The Illinois economy has been in deep crisis for decades. This American state exists in the face of huge budget deficits and pension underfunding. The authorities are trying to compensate for the lack of money with high taxes, which is why local residents massively flee to other states in search of a better life. Recently, however, a billionaire has taken over as governor with an ambitious plan to bring Illinois out of the crisis. He believes the treasury can make good money on marijuana and gambling. And it seems that this plan has a chance to really help the state get things done. The price of opium for the American people.
In Russia, marijuana is recognized as a dangerous drug, its use and distribution is prohibited by law. This material does not promote the sale and distribution of drugs. We urge you to avoid drug use.
In deep crisis
Illinois has lived with a protracted economic crisis and chronic budget deficits for over 30 years. This is largely due to the imbalance of the pension system, which is why the state throughout the 20th century has repeatedly faced the inability to pay pensions to all insured. For example, between the early 1970s and the mid-1990s, the deficit rose from 35 percent to 50 percent. In addition, the authorities often lack money for critical social expenditures such as medicine and education. To remedy the situation, a 50-year plan to eliminate the imbalance was adopted in 1994. According to its terms, by 2045, the assets of the funds were supposed to cover their liabilities by 90 percent.
To do this, the state had to make payments on schedule, but they were unevenly distributed: in the first 15 years, payments were small, which made it possible to successfully fulfill obligations, but they increased sharply after 2010, and the state authorities simply could not allocate such amounts of money. As a consequence, not only has Illinois failed to close its pension fund deficit - unfunded liabilities have only grown larger over the years. If in 1995 the deficit of funds was $ 17 billion, then by 2010 it was already at the level of $ 57 billion.
The populist program of early retirement of civil servants, proposed in the early 2000s, made its contribution. An error crept into her calculations in assessing what payments would fall on one employee - the real amounts turned out to be much higher than predicted. As a result, instead of $ 622 million, the program cost the state authorities $ 2.5 billion.
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In addition, the prospect of retiring early and receiving good benefits has proven to be very attractive to public sector workers, and many have chosen to retire early. This has increased the number of people who need to pay pensions. The crisis was aggravated by the so-called retirement holidays, which were announced in Illinois in 2006 and 2007 financial years, due to which the system received less than $ 2.3 billion.
In an attempt to patch financial holes, the state began issuing billions of dollars in bonds since the early 2000s. The very first ones appeared in 2003, then the state borrowed in 2010 and 2011. However, amid the financial crisis, Illinois' bond reliability rating dropped to a very low level. Illinois now has the worst of the American states. As of 2019, S&P Global Ratings has assigned the state's long-term bonds a BBB- rating, which is the final investment grade and just one notch above the so-called “junk level”. This means that if the valuation drops even one more position, this will be a signal for investors that it is simply dangerous to invest in such bonds, and the interest on these securities will be huge.
Illinois was hit hard by a string of crises that affected the pension system and budget. The first was the so-called dot-com bubble, which burst in the early 2000s. As a result, the state incurred investment losses (which are a significant flow of pension funds). In addition, pension funds by that time already felt a decrease in the volume of incoming money against the background of the economic recession after the boom of the 90s. The second moment, which dealt a severe blow to Illinois's pocket, was the bursting of the housing bubble in 2007 and the global economic crisis that followed.
Beyond
Against the background of the unsuccessful policies of several governors in a row, systemic errors, and the influence of such uncontrollable circumstances as market crises, since the early 2000s, the state budget has actually never been "truly" balanced. Balance was achieved every time with gimmicks. For example, Governor Pat Quinn, instead of pursuing structural reform, issued $ 3.5 billion and $ 3.7 billion in bonds in fiscal 2010 and 2011, respectively.
At their expense, he balanced the budget, since such receipts are considered treasury revenues. In 2011, unable to borrow anymore, he undertook a massive temporary income tax hike in Illinois that earned the Treasury more than $ 30 billion. Despite the fact that 90 percent went to pension funds, their deficit still grew by 20 billion, reaching 105 billion.
The most critical situation arose later: from 2015 to August 31, 2017, Illinois did not have a full state budget at all. All this time, the state actually existed due to short-term budgetary agreements. As a result, many government agencies, schools, colleges, medical and social services found themselves in dire straits and were forced to borrow money from banks just to pay their salaries.
The situation was so deplorable that by the end of this "budget impasse", the announcement of bankruptcy by Illinois was even considered as a scenario for the development of the situation, although the official authorities did not speak about it. At the very least, this is hindered by the fact that, according to American law, the state cannot declare itself bankrupt.
However, the situation in Illinois may change soon - in 2019, the governor's chair in the state was taken by a native of one of the richest families in America, Democrat JB Pritzker. The dollar billionaire Hayatt's founding clan has presented an action plan to help tackle Illinois' huge budget deficit. But this requires raising taxes, legalizing marijuana and giving the green light to the gambling business.
