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Past Due: Illinois Not Alone In Post-Recession Budget Woes

Illinois’ budget is in even worse shape than previously thought. Illinois has the biggest unfunded pension obligation in the nation. Illinois slapped with the lowest credit rating of any state. These are the grim headlines Illinois residents endure on a regular basis. You can’t live in this state and not have at least a vague idea that our budget is in the dumps. 

But what’s going on with budgets in some of the other 49 laboratories of democracy that make up our country? Where can Illinois find lessons, commiseration and potential warnings about the budget pitfalls of the future? The entire country weathered the 2008 financial collapse, and some other states had serious underlying budget concerns, as Illinois did, when it hit. While Illinois’ problems may be larger in scope than those of many other states, it is not alone in the challenges it faces. For example, 44 states owe more in retirement benefits for public employees than they do in other forms of debt, such as borrowing for capital projects, according to an analysis from The Pew Charitable Trusts. The following is a glimpse into the budget stories of three other states with large populations as they have attempted to bounce back from the Great Recession. 

New Jersey: The pension deal gone sour

Because misery loves company, let’s look first at New Jersey. In 2011, New Jersey Republican Gov. Chris Christie struck a deal with Democratic legislative leaders to reduce pension benefits for state workers. The plan had bipartisan support and was described as “historic” in news reports at the time. The legislation increased workers’ contributions toward their benefits, raised the retirement age and froze cost of living increases for retirees. In return, the state, which had long failed to kick in its share, agreed to gradually step up contributions over seven years until it would be making the full payment. “We are putting the people first and daring to touch the third rail of politics in order to bring reform to an unsustainable system,” Christie said in a statement released after the legislation passed. But at the end of last fiscal year, tax revenues came in well under the Christie administration’s estimate.

New Jersey Gov. Chris Christie

To balance the budget without deep cuts or a tax increase, the governor cut the pension payment that year from $1.6 billion to $696 million and slashed the current fiscal year’s payment of $2.25 billion down to $681 million. The payments will cover current benefits but will do nothing to chip away at the unfunded liability of $83 billion. The state owes another $53 billion in unfunded health care benefits for retirees. Last year, credit rating agency Moody’s Investor Services warned that if nothing changes, the retirement funds for teachers and public employees could run out of money in as little as 10 years. Unions and trustees for the boards that oversee the pension funds sued the state for shorting its payments, and the case is still working its way through the courts. Christie’s administration challenged the constitutionality of the provision in the law that requires state payments — which at the time of the law’s passage was a key bargaining chip that won Democratic votes. At the end of last month, a judge ruled against the state and ordered that the payments must be made. Christie's administration has vowed to appeal the ruling. 

Much like in Illinois, the problems with New Jersey’s pension systems and budget are the result of years of financial mismanagement by politicians from both parties. The state has been shorting and sometimes outright skipping pension payments since 1996. Leaders have used one-time revenue sources, including borrowing, to balance the budget. According to a report from the State Budget Crisis Task Force, one-time revenue covered 14 percent of the state’s spending in 2003. The practice continued after the financial collapse decimated state revenues. In 2010, one-time funding sources covered 13 percent of spending.

Like Illinois, New Jersey has a constitutional requirement that its budget be balanced. And also like in Illinois, somewhere along the line New Jersey’s elected officials began to ignore it. “Between 1947 and 1990, there was a scrupulous regard for the constitutional provision that the governor and the legislature enact budgets that were balanced,” says Gordon MacInnes, a former Democratic state senator. He says in the 1990s that began to change. “When we lost the bipartisan commitment to honor the constitutional requirement for balancing revenues and expenditures on a current basis, that was the start of the decline.” MacInnes is now president of New Jersey Policy Perspective, a nonprofit that researches economic and budgetary issues.

New Jersey relies mainly on sales taxes to fund services besides education. Revenue from the state’s graduated income tax goes to local governments to fund public schools and other costs. Even so, the state has some of the highest property taxes in the country. In 2014, New Jersey ranked third in the nation for millionaire residents per capita. While its ranking has slipped in recent years, New Jersey remains an affluent state. But it has lagged behind much of the rest of the nation’s post-recession recovery.

