The state of Illinois is a train wreck in action. It can’t pay its bills.
It has come down to this: Medicaid or pension payments to retired state workers. The politicians have decided to pay state retirees. Does this surprise you? Let’s see: politicians either stiff the poor (who do not vote in large numbers) or stiff the state’s unions (who do vote in large numbers).
The governor says the state must face the music. It’s more like a song and dance.
To save a system he says is “on the brink of collapse”, Mr Quinn proposes cutting $2.7bn from Illinois’ $11.5bn Medicaid bill. Few would dispute that the state needs to change its behaviour. Last year, Illinois underfunded Medicaid by $2bn as it struggled with debts totalling more than $280bn, an $86bn hole in its public pension funds and a $9bn backlog of unpaid bills.
The Medicaid tab has grown since the financial crisis, which pushed more people into poverty. In 2007, 2.1m Illinois residents were eligible for the low-income programme. Today, 2.7m qualify – 1.7m of them children, according to the state’s department of healthcare and family services.
The state looks like a doomed beast.
To stem the growing shortfall in its public pension funds, Illinois pledged to pay its full pension obligations – $5.2bn next year – without borrowing, something budget watchdog groups have long urged it to do.
However, the state can only afford to do this by cutting sharply elsewhere. “This represents the ‘crowding out’ of spending as a result of the demands of the pension system,” says Joshua Rauh of Northwestern University.
This is the first shot. There will be lots of other shots over the next 20-30 years.
In that sense, Illinois – which has the most underfunded public pension system in the US – could be a leading indicator for a pension crunch that will hit other cash-strapped states. “We’re going to see more and more states cutting spending to meet pension obligations mandated by the state’s own statutes,” says Prof Rauh.
In Illinois, the axe will not just fall on healthcare spending. Among other big cuts, Mr Quinn also proposes closing two state prisons and six halfway houses. Already, the system’s 48,620 inmates are crammed into space designed to hold 33,704, according to the state’s department of corrections.
Inmates don’t vote.
Illinois is only remaining solvent by not paying its bills on time, a practice that hurts thousands of small contractors that do business with the state. When payments do arrive, they are often incomplete. If Illinois continues this practice, it will rack up $35bn in unpaid bills by 2017, according to the Civic Federation, a Chicago think-tank.
Yet state legislators are in little mood to cut spending when they are facing re-election in November. Mr Quinn declines to specify what programmes should be cut, saying this is a decision for the legislature. Many expect this to water down the proposed cuts.
The welfare state is going bankrupt, all over the world. Illinois is the poster child of this development.
Be prepared, wherever you are.