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Illinois Faces Hurdles as Cliff Approaches

Illinois State Elegance

Illinois State Elegance (Photo credit: Michael J. Linden)

 

The package of tax increases and spending cuts known as the “fiscal cliff” takes effect in January unless Congress passes a budget deal by then. The economy would be hit so hard that it would likely sink into recession in the first half of 2013, economists say.

Illinois’ Democratic lawmakers are facing their own description of the fiscal cliff, perhaps even direr, including $139 billion in debt, when enacted, will permanently higher tax rates on personal income, massive unfunded public pension liabilities and the looming calamity of large volumes of commercial real estate debt to mature within the next seven years.

ILLINOIS’ DEBT

U.S. Sen. Dick Durbin, now the Democrats’ “whip,” or assistant majority leader, got his political start in the Illinois Legislature. Now a powerful player in Washington D.C., he says, “The only way Congress can avoid the so-called fiscal cliff is through a balanced approach that cuts spending and raises revenue while asking millionaires and billionaires to pay their fair share.”

Durbin, who is a member of The Gang of Eight — the four Republicans and four Democrats—has been working with the group on key subjects including taxes, entitlement programs, and legislative process issues.

The full group is comprised of Sens. Tom Coburn (R-OK), Saxby Chambliss (R-GA), Mike Crapo (R-ID), Mike Johanns (R-NE), Dick Durbin (D-IL), Kent Conrad (D-ND), Mark Warner (D-VA), and Michael Bennet (D-CO).

U.S. Senator Richard Durbin, of Illinois.

U.S. Senator Richard Durbin, of Illinois. (Photo credit: Wikipedia)

Illinois has America’s second-largest public debt per capita, $9,624, including state and local borrowing, according to the State Budget Crisis Task Force.

The task force partnered with leading independent experts in each state, including executive director Donald Boyd, who was the director of the economic and revenue staff for the New York State Division of the Budget.

Boyd has over three decades of experience analyzing state and local fiscal issues, and has written or co-authored many of the program’s reports on the fiscal climate in the 50 states. His previous positions include director of the tax staff for the New York State Assembly Ways and Means Committee.

In 2011, Illinois’ flat 3 percent individual income tax rate was raised to 5 percent, with the rate scheduled to fall to 3.75 percent in 2014. The 4.8 percent corporate tax rate jumped to 7 percent and was to drop to 5.25 percent in 2014. Lawmakers also put a 2 percent cap on annual spending growth through fiscal year 2015.

Public Information Officer at Illinois’ Department of Revenue, Susan Hofer, confirmed one major result that would go into effect for federal taxes if there is no action. She stated, “If in fact the federal government does not take action to keep low tax cuts in place, then we go back to the tax rates that were in effect in 2000.”

State officials, however, warned that Illinois stands to lose more than $1 billion if Congress and President Barack Obama cannot reach an agreement to prevent the fiscal cliff brought on by preset tax increases and budget cuts.

“The worst-case scenario,” says Hofer, if Congress does not act on either of the tax rates, Illinois “could lose $800 million in tax revenue in fiscal 2014.”

The ramifications of federal tax increases would not necessarily affect state budgets in a negative way. Because of how their tax codes are coupled to federal regulations, more than half the states might see a boost in state income tax collections if cuts are made to federal income tax deductions and credits.

But that potential boost in state revenues could be wiped out if the plunge over the fiscal cliff were to result in another recession, said Ingrid Schroeder, a research director at the Pew Center on the States, according to Yahoo News. Rising unemployment could mean more people qualifying for Medicaid and other government services, costing states additional money.

The latest national survey by the Pew Research Center for the People & the Press, conducted Nov. 15-18 among 1,002 adults, finds that nearly identical percentages of Republicans, 36 percent, and Democrats, 35 percent, say they very closely followed the debate over the automatic spending cuts and tax increases that will take effect at the beginning of next year unless the president and Congress act.

According to State Budget Solutions (SBS), state government debt amounts to $13,425 for every American and $37,486 for every private sector worker in this country.

If the tax increases are allowed to expire, the Illinois budget gap could distend to $9.4 billion in fiscal 2016 in a state required by its constitution to have a balanced budget, according to economists.

