Illinois Is Broke
- Posted by Jeff Carter
- on September 27th, 2010
Went to an event tonight sponsored by the Economic Club of Chicago. The co-founders of a project called IllinoisisBroke.com were there along with other luminaries from the Chicago business community. They made a very sober, well thought out and factual case about the condition of government finances in the state of Illinois.
I encourage you to elect members of the Illinois General Assembly that will take their proposals seriously. The current crop of leaders in the Illinois legislature, virtually all of them Democratic, have put us in the dire straits that the state is in. We have to vote them out.
The city of Chicago is broke, and so is Cook County. ALL the political leadership there is Democratic.
In Illinois, the political leadership happens to be Democratic. Other states are in trouble too that are run by Republicans. It is a non-partisan issue. Illinois has had its share of really bad Republican leaders too.
While the photo at the top of this blogpost is cutesy. The situation isn’t a laughing matter.
The size and scope of government is untenable. It cannot continue at the Federal, State or Local level. In Illinois, if we continue down the path the legislature has lead us down, we will be busto in10 years. With the addition of federal burdens, I’d say the clock is ticking faster than that.
Amazingly, the idiots in Springfield decided to use an 8.5% discount rate to discount state liabilities back and present a credible number to the electorate. When a more realistic 5% discount rate is used, the present value of unfunded liabilities double. Only one state in the US is worse than Illinois, California.
The summary of the meeting went something like this:
If the legislature decides the first thing that they want to do is raise taxes, it’s over. There is no way that the tax rate can be raised high enough to fund all the unfunded liabilities.
Hence, we need to drastically cut spending. But it can’t just be cutting spending. We need to cut the size and scope of government. Government cannot be all things to all people. Along with a big spending cut, we must get pensions under control. We need to go from defined benefit, to defined contribution. We need existing retirees to pay something for the health care that they receive. Currently, many pay nothing. Illinois needs to change retirement ages. Currently many people can retire at 55. 67 is more like it.
Once all the front end financial reform is in, they say that Illinois will have to raise taxes.
There is much more at the website.
One small quibble that I have with their approach. Their analysis, as far as I can tell, utilized static budget analysis. Taxes are incentives. Higher taxes will cause less income to be collected by the state. This happens every time a government raises taxes.
The one ace in the hole that they might be counting on is that many other states are in rough shape. Expectations are that all governments will raise taxes. Hence, Illinois won’t seem so bad.
However, Illinois has one of the most bloated governments in the world with a tip of the hat to the Illinois Combine (Democrats and Republicans that used government to line their pockets).
The mobile in Illinois will get the hell out of here. Others will not come. An aside, they said that people and companies are refusing to move to Illinois because of the financial situation, not the weather.
I would slash spending, privatize lots of government services, and hold the line on taxes. See what happens. Maybe Illinois will look better compared to other states and people will move here, increasing the size of the tax base.
If we do nothing, we are “toast”. Stick a fork in the state, it’s done.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)
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