Illinois - The canary in the fiscal coal mine

Illinois is showing the way how not to deal with fiscal catastrophe.  It is of course, the Obami approach, though.  Josh Barro explains:

Illinois hasn’t really balanced its budget since the tech-boom years of the late 1990s. Faced with a growing gap between revenue and spending, state lawmakers have resorted to borrowing money to pay for current operations. This borrowing can take unusual forms; sometimes, for example, Illinois simply stops paying its bills, sending IOUs to vendors, such as hospitals that provide Medicaid services, and to local governments and authorities. (As of March, Illinois had piled up over $8 billion in such unpaid bills, and the governor and legislature were squabbling over whether to borrow even more to pay them.) All this borrowing has added up: the state’s bond debt and unfunded pension liabilities have skyrocketed from $20 billion in 1998 to $126 billion by this July.

Technically, Illinois shouldn’t be able to amass such a heavy debt burden, since its laws, like most states’, require the state budget to be balanced yearly. The problem is that Illinois’ balanced-budget rule is full of loopholes. The legislature, for instance, can meet the requirement simply by attesting that the budget is balanced at the time of enactment, even if it knows that budget gaps will appear later in the year. When those deficits appear, the legislature can then borrow money to close them; it doesn’t have to cut spending or raise taxes, as most other states require. The balanced-budget requirement also doesn’t apply to Illinois’ pension obligations; the state is free to treat them as carelessly as it likes.

These lax rules have allowed Illinois to increase its spending, through good times and bad, without raising taxes. In 2003, for instance, with state tax receipts still lagging from the 2001 recession, then-governor Rod Blagojevich sold legislators on a plan to float $10 billion in bonds to reinforce the state’s teetering pension funds. However, $2.7 billion of that money went not to the funds themselves but to substitute for the state’s current-year pension payment and to service the bonds’ own interest costs. That freed up other money, which Blagojevich used to finance an ambitious spending program, including expansions of eligibility for Medicaid and the Children’s Health Insurance Program.