Illinois's "State Capacity" Crisis

Part 1: The Government Hiring Crisis and its Many Causes

One of the chief concerns of mine has been a term described as “State Capacity”. To put it in simple terms, it’s the ability of the government to accomplish stated objectives effectively and efficiently. What it is critical to know about this is that our present government has seen its capacity diminish. Particularly State and Local government. This is manifested in the weakening capacity of hospitals with long emergency room lines and overworked staff. It’s the declining clearance rate of violent crime from local police departments while we pay record high overtime costs. You see it in the high cost of public infrastructure and the worsening frequency of public transit. It’s the decline in real spending on education, welfare, infrastructure, and police versus retirement and employee health insurance programs. All of this drags down our quality of life while simultaneously choking us with record high property taxes as municipal government works to bridge the gaps in funding. But why is this our present?

The Roots of the Crisis: Pensions

The State of Illinois is in somewhat of a doom loop. While Governor Pritzker has put a stop to the dangerous and extremely fiscally irresponsible governance of the 90’s and 00’s, the lingering effects of these bad choices weigh down on us like a nightmare. Illinois has had a Republican and Democratic governor go to jail, in a row, followed by two mediocre and unpopular one-term wonders from each party. There should be no surprise as to why there is such political disengagement, apathy, and cynicism in Illinois across the spectrum. Nor should there be surprise that both the Democratic and Republican parties have turned away from those more moderate political modes of the 90s and 00s. But it isn’t just corrupt or weak leadership, it’s explicitly bad decisions. Among these infamous decisions are Republican Governor Jim Edgar’s 3% compounded cost of living “Edgar Ramp”. It increased benefits while it underfunded the pensions, including during his term, below what actuaries estimated was required to keep pace with payments over the 50 year funding plan. Thus giving the veil of balanced finances while kicking the can down the road. His successor, Republican George Ryan went to prison for corruption. Following him was Democratic Governor Rod Blagojevich. He famously was forced out of office for corruption in 2009 but his fiscal crimes are equally bad. In 2003, he performed a $10 billion dollar pension bond sale, selling $10 billion in debt, with interest, backloading that interest until he’s well out of office, and then took $2.7 billion of those proceeds to shore up that current year's budget. He then took another “pension holiday” underfunding the system again by another $6.8 billion. That’s $9.5 billion in lost funding on top of the initial underfunding from the Republican years. As we can see, this is a bipartisan, multi-decade, multi-institution crisis. And these growing debts require a greater and greater share of the State budget, crowding out other spending. Pension spending now tops 21% of the State budget and is only going to grow over the years.

The Impacts on our Lives

With pensions taking up a larger and larger share of the State budget, investments won’t be made and staff won’t be hired. Illinois is suffering from a lingering staff shortage in virtually all sections of government. Police departments across the State face staff shortages that not only burn out officers and drive up personnel costs: it worsens their ability to respond to calls and perform their jobs. Both qualitatively, exhausted cops will do worse but also in manpower terms. There simply aren’t enough police on gang, violent crime, and other critical sections to handle all of the problems we face. Chicago alone has more than 1,700 police vacancies and barely enough cadets in training to replace retirements and quits. Overtime costs have more than doubled over the last 3 years, meaning we are paying significantly more for the same labor during budget crunches. And what does this do for morale, and downstream of that, quits and retirement? Education fares no better. The State has more than 4,000 positions unfilled in the system. Increasing the ratio of students to teachers and burning out our professional staff. The story repeats in transit: Pace, Metra, and the CTA being both the largest transit systems and facing multi-hundred personnel staff shortages. Even the bureaucracy itself, the regulators and employees who administer the State face staffing shortages that worsen service and is bad for workers. For example, you see it in the failure of the State’s climate programs to even get off the ground. Only just recently has a pilot green energy jobs training program launched, more than 2 years after the bill passed. We make available huge quantities of grants and loans, we talk up bold rhetoric of transitioning our energy sector, yet nothing comes of it because the State simply cannot make it so. Dry rot at all levels.

No business would thrive if it deliberately underpaid its staff keeping qualified candidates away, overstretched them to the point of destroying their morale, or underhired such that it was forced to close early or not complete orders. Yet that is how Illinois operates itself. I don’t believe the government should be ran as a business but I include this example for those who do.

This has worsened our State’s ability to provide services or be an attractive place to live and create opportunity for its residents to be in gainful employment: jobs with self-supporting pay and reasonable quality of life. Education is the biggest manifestation of this pension funding problem. Illinois has some of the highest property taxes in the US because the State funds its schools among the least. Why? Pensions. Pensions eat away at the budget which drives school underfunding, which then necessitates sky high property taxes to fill in the gap. Beyond K-12, the real purchasing power of the higher education budget has declined by 55% over the last 20 years. As a percentage of university revenue, the State provided share fell from 72% in 2002 to 35.6% by 2020. And as a result, tuition and fees have gone through the roof, making loans mandatory for many students. Worse still, it hollows out the academy, making tenure track positions scarcer. We lose our competitive edge in the quality of higher education and put it out of reach financially for the working and working-middle class. These public universities are opportunity factories, where people can enter or reproduce themselves into the middle class with credentialing that enables them to get higher paid gainful employment. It also gives the students networking opportunities and in many fields, prerequisite knowledge and job skills. These soft and hard skills are crucial for entering the corporate dominated, information economy of the present.

