeling that there was an adult in the room and some hope.

A mere two hours later, the Illinois Supreme Court struck down a law to amend the pension system modestly, claiming it violated the Constitution, stating that "the state must pay" (even though COLAs exceed the inflation rate) and that  "The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and ...it is a crisis for which the General Assembly itself is largely responsible."

Undeterred, Rauner is plowing ahead and will seek a Constitutional amendment and seek to implement a Tier 2 pension plan.  He did not see the law as going far enough.  In the meantime, Illinois is constrained.  Higher taxes will drive more taxpayers out and inhibit businesses from forming or coming to Illinois.

Rauner is seeking to uproot long entrenched symbiotic relationships between the unions and politicians.  Politicians granted fat pay and benefit plans.  Unions elected them and kept electing them.  It was a nice, comfy relationship.

Until we ran out of money.