Obama's Home State, Illinois, Reflects The Problems Obama Has Brought to Washington, D.C. and the Nation

In Illinois, a Democrat-controlled Legislature and Public Employee Unions Make Borrowing More Expensive

By George Will · Thursday, April 26, 2012

WASHINGTON -- After trying to tax Illinois to governmental solvency
and economic dynamism, Pat Quinn, a Democrat who has been governor since
2009, now says "our rendezvous with reality has arrived." Actually,
Illinois is still reality-averse, so Americans may soon learn the
importance of the freedom to fail in a system of competitive federalism.

Illinois was more heavily taxed than the five contiguous states
(Indiana, Kentucky, Missouri, Iowa, Wisconsin) even before January 2011,
when Quinn got a lame duck Legislature (its successor has fewer
Democrats) to raise corporate taxes 30 percent (from 7.3 percent to 9.5
percent), giving Illinois one of the highest state corporate taxes, and
the fourth highest combination of national and local corporate taxation
in the industrialized world. Since 2009, Quinn has spent more than $500
million in corporate welfare to bribe companies not to flee the tax
environment he has created.

Quinn raised personal income taxes 67 percent (from 3 percent to 5
percent), adding about $1,040 to the tax burden of a family of four
earning $60,000. Illinois' unemployment rate increased faster than any
other state's in 2011. Its pension system is the nation's most
underfunded, and the state has floated bond issues to finance pension
contributions -- borrowing money that someday must be repaid, to replace
what should have been pension money that it spent on immediate
gratifications.

Quinn's recent flirtation with realism -- a plan to raise the
retirement age to 67 and cap pension cost-of-living adjustments -- is
less significant than the continuing unrealistic expectation that some
Illinois' pension investments will grow 8.5 percent annually. Although
the state Constitution mandates balancing the budget, this is almost
meaningless while the state sells bonds to pay for operating expenses
(in just 10 years the state's bonded debt has increased from $9.4
billion to $30 billion), underfunds pensions and other liabilities, and
makes vendors wait (they are owed $5.6 billion).

The Illinois Policy Institute, a limited-government think tank, in a
report cheekily titled "Another $54 Billion!?" argues that in addition
to the $83 billion in pension underfunding the state acknowledges, there
is $54 billion in unfunded retiree health liabilities over the next 30
years. Illinois, a stronghold of public employees unions, "is on pace to
spend nearly $1 billion on retiree health care benefits in fiscal year
2013, more than double what it spent in 2003. Worse yet, these
liabilities are growing more than twice as fast as tax revenues."

To prepare for Illinois' probable plunge into insolvency, read
"Freedom to Fail: The Keystone of American Federalism" by Paul E.
Peterson and Daniel Nadler in the University of Chicago Law Review. They
note that only 25 of the world's 193 nations have federal systems, and
in most of the 25 the freedom of the lower tiers of government is more
circumscribed by the central government than American state governments
are by the federal government. American states' greater freedom --
autonomy under America's system of dual sovereignty -- from the central
government's supervision requires that they be disciplined instead by
the market for government bonds, and the real possibility of default.

Peterson, a professor of government at Harvard, and Nadler, a
doctoral candidate also at Harvard, say collective bargaining rights for
government employees pose "a dramatically new challenge to the
viability" of American federalism. They cite studies demonstrating that
investors' perceptions of risk of default are correlated with the rate
of unionization among government employees. Higher percentages of
government employees who are unionized, and larger Democratic shares of
state legislative seats, correlate with increases in state borrowing
costs.

At least 12 percent of Americans change their residences each year,
often moving to more hospitable economic environments. In a system of
competitive federalism, Peterson and Nadler write, "If states and
localities attempt in a serious way to tax the rich and give to the
poor, the rich will depart while the poor will be attracted." [This is a lesson that Illinois, California and similar high-tax-and-spend states have been loath to learn.] And
government revenues and expenditures vary inversely.

From September through December 2008, the premium that investors
demanded before they would buy California debt rather than U.S.
treasuries jumped from 24 to 271 basis points (100 points equals 1
percent). The bond market, the only remaining reality check for state
politicians, must be allowed to work.

Constitutional jurisprudence affirms that states exercising
substantial autonomous powers thereby assume concomitant risks. Federal
loans or other bailouts of misgoverned states would remove bond market
discipline, the only inhibition on the alliance between the Democratic
portion of the political class and unionized public employees.

(c) 2012, Washington Post Writers Group