ILLINOIS’ PENSION

THE REALITY IS NOT CUTE: This campaign image provided by Illinois Go. Pat Quinn’s office shows a cartoon snake named “Squeezy the Pension Python” who coils around the statehouse as part of Quinn’s new online campaign to get Illinoisans excited about pension reform. AP Photo/Courtesy of Gov. Pat Quinn’s office

THE REALITY IS NOT CUTE: This campaign image provided by Illinois Go. Pat Quinn’s office shows a cartoon snake named “Squeezy the Pension Python” who coils around the statehouse as part of Quinn’s new online campaign to get Illinoisans excited about pension reform. AP Photo/Courtesy of Gov. Pat Quinn’s office

Illinois is facing a crucial, critical and central difficulty. The state’s pension systems are only 43 percent funded, leaving an $83 billion pension liability that is brimming spending on the most vital services, including schools, human services and prisons. This year, the state paid $5.7 billion toward pensions, including debt service, consuming 17 percent of state spending. By 2017, that will reach $7.8 billion, or 21 percent of state spending, according to the Civic Federation.

In a statement, Gov. Pat Quinn called the pension funding crisis the “most urgent challenge of the decade” and urged the state legislature to take action.

On Nov. 18, Gov. Quinn launched an Internet grassroots campaign to increase public awareness about the need for pension reform in Illinois. Conveying a message from the next generation to today’s leaders, the “Thanks in Advance” public awareness campaign was designed to educate citizens about the “squeeze” caused by skyrocketing pension costs.

“Kids count on adults to look out for them and act responsibly,” Gov. Quinn said. “Children have a critical stake in pension reform and that’s why we are here today calling Illinois citizens to action. If the General Assembly passes comprehensive reform, we will ease the squeeze on essential services, restore fiscal stability to our state and protect the future of the next generation. Illinois’ children have a message for us: Thanks in advance for rising above politics and getting the job done.”

The strategy includes a website featuring a video on the history of pensions since ancient Rome, a chorus of children shouting “Thanks in advance” for fixing the retirement system and a mascot of a python called “Squeezy the Pension Python.”

Illinois’ unfunded liability recently grew to $96 billion, the worst in the nation. Illinois’ seven-decade old pension crisis began in the 1940s and grew out of Springfield neglect, two economic recessions and changing demographics.

The Pew Center on the States, a national nonpartisan think-tank, rated Illinois 50th in unfunded pension liability. Moody’s Investors Service lists Illinois as the lowest-rated state due primarily to “a severe pension funding shortfall.” According to the Governor’s Office of Management and Budget, each day that pension reform is not enacted boosts the long-term shortfall by $17.1 million. By 2016, the state of Illinois will be paying more on public pensions than on schools without comprehensive pension reform.

ILLINOIS’ COMMERCIAL REAL ESTATE

While the possibility of falling back into a recession is hovering over many consumer’s heads, the repercussions of falling off the cliff for businesses is staring them straight in the face.

According to a study by Cassidy Turley, a leading commercial real estate services provider, the top 100 government contractors occupy a total of 208 million square feet of office space in the U.S. Under the sequestration scenario, those same contractors would potentially shed 18.7 million square feet of office space across the U.S. as the government is forced to tighten its belt on various projects.

“Government contractors are a major tenant in many office markets across the country,” said Cassidy Turley’s Chief Economist Kevin Thorpe.  “Sequestration is essentially an immediate nine percent drop in revenues for the government contracting world.  Contractors would invariably need to cut staff, which would create numerous holes in many real estate markets.”

CassidyTurleyA financial firm specializing in commercial real estate services and investment management, Jones Lang LaSalle’s concluded in their research lenders and investors are still waiting to see how legislators will deal with the fiscal cliff, which consists of tax cuts set to expire at the end of the year and federal spending decreases scheduled to begin in January. Most aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, too, will be implemented starting in 2013.

“It takes time for policy action to translate into business activity,” said the Managing Director, Ben Breslau. “If we’re able to clear some of these hurdles without a big near term fiscal drag, the release of some pent up demand could accelerate growth in the second half of 2013.”

Retailers, however, will continue to struggle with the battle between e-commerce and m-commerce sellers, with firms that are able to adapt to these new models coming out ahead, predicted Jones Lang LaSalle for 2013.

“The shift to online sales has retailers moving out of less-successful stores and adopting smaller footprints,” Breslau said.

Much of the nation’s consumers will see these effects this holiday season when out shopping.  More of the “Ma and Pa shops” have closed and the majority of shopping has been done online. Websites like Amazon and eBay have consumers flocking to their computers rather than their cars.

Nationally, companies remain less likely to ramp up hiring until there’s a political resolution of the more than $500 billion in tax increases and spending cuts that would take effect Jan. 1. Members of Congress are scheduled to finish the year on Dec. 14 with the new 113th Congress will be sworn in on Jan. 3, 2013.

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