Pensions also discourage hiring of public employees generally. We are then forced to pay government employees lower than college premium salaries without even the promise of long term security. Public sector employment has historically been yet another source of gainful employment. While effective provision of services should be the goal of state policy, not job creation per se, public sector jobs in healthcare, education, transit, and police to name a few have been ways in which people enter and stay in the middle class. This is especially true for non-white workers. Our inability to have a robust public sector that is staffed and effective once again makes opportunity in our society scarcer.

Illinois has seen a recent boom in manufacturing investment. New plants have opened in the electric car industry across Illinois and recent news has reported that a once thriving 3 shift plant that was shuttered in Belvidere will reopen. This industrial policy from the Biden administration and the Pritzker Administration’s own business attraction policies coupled with a recent spike in labor activism have been a welcome, if partial, relief for non-college graduate gainful employment opportunities in the State. But as always, fiscal policy will choke us if we are not careful. Rather than pursuing policies that make these opportunities more abundant, we are given few fiscal opportunities to survive at all.

The Way Forward

Part of this is irresponsible choices in other policy matters. There is a multi-hundred million dollar program trying to provide Medicaid to undocumented immigrants, without the needed federal reimbursement, which we likely cannot sustain especially as the migrant crisis grows in size. We likely couldn’t have afforded to give out as much pension benefit to as many people as was initially promised or we lied on the other end and didn’t deliver the necessary but unpopular taxes to pay for it. All of this lays at the feet of policy makers of both parties and of many generations. We need a new era of policymaking to rectify these fiscal woes.

The only way to achieve this is through constitutional reform and a profound transformation of our tax system in Illinois. Without state-level constitutional reform, a graduated income tax cannot be implemented. This would be a critical tool in raising revenue for the State and is in line with the general Democratic principles of the voters. Well, one would assume but in 2020 such an amendment was voted down by nearly 10%. I would argue that the mid-2010s income tax fight coupled with the general malaise of high property tax poisoned the issue. We need better voter education from advocates to breakthrough. Without constitutional reform, changes to pensions cannot be made either. We clearly have overpromised benefits to retirees. As Einstein famously said, compound interest is the 8th wonder of the world. Compound interest on pension benefits can’t be sustained. But this isn’t the only fiscal tool that we can use to both alleviate property taxes and raise revenue. Illinois doesn’t tax as many professional services as other neighboring states, such as Iowa. Increasing this would raise rates while matching our neighbors, therefore blunting its negative effects. Illinois could also reform its sales tax into a Value Added tax, which would both make the sales tax more progressive in impact and expand the taxing base raising revenue. In that system, higher value goods would be taxed more and the tax would be distributed from manufacturer to distributor to merchant, spreading the burden while expanding the tax roll. Illinois could also pursue Split-Rate property taxes, which would shift the bulk of the property tax burden onto land values rather than developments. This would both turn the many vacant lots of Cook county into larger sources of revenue but also alleviate homeowners whom the bulk of their property value is in their home, not the land. Placing pressure on land speculators to develop or sell their lots drives employment and widens opportunity for more people. Ultimately, the simplistic 20th century tax models of income, sales, property development, and corporate taxes aren’t effective for the crisis of the 21st century.

This is the underrated crisis of the 21st century: the coming apocalypse of the baby boomer retirement and the demographic aging of the world. More money will have to be spent than ever before on the healthcare and pensions of non-working elderly people. While this is good in terms of fighting what otherwise would be a massive source of poverty, it means a structurally smaller working age population will have to be taxed more to provide for these people. We need new models of financing these pension programs with more realistic outcomes for workers while simultaneously expanding health insurance to cover a larger pool of people with greater state control of prices. Universal national health insurance with universal provider acceptance and price controls on services and drugs is in my view the only way out of this healthcare spending apocalypse but what about pensions? And how to pay for the healthcare? Or all these new public sector employees? If we assume that the working population will be smaller than it was in the 20th century as a proportion of population, we need to look to real estate taxes as a better, more durable source of revenue than income or payroll taxes. Specifically land value taxes. By taxing land, we tax something that: doesn’t decline in supply like labor payrolls, has no deadweight loss making it more efficient than income, corporate, or sales taxes, and has proven track record at stimulating growth in urban areas both domestically and in international examples. I’m looking forward to the land tax proposal in Detroit and potential lessons learned for our Rust Belt city of Chicago. Consumption taxes, much like the income and payroll tax dilemma, faces demographic pressure which is why it also shouldn’t be relied on. Again, the share of society out of work and on fixed incomes will rise, we cannot expect consumer spending to rise year over year fast enough to eclipse healthcare and pension obligations.

We need something like the Green New Deal. Not the one specifically proposed by Democratic Socialists but an era of policy making that moves the status quo of the country forward and tackles significant social problems. And we can’t do this unless state capacity grows. I’m hoping that these ideas take root in the minds of the politically engaged so when the primaries come around, more serious and more thoughtful candidates have at least some kind of audience. In my next piece I will examine a little further the specifics of the pension problems and some proposed solutions.

I’ll see you in the next one.