MacInnes says that transportation is key to the state’s future prosperity. “Our biggest advantage economically is that we are a corridor between New York and Philadelphia.” But the state’s transportation trust fund has run dry. The Budget Crisis Task Force estimates the state will need $133 billion for capital construction over the next 10 years. The proposal that seems to be getting the most attention in the state is an increase to the gasoline tax.

Those watching the action in New Jersey say it’s difficult to predict what Christie will do. His State of the State address focused on national issues, fueling speculation that he will run for president in 2016. The governor’s political aspirations may be bad news for those supporting a gas tax increase. “I think the 12th Commandment of the Republican Party is ‘thou shall not raise taxes,’ particularly if you want the nomination for president,” MacInnes says. Christie has renewed talks with unions about doing more to cut pension costs, but some who worked on the 2011 changes say that he must make the state payments before a deal can be reached. MacInnes says it is unlikely Christie and the legislature will address both the transportation shortfall and the pension-funding problem in the same year.

California: The gilded comeback

California has been widely touted as a budget success story. The state had racked up a $25 billion budget deficit and $35 billion in debt when Democratic Gov. Jerry Brown took office in 2011. Contrast that with Brown’s 2015 budget proposal, which calls for increased education spending and contributing $1.2 billion to the state’s rainy day fund.

Like Illinois, California had serious fiscal problems before the economy collapsed in 2008. When the economy was doing well, state and local spending went up without increases in taxes or fees to provide ongoing revenue. Borrowing was used to pay operating costs, creating a debt obligation that would later eat up resources needed to fund services. Medicaid costs, as well as the costs of public employee benefits, ballooned.

California Gov. Jerry Brown

How did the Golden State’s budget bounce back? According to a new report from bond rating agency Standard & Poor’s, mostly through cutting services. In addition, voters approved Proposition 30, a temporary increase in the sales tax and income tax rates on top earners. Revenues from the increase are going to fund public schools.

California’s budget recovery seems remarkable from the outside, but Brown is not publicly celebrating it. Instead, he proposed a budget for next fiscal year that funds some social services below prerecession levels. “If we don’t rein things in, then down the road there will be drastic cuts, just like there were over the last 10 years. It’s either stop and start or steady as you go,” Brown told reporters at a January news conference after he presented his budget.

Much of the reason for caution is the state’s unpredictable revenue structure. A recent analysis from Pew found that California has the fifth most volatile state revenues in the country. California relies heavily on capital gains taxes and its upper income tax brackets, so the money coming into the state dips and spikes along with the stock market. Because the stock market has come roaring back post recession, so too have California’s revenues. Brown’s administration estimates that revenues from capital gains taxes will make up about 10 percent of the state’s general revenue fund in 2015. Policymakers in California who might seek to reform the state’s tax system face an added barrier. In 1978, voters approved Proposition 13. The initiative capped property tax rates, as well as the amount the assessed value of a property can increase. Proposition 13 also requires that state taxes be approved by a two-thirds majority in each chamber of the legislature.

This linking of California’s budget fortunes to the success of its wealthy residents and the stock market has caused some to argue that the tales of the state’s recovery are overblown. “The next time the stock market falls ... California’s situation will be even worse than it was in 2009, even worse than it was in 2001(after the dot- com bubble burst),” says David Crane, a lecturer on public policy at the Stanford Institute for Economic Policy Research. Crane is a Democrat who served as a budget adviser to former California Republican Gov. Arnold Schwarzenegger. He describes Brown as a “caretaker” of the state’s budget instead of a revolutionary savior. Crane and others warn that the cost of obligations like the public retiree benefits and Medi-Cal — the state’s Medicaid program — will crowd out other services if there are not fundamental changes. Crane is also president of Govern for California, a political action committee funded by Republicans and Democrats. He says the group hopes to recruit and support candidates with “courage” and seeks to get the public engaged with their state government. “States are responsible for the vast majority of services for ordinary citizens ... and no one pays attention to them.’’

California has pension problems of its own. According to a December report from Moody’s, California owes $177 billion in pension liabilities and an estimated $72 billion in retiree health care costs. While schools will get more money under Proposition 30, they will also be paying more toward teacher pension costs. The state’s pension system for public school teachers has a $74 billion shortfall. Over seven years, the annual contributions from schools will grow from $2.2 billion to nearly $6 billion, according The Sacramento Bee. Contributions from teachers and the state will also increase.

