In January 2011, facing a forbidding budget deficit and a backlog of unpaid bills, Illinois officials decided that a massive tax increase would lay the groundwork for the states recovery. As Barbara Flynn Currie, the majority leader in the state house of representatives, said at the time, the nearly $7 billion in new revenues would allow Illinois to pay our old bills and deal with the structural deficit. The taxes passed with little controversy. Several weeks later, Wisconsin governor Scott Walker proposed fixing state and local fiscal problems by narrowing public-sector workers collective bargaining rights and requiring them to contribute more to their pension and health-care benefits. His reforms, which took months to become law, provoked an occupation of the capitol and set off a national debate.
Little more than a year has passed, and Illinois is right back where it started: the states unpaid bills now top $9 billion. Meantime, Wisconsins state and local governments have made substantial strides toward long-term budget stability. The different fiscal outlooks of the neighboring states illustrate a crucial fact in todays budget wars: you cant tax your way to a better future. Thats because the promises made by previous generations of politicians to public employees and special interests have become, as one northeastern mayor colorfully put it, the Pac-Man of budgets, gobbling up revenues faster than governments can raise them.
Illinois has emerged as a poster child for fiscal irresponsibility. With its legislature beholden to public-sector unions, Illinois has long avoided financing state workers pensions out of its own budget. Instead, the state skips its contributions into retirement funds in some years and borrows money to finance the pensions in others. Since 2003, Illinois has floated more than $15 billion in pension-obligation bonds rather than pay for workers benefits out of its annual budget. Even with the borrowing, Illinois has one of the worst-funded pension systems in the country. One study estimates that the system could run out of money by the end of the decade.
Illinois legislators have consistently avoided tough choices. When the recession of 2008 curtailed tax collections, Illinois stopped paying its bills rather than cut spending. The state has accumulated a steep pile of IOUs, including tax refunds owed to corporations and Medicaid payments owed to doctors and hospitals. Though Illinois constitution mandates a balanced budget, the state has met that requirement only by ignoring those bills. The Chicago-based Civic Federation projects that, under current budget trends, the states backlog of unpaid bills would grow to $34 billion in five years.
All this has made investors and job creators leery of the Prairie State. In February, Peoria-based Caterpillar announced that it would not consider Illinois as a potential home for a Japan-based plant that the giant company was moving to the United States. In a statement to Illinois leaders, the company noted that even if your community had the right logistics for this project, Caterpillars previously documented concerns about the business climate and overall fiscal health of the state of Illinois still would have made it unpractical for us to select your community for this project.
When Governor Walker took office in January 2011, Wisconsin had already tried the Illinois approach to deficit reduction, hiking taxes by an estimated $3 billion in its 200911 budget cycle. Yet as it prepared for another two-year cycle, the Badger State faced a new deficit estimated at $3 billion to $4 billion. In tackling the budget, Walker used some typical strategies for cutting spending, including the increased pension and health-care contributions by government employees, which could save three- quarters of a billion dollars. But Walker also wanted structural changes in government that would make managing state and local budgets easier.
To accomplish that end, Walker looked not to Illinois but to Indiana, where in 2005 Governor Mitch Daniels had rescinded collective bargaining rights for state employees as the prelude to a vast restructuring of state government. Among the innovations Daniels put in place, once he no longer had to negotiate every change in compensation with the unions, was a money-saving benefits plan for state workers featuring individual health savings accounts. With moves like that, Daniels put Indiana on better footing to withstand the 2008 financial meltdown, one reason that the state today enjoys one of the soundest budgets in the country.
Critics branded Walkers push to narrow collective bargaining rights an effort to break the states public-sector unions. What the legislation actually did was break the unions hold on the public purse. The Wisconsin Education Association, the states teachers union, had used its collective bargaining power to require school districts to offer health insurance through a union-affiliated insurer—the WEA Trust. With that benefit collectively bargained into many contracts, the WEA Trust charged 20 percent more for its coverage than competing insurers, on average, according to a 2010 study by the MacIver Institute. Then Walkers reform eliminated the unions ability to bargain collectively for health benefits. By September 2011, just months after the Walker reforms went into effect, two dozen school districts had already competitively bid out new health-insurance plans, saving millions (see Its Working in Walkers Wisconsin, Winter 2012).
Though Walkers collective bargaining reform got most of the press attention, the governors efforts are part of a broader trend. Last year in Tennessee, Governor Bill Haslam signed a bill ending collective bargaining rights for public school teachers as part of an effort to jump-start school reform. In New Jersey, Governor Chris Christie signed legislation narrowing the rights of public employees to bargain collectively on pension and health benefits.
Wisconsin is in far better shape today than Illinois, but it has a long way to go to make itself more attractive to new investment. In the hypercompetitive environment emerging since the financial meltdown, businesses are weighing carefully where they invest dollars to create new jobs. According to the Tax Foundation, Wisconsin still has the nations seventh-highest business-tax burden and the fourth-highest overall tax burden.
Those are two reasons, no doubt, that the state wasnt adding many jobs even before the recession. From 2000 through 2008, Wisconsin ranked only 30th among the states in the various elements of job creation, called job dynamics, measured by the National Establishment Time-Series database. The state performed particularly poorly—36th among the states—in job migration, which measures jobs gained or lost when firms relocate from one state to another. Wisconsin also ranked 34th in jobs created by new firms versus jobs lost through business failures.
Many see Walkers budget-repair bill of 2011—and the current union efforts to recall him from the governors office and rescind that legislation—as a battle over the future of Wisconsin. But the real struggle for Wisconsins future is about whether the state can emerge from the countrys long economic slump fiscally sound and positioned to win the jobs race.