The Dangers Hidden in Structural Budget Deficits and Uncontrolled National Debt

THE REAL NEWS TODAY IS A CAUTIONARY TALE OF PUBLIC DEBT IN ILLINOIS. • • • ILLINOIS SENATE OVERRIDES GOVERNOR'S BUDGET VETO. In an extraordinary 4th of July session, the Illinois Senate, led by Democrats who have a 15-seat edge, voted to override Republican Governor Bruce Rauner's vetoes of a $36 billion budget package, including a $5 billion tax increase designed to start digging out of the nation's longest budget crisis since at least the Great Depression. The Democratic-controlled Senate completed its work 30 minutes after the Republican Governor's vetoes, sending the package back to the House for an override vote that would give Illinois its first annual budget since 2015. The Illinois House, also controlled by Democrats with a 17-seat edge, did not plan to take up the action on July 4th. Governor Rauner wrote in his veto message : "The package of legislation fails to address Illinois' fiscal and economic crisis -- and in fact, makes it worse in the long run. It does not balance the budget. It does not make nearly sufficient spending reductions." • • • ILLINOIS TAXES SET TO GO UP. Governor Rauner acted about three hours after the Senate voted to hike the personal income tax rate by 32 percent, from 3.75% to just under 5%. Corporations would pay 7% instead of just over 5%. Rauner had promised to veto the tax measure because Democrats who control the General Assembly have not agreed to resolve his budgetary issues, including statewide property tax relief, cost reductions in workers' compensation and benefits for state-employee pensions, and an easier process for dissolving or eliminating local governments. • The tax hike portion of the budget would not have passed the Illinois Senate without the support of a lone Republican, Dale Righter, whose district includes Eastern Illinois University, which has been hit hard by the budget impasse. Righter said : "This state has to start balancing its budgets...that is the first and most important thing. Every dollar that we throw onto the backlog of bills is another dollar that the next generation has to pay for even though we got to spend it, and that is simply wrong." The Illinois House approved the tax increase with 72 votes on Sunday, one more than necessary, with the help of 15 Republicans. Whether the Republicans will continue to defy GOP GOvernor Rauner remains to be seen. • The sponsor of the tax increase bill, Senator Toi Hutchinson, said : "We are at a moment in time. We are faced today with the fierce urgency of 'now.' We don't have any more time. And too late is not good enough." The Illinois Senate's new Minority Leader, Republican Bill Brady said : "It's regrettable that I stand here today not capable of being able to support this package, not because what's in the package is bad, but because it's incomplete. We need a comprehensive budget package with reforms." • • • THE GOVERNOR'S VETO MESSAGE. GOP Governor Rauner's full veto message reiterated Brady's concerns : "Today I veto Senate Bill 6 from the 100th General Assembly, which is part of Speaker Michael Madigan's 32% permanent income tax increase forced upon the hard working people of Illinois. The package of legislation fails to address Illinois' fiscal and economic crisis -- and in fact, makes it worse in the long run. It does not balance the budget. It does not make nearly sufficient spending reductions, does not pay down our debt, and holds schools hostage to force a Chicago bailout. This budget package does not provide property tax relief to struggling families and employers. It does not provide regulatory relief to businesses to create jobs and grow the economy. It does not include real term limits on state elected officials to fix our broken political system. Even with the Madigan permanent 32% income tax increase, this budget remains $2 billion out of balance for fiscal year 2018. This budget will require even more tax hikes to balance the budget and pay down the bill backlog. This budget puts Illinois on track for major future tax increases and will lead us to become the highest taxed state in America in the coming years. Moreover, this budget package holds K-12 school funding across Illinois hostage to force a bailout of Chicago Public Schools (CPS). Hidden in this budget are terms that withhold school funding unless the school funding formula is rewritten to shift money from suburban and downstate school districts to CPS. Budgets in Illinois will not be balanced or stay balanced unless our economy grows faster than our government spending. We have been ignoring that truth for 35 years. This budget package includes no changes to create jobs and grow our economy. It will push more families and businesses out of our state. Therefore, pursuant to Section 9(b) of Article IV of the Illinois Constitution of 1970, I hereby return Senate Bill 6, entitled 'AN ACT concerning appropriations,' with the foregoing objections, vetoed in its entirety." • After the Senate voted to override Rauner's veto, Senate Majority Leader, Democrat John Cullerton, released a statement : "Today, the Senate voted to end this financial chaos and restore some sense of stability to our state. We have been working toward a bipartisan compromise on a balanced budget since January. Republicans and Democrats shaped