Still, the state has seen its credit rating go up four times since it bottomed out as the worst in the nation. Last year, voters passed Proposition 2, which calls for money to be set aside annually to pay down debts and build the rainy day fund. The proposition also requires that excess revenue from capital gains taxes be socked away. Brown said after putting forth his plan this year, “We have a carefully balanced budget, more precarious than I’d like, but it is balanced.”

Texas: The boom state

Texas is a state many governors, including Illinois Gov. Bruce Rauner, say they want to emulate. The state fared the recession better than many others. New Jersey, Illinois and California were hit particularly hard by the housing market collapse because their economies rely more heavily on real estate than many states.

Texas Gov. Greg Abbott

According to an analysis from J.P. Morgan Chase, energy, manufacturing and the public sector — primarily the military — are the top drivers of Texas’ economy. Still, budgeting in the Lone Star State has been a roller-coaster ride in recent years. Texas produces more oil than any other state by far, and revenue from taxes on oil can be difficult to predict as the price spikes and dips. Recessions can have a big impact on the state’s primary revenue source, sales taxes. “When you do see a recession, of course, the first thing that people do is they stop buying extra stuff,” says Sherri Greenberg, a former Democratic state representative. Greenberg is now a clinical professor at the University of Texas at Austin’s Lyndon B. Johnson School of Public Affairs.

When the Texas legislature, which meets biannually, came to Austin in 2011, they faced a $27 billion shortfall for the next two fiscal years — as a portion of the overall budget, it was the biggest shortfall in the nation at that time. Then Republican Gov. Rick Perry, another one-time presidential hopeful, vowed not to raise taxes. The budget he signed that year cut $5.4 billion from K-12 schools and reduced higher education spending by 5 percent, or $74 million. The budget also cut social services and underfunded Medicaid.

A year after the cuts, The Texas Tribune reported that despite a recent estimated growth of 83,000 students, schools eliminated roughly 10,000 teaching positions after the cuts. Some districts cut programs or charged students more fees. Voters in San Antonio approved a sales tax increase to fund preschool.

When Texas lawmakers met again in 2013, they had an estimated $8.8 billion surplus to work with. They restored $3.4 billon in school funding. Nevertheless, the state faces a legal challenge from hundreds of school districts claiming that the way it funds schools is unconstitutional because it is inadequate and inequitable. The Texas Supreme Court agreed to hear the case.

This year, the Texas legislature is back in session to craft a budget for the next two years. Lawmakers have a projected $7 billion surplus to work with. But they aren’t expected to address the state’s school funding formula because a ruling will not come from the Supreme Court before the end of the legislative session. Current Gov. Greg Abbott, a Republican, says he will veto any budget that does not contain tax cuts for businesses.

In the last decade, Texas has added more residents than any other state. The population growth has driven economic growth. But it will also lead to pressures, in the form of greater demands for services, education and infrastructure. 

Credit Texas A&M Transportation Institute
U.S. Highway 81 in Austin in 1957

A 2014 report from the Texas A&M Transportation Institute summed up the effect of the state’s population on infrastructure. “Over the past 40 years, our population has more than doubled. ... The number of cars and trucks on the road has almost tripled. And the number of miles those cars and trucks travel has more than tripled. Over the same time, our roadway capacity has grown only modestly — by 19 percent. We have too much demand for roadway space and not enough supply. It’s that simple.” The budget crisis task force estimates that the state would have to spend $270 billion by 2030 just to maintain its transportation system at 2010 levels. 

Credit Texas A&M Transportation Institute
Interstate 35 in Austin in 2011

Like California, parts of Texas have been recently ravaged by droughts. As they continue to grow, water will  join revenues as a top concern for the country’s two most populous states. Texas’ 2012 water plan bluntly lays out what more droughts could mean: “In serious drought conditions, Texas does not and will not have enough water to meet the needs of its people, its businesses, and its agricultural enterprises.” Bill Hammond, the president of the Texas Association of Businesses, told The Texas Tribune that if the state does not figure out how to meet the need for roads and water, its rapid economic growth could slow down. “If we don’t address these issues, the message is — don’t go to Texas,” he said.

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