Golden Boy
Pritzker took over the state in early 2019. From his predecessors, he inherited a budget deficit of $ 134 billion in pension funds and nearly $ 3 billion for the entire state. In addition, he faced another challenge - the rapidly shrinking tax base, which is one of the main sources of funds in the treasury. The fact is that due to high taxes, state residents, especially business representatives, prefer to leave Illinois and not pay local increased deductions.
These conditions influenced the 2020 budget - the $ 40 billion document was signed by the governor in early June. Then the governor said that Illinois finally managed to "achieve what has eluded government for decades - we have adopted a real balanced budget." The document contains 21 new sources of income, through which the authorities plan to increase revenues to the treasury by $ 4.7 billion, as well as help with payments to retirees and finance a project to renovate and renovate state infrastructure, schools and universities.
According to this plan, the new main source of revenue for the treasury will be a tax reform, on which residents of the state have yet to vote. Illinois currently has some of the highest income taxes in the country, but it is levied at a flat rate of taxation. At the same time, in general, America is more characterized by a progressive scale, to which Pritzker proposes to go. Also, citizens expect several increases in taxes and fees at once: taxes on gasoline will double, there will be increased fees for registering a car, excise taxes on cigarettes will increase and a tax on electronic cigarettes will appear. Among other things, residents of the state will expect a tax on plastic bags and an increase in sales fees for online stores. However, the most original way to increase budget revenues will be the legalization of marijuana and the widespread popularization of the gambling business.
Casino Royale
Illinois became one of the few US states where legalization was not an initiative of the residents of the region, but was proposed by local authorities. The legalization of marijuana was approved in Illinois in late May and is set to go into effect on January 1, 2020. The main treasury revenues will come from licenses for the production of cannabis, as well as tax revenue from sales. They will range from 10 to 25 percent, depending on the content of THC (the active ingredient in marijuana) in the product. In addition, municipal authorities will be able to additionally tax companies in excess of the level set by the state, or even ban cannabis in their territory. The municipal allowance will not exceed 3.75 percent.
Marijuana revenues are expected to be $ 57 million in the first half of fiscal 2020. Within five years, they will grow to half a billion a year, and then remain at this level. Drug money is planned to be spent on pensions and social programs: 35 percent will go to the state budget, 10 percent will be used to pay off Illinois' unpaid bills, the rest will go to public grants, education, mental health programs and law enforcement. Pritzker pins no less hopes on the gambling business, whose popularization he was closely involved in.
The most ambitious project in this direction will be the construction of a huge casino in Chicago. Although this will not surprise anyone in Illinois (there are already at least 10 casinos on its territory), this institution will be the largest and is designed for four thousand seats. It will be private, and the treasury will see taxes from its activities. The governor wants the establishment to be built right in downtown Chicago, but the exact location has not yet been determined. In addition, the project of the authorities involves the opening of five more new casinos in other cities. Also in Illinois there will be five establishments called racinos - a mixture of a racetrack and a casino. For this, three existing racetracks will be re-equipped, plus the authorities will open two more new facilities. Pritzker is also betting on an increase in the number of slot machines in Illinois and the widespread opening of kiosks,in which you can bet on sports.
In total, as a result of all the gambling initiatives of the new governor, the number of places for placing bets in casinos, bars or racino will grow from 44 thousand to almost 80 thousand. Revenues, just like marijuana, will come from operating licenses and taxes. If Pritzker's "gambling plan" is implemented in full, then in total this business could generate $ 2.7 billion in one-time income. These funds will be used in part to cover the deficit of pension funds, repair infrastructure facilities, schools, universities.
Underdog
Despite Pritzker's claims that his budget is balanced, analysts question this. The Illinois Policy Institute estimates that the fiscal 2020 budget will fall short of $ 1.3 billion, and Pritzker's initiatives are not all that lifesaving. Analysts attribute this to the fact that some of the revenue streams that the state sees as permanent are in fact “one-off”. In particular, this applies to marijuana licenses and work permits for gambling houses. This means that they will be purchased once, after which the demand for these licenses will drop. As a result, revenues from these industries will be below the projected level.
The effectiveness of the popularization of the gambling business is also questioned. The fact is that this is not the first time Illinois is trying to improve its financial situation at the expense of this income item, and so far the state's experience has been unsuccessful. In 2009, Illinois was already trying to follow a similar scenario. Then, in the midst of the economic crisis, a gambling law was passed, which allowed the installation of slot machines and legalized video poker. According to the plan, this was supposed to bring the treasury $ 300 million annually, which in turn was supposed to be used to repay a loan taken for a large infrastructure project. He, in particular, had to create new jobs in Illinois. Immediately after the law was passed, the state authorities began to collect loans and fell into a trap. As gaming industry revenues were lower than expected,Illinois has just accumulated new debts. Against this background, fears about the course chosen by the billionaire governor are quite justified: if the scenario of previous years is repeated, the state will become even more bogged down in the economic crisis, having earned only one thing - the status of the gambling capital of the American Midwest.
Anastasia Stakhanova