and voted for this proposal. There is obviously more work to do. There always is. With today's votes, the Senate approved a balanced budget that funds our schools, supports our universities, honors our commitments to social service agencies, keeps road crews employed and even ensures lottery winners get paid. This is a step in the right direction. The next challenge is to make sure we keep moving forward. I believe the people of Illinois are tired of the finger pointing, tired of fighting over crumbs from Springfield to try to survive. We can do better, and we will do better. It all starts with this step forward." • • • ILLINOIS CREDIT RATING. On Monday, two of the nation's top credit-ratings agencies signaled it would be a good idea for Rauner to accept the proposed budget. Fitch Ratings and S&P Global Ratings, having earlier threatened to move Illinois' creditworthiness into "junk" status without swift action to approve a budget, smiled favorably on the financial outlook. S&P Global Ratings dropped Illinois' credit rating by one notch to BBB-minus on Thursday and warned the state could sink into junk unless it passes a budget that addresses a gaping structural deficit. • But, those kind words have little meaning. On June 1, S&P Global Ratings dropped Illinois' credit rating by one notch to BBB-minus, and warned that the state could sink into junk unless it passes a budget that addresses a gaping structural deficit. Illinois is already the lowest-rated US state and has been operating under court-ordered spending, stopgap budgets, and ongoing appropriations mandated by law. As a result, the state's pile of unpaid bills, a barometer of its structural deficit, has topped $14 billion. S&P analyst Gabriel Petek said : "The rating actions largely reflect the severe deterioration of Illinois' fiscal condition, a byproduct of its stalemated budget negotiations, now approaching the start of a third fiscal year. He also said "unrelenting political brinkmanship" poses a threat to the timely payments for core state priorities. S&P said the nation's fifth-largest state risks "entering a negative credit spiral" in which further credit downgrades could sap its weak liquidity. • This latest rating downgrade marks the seventh for Illinois since January 2015 by major credit rating agencies. S&P also downgraded the AAA rating on Build Illinois sales tax revenue bonds to AA-minus and pushed the rating on the state's appropriation debt issued by the Illinois Sports Facility Authority and the Chicago-based Metropolitan Pier & Exposition Authority from BBB-minus to the junk level of BB-plus. S&P said : "In our view, the ongoing budget impasse has increased the nonpayment risk associated with Illinois' obligations that require a budget appropriation before they can be funded. We now view these payment obligations as having speculative-grade characteristics." Illinois is rated Baa2 by Moody's Investors Service and BBB by Fitch Ratings, both with negative outlooks. Records from S&P, Moody's, and Fitch dating back about half a century or more show no states being rated as junk. • • • GOVERNOR RAUNER IS A BUSINESSMAN. Rauner was the chairman of private equity firm GTCR, where he had worked for more than 30 years, starting in 1981 after his graduation from Harvard, until his retirement in October 2012. A number of state pension funds, including those of Illinois, have invested in GTCR. After leaving GTCR, Rauner opened an office for a self-financed venture firm, R8 Capital Partners. The firm will invest up to $15 million in smaller Illinois companies. Rauner, also a philanthropist, served as Chairman of Choose Chicago, the not-for-profit that serves as the city's convention and tourism bureau, resigning in May 2013, and as Chairman of the Chicago Public Education Fund. Rauner has also served as the Chairman of the Education Committee of the Civic Committee of The Commercial Club of Chicago. • In 2015 Rauner reported earnings over $180 million, an average of more than $3,000,000 per week. Rauner's exact net worth is unclear but has been estimated at, minimally, several hundred million dollars. During his campaign for governor he promised that he would accept only $1 in salary and no benefits from his office, including forgoing a pension and reimbursement for travel expenses. • Rauner was sworn in as Governor of Illinois on January 12, 2015. His first executive order halted state hiring, as well as discretionary spending, and called for state agencies to sell surplus property. On February 9, 2015, Rauner signed an executive order blocking so called "fair share" union fees from state employee paychecks. Also in February 2015, Rauner proposed $4.1 billion in budget cuts affecting higher education, Medicaid, state employee pensions, public transit, and local government support. In April, Rauner also suspended funding for programs addressing domestic violence, homeless youth, autism, and immigrant integration. Democrat critics called these moves "morally reprehensible" and harmful to the state economy. In May 2015, Governor Rauner announced the shelving of the Illiana Tollway project, a controversial proposed tollway between I-55 in Illinois and I-65 in Indiana, citing the "lack of sufficient capital resources" and the budget impasse, but did not completely remove it from the state's list of proposed infrastructure