I listened carefully to J.B. Pritzker’s inaugural address
and budget proposal last week, and it made my stomach lurch.
Last fall I heard University of Chicago economist Austan
Goolsbee speak at a small luncheon. His
prepared remarks concerned the national economy, and I asked him in the Q
&A, “By taking the House, it looks like we are back to gridlock in
Washington, but now that Pritzker won, and has a supermajority, there won’t be
gridlock in Illinois. What does that
mean for the state?”
Austan Goolsbee answered, “I said that the United States is
not Greece. But Illinois could be.”
When Bruce Rauner came into office, he proposed a series of
reforms, each of which was summarily rejected by Speaker Mike Madigan, who runs
the state with an iron fist. Madigan’s
Democratically controlled house overrode a Rauner veto, and Madigan was able to
jam through a 32% income tax increase.
And yet it is not enough.
I heard Pritzker’s speech and rhetorically it might as well
have been Bernie Sanders. Laced with the
usual “the rich have to pay more of their fair share,” and “fairness”
Pritzker’s budget is laden with tax and spending increases, and Pritzker is itching
to get a progressive tax implemented (which he will have to get a
Constitutional amendment to do).
Ironically it is the Constitutionally mandated provision
that forbids changing pension obligations that is the problem. So sacred is that provision that when Quinn
tried to alter the pension because it mandated 3% pay increases when inflation
was 1% (which amounts to a direct wealth transfer to retirees). With pension costs chewing up 25% of the
budget, the only way to address the sad state of Illinois finances is to
address the pension costs, as they are squeezing out other state services. Worse, Illinois is losing population—and its
most productive members. Illinois had a
113,000 decrease in population and the net average income differential between
those coming and going is $20,000 per year.
I personally know 5 people that have left Illinois whose decisions in
part were based on the state’s financial condition and where it is headed. New York governor Andrew Cuomo last week
complained that tax rates have driven high earners out of New York and he now
has a $1.3 billion shortfall as a result.
Amazon nixed plans to move to New York because of its hostile
environment for business.
One of the benefits of living in a republic is that you can
see what other states do to determine what works and what doesn’t.
Illinois appears to have learned nothing from New York’s
experience.
Desperate for cash, Pritzker vows a headlong rush at a
progressive tax system, legalizing cannabis and sports betting and slapping
taxes on those activities. Since Chicago
has a long legacy with prostitution (See Sin in the Second City), I’m surprised
that legalized and taxed prostitution wasn’t served up as an alternative. Perhaps that’s next. We will have to gamble, smoke and screw our
way out of this fiscal mess.
Let’s face facts, Illinois is in a turnaround mode. Illinois debt is near junk status. It has a backlog of bills of $15 billion, accruing interest at 12%. It has a structural deficit of $3 billion. One legal definition of insolvency is not
being able to pay your debts as they come due, and Illinois is there. The state is meeting its obligations by
borrowing—like borrowing under one credit card to pay off another. In short, it’s a mess and we are in a
financial recovery and have been for a decade.
Much of my professional work has been working with
struggling companies or companies in crisis.
I am a 25 year member of the Turnaround Management Association, a trade
organization dedicated to revitalizing financially ailing entities. At a roundtable of business executives a
couple of years ago, I asked a simple question, “If your son or daughter had
transferable skills, and you wanted him or her to have a happy and prosperous
life with a bright future, would you advise them to settle in Illinois?” The room responded with guffaws and mumbling.
Pritzker’s speech violated basic precepts of any successful
turnaround. First, there must be
structural and radical changes to your day to day operations. Pritzker proposed none of it. Nowhere did he address cuts, efficiencies, or
cost reductions. Not one word of
it. Second, all constituencies must take
some pain. Madigan and Pritzker propose
once again that the Madigan patronage army and the retirees take no pain at
all. Instead, the pain will all be
absorbed by the already overburdened Illinois taxpayers, many of whom are
fleeing to other states as soon as it is practicable to do so.
There was nothing in his speech about attracting businesses,
relieving the pressures on businesses to operate in Illinois, or any words
about making Illinois a vibrant, robust place to do business. Nothing.
Not a word.
The speech was not lost on the rating agencies, Fitch and
Moody’s, both of which indicated that they were not impressed by Pritzker and
stood ready to downgrade Illinois debt and turn their outlook to negative. Without a fix to the pension problem,
Illinois’s fiscal situation doesn’t get better.
You don’t fix a problem unless the problem gets fixed.
Illinois should be a wonderful place. It has a diverse economy and an educated
workforce. It is centrally located and
is accessible by air, rail and via the Great Lakes. Chicago is a magnificent world class city,
with two great universities, a cultural scene that can rival any other city in
the world, and ethnically diverse neighborhoods. We should be firing on all cylinders.
But we are not. We
are circling the drain and in great danger of becoming the next Baltimore.
I have deep roots in Chicago. A branch of my family was here before the
Chicago Fire. I grew up in one of the ethnic
enclaves of Chicago, and even wrote my college admissions essay on The Jungle
by Upton Sinclair. I’ve never lived
anywhere else. But I am not questioning how long I can stay. Several friends have already abandoned the state
for less punitive states, and many others are actively making plans to leave.
When will they learn?
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