I was invited to be a panelist at the Illinois Issues forum entitied "State Budget: The Challenges Ahead", hosted by the Union League Club of Chicago, NPR Illinois, and AARP. You can watch the stream of the event here.
Here were my remarks to the panelists and audience:
For decades, year after year, governors and legislators have told you the Illinois budget was balanced. You believed they were living within our means. You assumed the state’s revenues and equaled its expenses. You assumed the state wasn’t going into debt.
You didn’t know the governors and legislators were using a very sophisticated method to calculate a balanced budget. A method that allowed them to claim balanced budgets, while putting the state hundreds of billions of dollars in debt.
I call this method, “political math.”
Illinois’ budget crisis did not start when a budget failed to pass for 3 years. It is rooted in this political math that is featured in the balanced budget clause of the 1970 state constitution. Forty nine of the 50 states have balanced budget requirements for very good reasons:
To promote accountability and to avoid accumulating debt.
A balanced budget is intended to prevent elected officials from getting the pleasure of government spending, which will earn them votes, without the pain of taxing, which may lose them votes.
But the loose wording of the balanced budget clause has circumvented this intention.
The wording of the clause in essence says the budget’s expenditure should not exceed funds available.
What are funds available? They are funds that go into your checkbook, such as taxes and fees. But if you borrow money, doesn’t that money become available to spend? Meaning you can use loan proceeds to balance your budget.
The balanced budget clause uses the term “expenditures,” and not “expense.” The state has decided that expenditures mean only the checks you plan to write. So if the legislatures incur costs, like a Medicaid bill, they don’t have to include that costs in the current year’s budget calculations if they plan on writing a check to cover it in the next budgeted year. This is one of the reasons that, over the years, the state has billions of dollars in unpaid bills.
The largest accounting gimmick used to balance the state budget is the use of deferred compensation in the form of pensions. State employees are given a compensation package, which includes their salaries, pensions, and other benefits. As the employees work, they earn their compensation and the state incurs the related compensation costs. The salary portion of the compensation package is included in the budget calculations because the state has to write paychecks each pay period.
But all of the incurred pension costs don’t have to be included in the budget calculations because they will be paid in the future.
Because the state chooses to pay the pension in the future doesn’t mean that portion of compensation is not a current cost and should not be included in the current budget. Another way to think of it is that if the state didn’t offer employee pension benefits, then they might have to increase current paychecks.
Instead of including the full compensation costs in each year’s budget by fully funding the pension plans, legislators have chosen to use that money for politically popular services and benefits. Legislators have refused to raise taxes to cover the full costs of the government. This has gotten them re-elected, but put the state in a financial crisis.
At Truth in Accounting, we have calculated the state’s true financial condition since 2009. In 2009, we were $120 billion in the hole. When Governor Rauner was elected, we were $184 billion in the hole. As of the June 30, 2016 - when the state’s latest financial report was released - we are $210 billion in the hole.
So exactly why does the state have a budget crisis?
Poor wording in the balanced budget clause
Legislators and governors who made it impossible for us to hold them accountable -- They provided voters services and benefits that got them re-elected, but failed to properly fund earned and incurred pension benefits and didn’t have to live the political consequences of raising taxes to cover the true costs of government.
Finally, legislators and governors who claimed they were meeting the balanced budget requirement while putting the state $210 billion in debt.
The main reason we are in a budget crisis is our governors and legislators have chosen to use political math when calculating the state budget, instead of truth in accounting.