Illinois’ Great Lakes neighbor Michigan may have some lessons that Illinois could learn when it comes to finances.
Credit rating agency S&P’s latest Illinois report removed the Land of Lincoln from a negative to a stable outlook because of the budget and $5 billion tax hike imposed by lawmakers in July. But, Illinois still has the lowest credit rating of all U.S. states at BBB-.
Michigan, on the other hand, had its general obligation bond rating reaffirmed AA- by S&P, while its appropriations-backed debt was rated A+. S&P gave Michigan high marks for being able to manage its debt, having a growing economy, growing budget reserves and a balanced budget.
Michigan-based Mackinac Center’s James Hohman said it wasn’t easy to do, but Michigan learned to be lean following a rough decade at the turn of the century.
“Since then,” Hohman said of Michigan, “the state’s been recovering and recovering substantially. That has made budgeting decisions a lot easier for Lansing politicians, and they’ve been able to set aside money for a rainy day fund.”
Hohman said the lessons learned aren’t rocket science.
“Your debt rating is really a simple thing,” Hohman said. “It’s just spend less than you take in in taxes. Make sure that you pay your debt.”
Despite just increasing taxes by $5 billion, Illinois doesn’t have a rainy day fund. The state has $15.2 billion in backlogged bills.
In comparison, Michigan’s economy is up. Illinois’ is stagnant. State government finances in Michigan are structurally balanced. Illinois’ rating is nearing junk and only became stable after a tax increase, but that won’t even pay down owed bills. However, S&P notes both states have unfunded pension liabilities that need to be addressed.
Hohman said Illinois and Michigan share in having billions in unfunded pension liability, and it’s a problem for governments all across the country.
“We need to stop ourselves from promising benefits now and paying for it later,” Hohman said. “Then we can start to catch up on it as well. Michigan has been doing that. Michigan is a national leader in pension reform, and I hope that states like Illinois and everyone else follow suit.”
Hohman said Michigan has $29 billion in unfunded liability. Illinois has more than $130 billion, and it’s growing.
On Illinois’ unfunded liability, S&P said back in July, “Revenue spent on servicing and retiring the roughly $15 billion in unpaid bills is unavailable for contribution to the state’s severely underfunded pension systems or to fund state services. It also crowds out fiscal capacity the state might otherwise use to accommodate a reduction in tax rates.”
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