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posted on 27 August 2016

The Illinois Budget Crisis In Context: A History Of Poor Fiscal Performance

from the Chicago Fed

-- this post authored by Thomas Walstrum

The state of Illinois is in the midst of a fiscal crisis. It went through the entire previous fiscal year (FY)1 without a budget and began the current fiscal year (in July) with a spending plan through only the end of the calendar year. Lawmakers cannot agree on how to solve Illinois's financial problems, which are substantial: They include a $5.5 billion operating deficit, $7.7 billion in unpaid bills, and an estimated $111 billion in unfunded pension liabilities. The crisis has also led credit rating agencies to give Illinois the lowest ratings of any state - which has pushed up borrowing costs.

How did Illinois get to this point? To address this question, I compare Illinois's expenditure and revenue performance since the late 1980s with that of other U.S. states. I show that Illinois used to be a relatively low-expenditure, low-revenue state. However, unlike the spending of the typical U.S. state, starting in the mid-1990s, Illinois's spending consistently outpaced its revenues (which have stayed low). In particular, the accumulation of pension liabilities has become a major source of Illinois's fiscal problems.

There are a number of challenges in making a valid comparison of the fiscal situation in Illinois with that in other states. First, each state's budget makes different distinctions between activities funded through its general fund and activities funded through special funds. Second, each state divides responsibilities for its activities differently between state and local governments. For example, some states fund K - 12 schools primarily through state revenues, while others fund them primarily through local revenues. Third, states vary in population and income per capita.

[click on image below to continue reading]

Source: https://chicagofed.org/~/media/publications/chicago-fed-letter/2016/cfl365-pdf.pdf?la=en

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