Monday, September 25, 2017

Illinois in dire need of comprehensive fiscal, economic policy reform, experts say

Illinois in dire need of comprehensive fiscal, economic policy reform, experts say, Metamora Herald

By Andrew Burger | Illinois News Network

The median income for a middle-class American rose to a record-high $59,039 in 2016, according to the latest U.S. Census Bureau report, returning to a level not seen since 1999. In addition, the national unemployment rate came in at 4.4 percent in August, about the same as it was prior to the “Great Recession” of 2007-2009.

For many, it was a long, difficult haul recovering from the housing-banking bust and subsequent recession. It has been even more difficult in Illinois. A look ahead indicates it’s not likely to get any easier, according to economic experts.

Illinois has been lagging behind its Midwestern neighbors in several key economic respects – economic and jobs growth are prominent among them. Compounding the problems are recurring state budget deficits and the level of public debt, which have grown to be among the largest in the nation.

California’s economy stood out as a top performer among U.S. states in 2016, according to WalletHub’s latest annual national economic analysis and rankings. As of year-end, California’s economy ranked as the sixth largest in the world, equivalent to that of the U.K.’s and larger than France or India’s.

Washington, California and Utah came in 1, 2 and 3 overall. llinois, in contrast, continued to struggle with a public debt that ballooned to a record $14.5 billion, as well as registering the second-highest unemployment rate in the Midwest.

Overall, the Illinois economy ranked 34th among the 50 U.S. states and the District of Columbia in 2016, according to WalletHub, which ranks the health and strength of state economies based on assessments of 27 economic performance indicators. Among its neighbors, Michigan ranked 12th, Missouri 23rd, Wisconsin 25th, Indiana 28th and Iowa 33rd.

Minority Republicans in the General Assembly and some public policy experts are laying much of the blame on the big-government agenda being pursued and legislation pushed through by majority Democratic Party leaders – long-serving House Speaker Mike Madigan in particular. Even though Illinoisans already paid the highest combined local and state taxes in the nation, Madigan passed a $5 billion income tax hike over GOP Gov. Bruce Rauner's veto.

“It’s not surprising that states with lower tax burdens have an easier time attracting businesses and investment ...Generally speaking, I would say that it would be preferable to increase [state] revenue by growing the tax base as opposed to raising taxes," Ivan Osorio, editorial director at the Competitive Enterprise Institute in Washington, D.C., told Illinois News Network. “If you can implement enough in the way of favorable tax and economic policy incentives to attract and help businesses grow, you could increase the tax base and recurring revenues,”

Beyond taxation, the burden of state pension obligations looms large in Illinois. The state's five state pensions systems are underfunded by more than $130 billion.

“What’s particularly important in Illinois, beyond the issue of taxation, are the state’s pension obligations," Osorio said. "These have been taken on and they have to be met.”

Meeting these obligations will have long-running impacts in terms of future tax rates in Illinois.

“Broadly speaking, if you find yourself in a funding hole, you stop digging, so state policy makers need to find ways of reforming the state pension system so that it is financially sustainable,” Osorio said.

 Shifting from defined benefits to defined contribution pension system is one option. That could slow the rate of growth of state pension obligations, and thereby ease the fiscal pressure Illinois faces at present.

“Secondly, if you have a defined benefit pension system, you can review and revise its valuation and accounting methods so they are not overly optimistic,” Osorio said.

Future pension payouts are based on assumptions regarding the rates of return earned on investments made by the state government and employees’ contributions. A shortfall occurs when those assumed future rates of returns turn out to be less than had been expected.

“You have to use discount rates that are conservative enough so that the state’s contribution is high enough to meet future pension payment obligations,” Osorio said. “If they are too optimistic – too high – it gives the appearance that the state needs to contribute less up front than actually turns out to be the case when those obligations come due.”

Another potential pitfall associated with using discount rates – assumed rates for investment returns – is that could encourage pension fund managers to make riskier, higher-yielding investments, Osorio said.

Manufacturing has been particularly hard hit in Illinois. Taking steps to revive the sector could reward the state handsomely, according to Mark Denzler, vice president and chief operating officer of the Illinois Manufacturer’s Association.

Taking a bird’s eye view, Illinois has lost more than 309,000 manufacturing jobs since the turn of the century – enough people to populate what would be the second largest city in the state, Denzler said.

“Since that time, more than 150,000 manufacturing jobs have been added in Michigan, more than 90,000 in Indiana, more than 80,000 in Wisconsin and more than 43,000 in Wisconsin," he said. "Illinois actually lost manufacturing jobs, about 15,000 of them.”

That poor comparative performance indicates there’s something more at work in Illinois than issues of the regional, national or international economic competitiveness of manufacturing.

“Manufacturers face the same national and global issues everywhere," Denzler said. "Illinois’ poor performance is very simply a failure of the state General Assembly to create a strong economic climate.”

Manufacturing jobs have been coming back to the U.S. but Illinois isn't taking advantage of it, he noted.

Poor economic conditions and persistent fiscal problems have led Illinois to lead the nation in one respect – migration out of the state.

“Job losses have led to population losses,” Denzler said. “Illinois has led the nation in terms of out-migration for three consecutive years.”

If this continues as it has, the state stands to lose two seats in the U.S. House of Representatives when national election redistricting takes place with the next U.S. census, Denzler noted.

“The state has so many advantages – a central location, excellent transportation options with good infrastructure and access to waterways; a well-educated and experienced workforce, a statewide network of good educational institutions and good water resources, something neighboring states have been having problems with," Denzler said. “Nonetheless, Illinois continues to lag behind the rest of the Midwest and the nation in terms of manufacturing employment growth. Legislators and policy makers need to create a good economic climate that spurs business growth and job creation.”

What can, or should be, done? A host of things.

“We have to establish a supportive climate for manufacturing, commerce and investment that’s stable and predictable,” Denzler said. “We need economic development reforms, including changes to workers’ compensation. We need property tax relief and modernization of the tax system with comprehensive tax reform, and we need a stronger commitment to education and workforce development.”

More specifically, Denzler highlighted the high returns and varied benefits that could be gained in Illinois if state leaders were to pay greater attention, and devote more in the way of resources, to support manufacturing in the state.

“We have all this energy being focused on the fight for a $15 minimum wage for fast food workers. That works out to an annual salary of about $31,000. The average manufacturing job pays an annual salary of around $80,000," he said.


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