projects. Rauner vetoed the Illinois state budget on June 25, 2015 which would have created a deficit of nearly $4 billion but covered what Illinois Democratic lawmakers called "vital services." He stated that he would not sign a budget until the Democratic state legislature passed his "Turnaround Agenda" to reduce trade union power and freeze property taxes. With no state budget, social service agencies have cut back on services, state universities have laid off staff, public transit service has ceased in two counties, and Child Care Assistance eligibility has been cut by 90%. • Illinois's unpaid bill backlog could reach as high as $25 billion by FY2019 if things continue as they have been. On June 30, 2016, just before the beginning of the next fiscal year, Rauner signed a temporary bipartisan stopgap budget to allow public schools to continue operating for an additional year and for necessary state services to continue for 6 months. However, the stopgap budget covered only 65% of social services agencies' normally allocated funds and provided $900,000 less for colleges and universities than FY2015, while attempting to cover eighteen months' worth of expenses. • • • WHY GO INTO SUCH DETAIL ABOUT THE ILLINOIS DEBT CIRSIS? It is not because Barack Obama is from Chicagoland. It is because in Illinois, we can see the future effect of ignoring the continuing US federal unbalanced budget -- often called a "structural deficit" because items are built into the budget with no hope of paying for them out of current tax revenues -- and the US national debt, accompanied by a looming threat of a liquidity crisis, although the US unlike Illinois, can simply print paper money, devaluing it with every liquidity crisis until there is a situation similar to the Greek mess. • • • RAISING THE US DEBT CEILING. TheHill reported on July 3 that only 16 House Republicans who are currently in office backed the last “clean” US debt ceiling hike, and few of them will say they are certain to support it this year. If the debt ceiling is raised with a clean hike -- a distinct possibility given Democratic demands and the narrow majority for the GOP in the Senate -- Republicans will need at least 24 members of their own conference to back a clean debt bill in the House. That could be difficult. Only four of the 16 Republicans who voted for the clean debt hike in 2014 suggest they will or are open to doing so this fall. GOP Speaker Paul Ryan, who would be charged with convincing Republicans to back the bill, voted against the clean debt hike in 2014, when he was still chairman of the House Budget Committee. Only 28 Republicans backed it, and 12 of them are no longer in Congress. • Only four of the 16 House Republicans who backed the clean debt ceiling in 2014 suggested they would consider voting for a clean debt hike this year : Representatives Charlie Dent (Pa.), Darrel Issa (Calif.), Pete King (N.Y.) and David Valadao (Calif.). Dent, a longtime centrist GOP leader, acknowledged more Republicans will probably have to take that step, saying : “Guess what? We’ll need at least 24 Republicans, and it should be a much larger number than that. • In the Senate, every Republican opposed the clean debt-ceiling bill on final passage. • And, it’s also far from clear that every Democrat in the House will back a clean debt hike. • This will be the first time in more than a decade that Republicans will have to raise the debt ceiling while controlling the White House and both chambers of Congress. That political dynamic puts the total responsibility for raising the debt ceiling on the GOP, and little if any responsibility on Democrats. House Minority Leader Nancy Pelosi will undoubtedly not give slack to vulnerable Republicans who don’t want to back the debt ceiling hike for their own party’s President. Steve Bell, senior advisor for the Bipartisan Policy Center and a former staff director of the Senate Budget Committee, said : “I don’t see Democrats bailing out Republicans, just like Republicans didn’t bail out Democrats. They’ll say, ‘We’re going to give you the same amount of help you gave us.’ ” • This past Spring, Pelosi and Senate Minority Leader Charles Schumer suggested that Democrats could withhold support from a clean debt hike if Republicans separately press for legislation cutting taxes on the wealthy. They later said Democrats would back a clean debt hike, but Pelosi will want as many Republicans as possible to support it since their party controls the White House. Since the last time Republicans enjoyed full power in Washington, raising the debt ceiling has become a much more politically sensitive vote. The GOP base railed against spending during the Obama administration, and fights over raising the debt ceiling in 2011 led Standard & Poor's to lower the US credit rating. Conservative Republicans are already pressing Speaker Ryan to tie spending cuts or budgetary reforms to a debt-limit bill, signaling they do not plan on changing their strategy with fellow Republican Donald Trump in the White House. Democrats, however, say they will insist on a clean debt hike. This means that if the House could pass a debt ceiling bill that included provisions backed by conservatives, their GOP colleagues in the Senate would need at least eight Democrats to back it to overcome an expected Democrat filibuster. • The Trump