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Budget impasse puts Illinois economy in downward spiral

St. Louis Post Dispatch

Friday, June 30, 2017  |  Commentary  |  By David Nicklaus

Budget--State (8) , Economy (34)
A Powerball lottery ticket is an extreme long shot, but it provides a sliver of hope for buyers looking to escape the economic doldrums.

As of Wednesday night, such fantasy financial planning is no longer available in Illinois. The other states that participate in Powerball were worried that Illinois couldn’t pay its bills.

That adds convenience stores and other lottery retailers to the long list of businesses hurt by Illinois’ budget crisis. The brinkmanship in Springfield has been hurting the state’s economy for years, and the damage could get worse if legislators and Gov. Bruce Rauner don’t reach an agreement soon.

Illinois’ credit rating is just one level above junk-bond status, and a downgrade could happen soon. This will cost the state real money: Since late May, the spread between Illinois’ bonds and those of more creditworthy states has risen by 2 percentage points, according to IHS Markit.

On many economic measures, Illinois is the sick man of the Midwest. It’s the only state that has lost population for three straight years, and it’s a laggard in job and income growth.

Illinois lags in job growth - Interactive chart

While other Rust Belt states rebuild their economies around education and health care, Illinois is hurting state universities with budget cuts and sticking medical providers with unpaid bills.

Perhaps most damaging, the lack of a state budget leaves businesses guessing about future tax rates and about state services.

“Any type of uncertainty creates tremendous challenges for businesses,” says Ronda Sauget, executive director of Leadership Council Southwestern Illinois. “This is a very frustrating place for businesses right now.”

Her manufacturer members have jobs they can’t fill, yet school districts have eliminated vocational education as part of budget cuts. Transportation companies still complain about big license fee increases a few years ago.

And nobody can tell them how much more pain lies ahead.

Sauget recently met with site selection consultants in Atlanta, and thought she had a good story to tell about Metro East as a location for manufacturing and distribution companies. Inevitably, the consultants asked about the budget talks in Springfield.

“That’s a tough question to answer,” Sauget said.

Laurence Msall, president of the Civic Federation in Chicago, also says the indecision is causing damage. “It’s a huge impact on the economic strength of the state,” he said. “Businesses are moving or making alternative decisions rather than investing in Illinois.”

Steven Frable, a senior economist at IHS Markit, predicts that employment in Illinois will grow 0.65 percent this year, less than half of the 1.4 percent U.S. growth rate.

A sluggish economy makes the state’s revenue problem harder to solve, but continued procrastination will make the economy even weaker.

“The cost of debt is going to lead to tax increases, and you’re going to get more exodus of state population,” Frable said. “That’s going to reduce further the state’s weakened tax base, and it leaves less demand for industries like retail and wholesale trade. It seems like the budget deficit has created a vicious downward spiral.”

It’s hard to say how long the spiral might continue, but IHS Markit sees population losses and slow job growth continuing for the next couple of years. There’s no painless route to prosperity in a state with $15 billion in unpaid bills and $250 billion in unfunded pension liabilities.

To keep postponing tough decisions, though, is about as irrational as pinning your hopes on the lottery. With Powerball out of the picture, it’s time for Illinois politicians to quit playing games too.