administration has given mixed signals about the debt ceiling. Treasury Secretary Steven Mnuchin has called for a clean debt hike and initially said it should be done before the August recess. He has since said a vote could take place in September. Trump budget director Mick Mulvaney, a former House Republican who demanded that steep budgetary restrictions be tied to the debt limit hike, has said there should not be a clean debt hike vote. Some Republicans who backed a clean debt hike in 2014 are expressing confidence the votes will be there in 2017. House member Darrell Issa says : “If you write the purchase order, the goods are delivered, you’ve agreed to pay for it, and suddenly you’re saying ‘well I hit my limit,’ well no, your limit was determined by your decision to write the purchase order and accept the goods.” Issa is one of five members who backed the last clean debt hike and represent districts won by Democratic nominee Hillary Clinton in the 2016 presidential election. Pennsylvania Congressman Dent is optimistic : “This will happen. The question is how much drama will be endure between now and the time that happens.” • • • DEAR READERS, of course, the United States has a huge debt capacity compared to that of Illinois, but like every public and private debt, there comes a time when the credit dries up or existing creditors call for a halt to more debt being piled on. The US, in many ways like Illinois, has ignored the signs of budget expansion beyond the capacity to fund line items without borrowing -- creating a "structural deficit." The borrowing creates interest payments that eat into the tax revenues that would otherwise be available for budget balancing. And, the very term "balanced budget" is treated like a leper by most of the Washington elites, who know that balancing the budget would cut many of their social entitlement programs meant to buy voter loyalty. • Many Tea Party Republicans elected in 2010 and later represent districts in which the majority of voters are demanding a balanced budget and a reduction in the national debt. They oppose the routine raising of the debt so that Washington can continue to fund items that are not essential. Governor Rauner of Illinois made his list of painful but necessary budget cuts, and it could be the US list as well, when he vetoed the budget, saying of the Democrat legislature's budget in Illinois : " It does not balance the budget. It does not make nearly sufficient spending reductions, does not pay down our debt, and holds schools hostage to force a Chicago bailout. This budget package does not provide property tax relief to struggling families and employers. It does not provide regulatory relief to businesses to create jobs and grow the economy. It does not include real term limits on state elected officials to fix our broken political system. Even with the Madigan permanent 32% income tax increase, this budget remains $2 billion out of balance for fiscal year 2018. This budget will require even more tax hikes to balance the budget and pay down the bill backlog. This budget puts Illinois on track for major future tax increases and will lead us to become the highest taxed state in America in the coming years....Budgets in Illinois will not be balanced or stay balanced unless our economy grows faster than our government spending. We have been ignoring that truth for 35 years. This budget package includes no changes to create jobs and grow our economy. It will push more families and businesses out of our state." • President Trump is depending on a roaring economy to balance the US budget and create excess in tax revenue to pay down the national debt. But, prolonging the critically important step of reforming entitlements,as well as retirement pensions and medical care, only generates a greater problem to be solved later. And, the day will come, unless Congress accepts its responsibility for the future of America, when US creditors will come knocking on the US Treasury door just as they are now doing in Illinois. The United States needs a balanced budget amendment to the Constitution, an interim law to require balanced budgets every year while the amendment is working its way through state legislatures, and a tax reform package that reduces the tax burden on business and individuals so that Trump's "roaring economy" has a chance to get out of the starting gate. • There are no miracle cures. There is only the determination as a nation to pay back the trillions of dollars borrowed and spent recklessly since Franklin Roosevelt's 1930s leap into Progressive socialist welfarism. President Trump and EVERY Republican in Congress should make this the top item on their punch list. And, if the Senate Progressive Democrats filibuster, then Senate Majority Leader Mitch McConnell must seriously consider eliminating the filibuster altogether. After all, protecting the niceties of Senate procedure will be of little value if it means that the Republic crashes into bankruptcy. • President Trump and the Republican Party leadership would do well to heed the cautionary words of Illinois GOP Governor Rauner : "Budgets in Illinois will not be balanced or stay balanced unless our economy grows faster than our government spending. We have been ignoring that truth for 35 years." And, the truth about "Truth" is that it cannot be ignored forever.