States in Financial Trouble: Budget Imbalances & Deficits - Research Paper

Introduction

Budget imbalances or budget deficits exist when expenses of a particular sate exceed the revenue that they collect from the various activities in the states. Bunch et al. (2010) says that although states cannot go bankrupt, reports in 2010 noted that Illinois is in the verge of being declared insolvent. Illinois liabilities exceed its assets with a significant margin, and the state does not generate enough revenue to pay all its bills. Since this problem was reported back in December 2010, it has only gotten worse from what was initially experienced. By then, Illinois had a budget deficit of 13 billion dollars which amounted to half the debt of all the states and was almost twice that of California which had the second largest deficit by then.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

History and Causes

According to O'connor, James (2017), Illinois State budgetary crisis began a couple of years before the budget impasse. The state's fiscal collapse culminated over a couple of years and decades of budgetary strategies over the structural spending problems in Illinois. By the end of the Fiscal Year 2010, Illinois was more than six months late in paying its bills due to the shortage of ready cash. State universities, local schools among other public institutions were forced to lay off quite a large percentage of their employees, borrow money or resort to the imposition of furloughs. Delays in disbursing employee's health insurance contributions by the Illinois State has resulted in the state workers paying cash to their medical providers. There are quite many reasons for the deteriorating condition of Illinois State of the budget, and they include:

1. Borrowing to cater for the operating budget deficit is a burden to the future budgets. State bonds to cover for previous fiscal years budgets must be paid up with interest which must be funded by the current year budget. Decisions to carelessly borrow by not putting aside adequate funds to cater for pension liabilities in the future has made pension underfunding in Illinois the worst in the whole country. A move by former governor Pat Quinn to raise the retirement age to limit pension benefits of the future employees did not cure the situation but rather added more problems to existing ones.
2. Borrowing became costlier after Illinois bond rating downgraded. In 2010, Illinois State lowered their general obligations debt ratings by almost three times and by then, only California had a lower bond rating than Illinois. Bondholders withdrew from holding Illinois bonds claiming that the underfunded Illinois pension system is a considerable risk and they are not willing to take it. Downgrade by the Illinois state bonds have also hurt other state agencies like the Regional Transportation Authority. Their bond rating went down due to their heavy reliance on funding from the Illinois state. Had the state been able to hold their AA bond rating, it could have saved almost 3.2 billion dollars in interest during the 2010 fiscal year when the budget deficit problem stated.
3. The initial budget deficit of the fiscal year 2010 was not correctly stated and announced. This resulted in more deficit being carried over to the following years.

Present Day Implications

Illinois State fiscal crisis is creating substantial difficulties to state workers, residents, state service providers among other stakeholders since it began. It has led to reduced funding of state-funded services for the majority of the state's lowest and middle-income residents. To date, the state is still being hard-pressed to pay its bills not only on time but full payments despite the states continued economic recession. The accumulation of unpaid bills has reached unpredictable levels and the lag time for paying bills has almost tripled from the previous years. Several social service agencies that solely rely on state funding are faced by severe financial stress. Some said that they are being forced to shut their doors and seize giving services to citizens or lay off a significant percentage of them if they do not receive funding.

The state universities and local schools among other public institutions are also profoundly affected by the delayed payments. They are forced to borrow funds or lay off their workers to be able to deal with the current funding shortage. Delays in paying out categorical grants by the State to educational institutions are accounted for almost. Due to the delayed payment of health insurance claims, doctors and other medical providers are forced to asking their patients who work for the state to pay for their medical bills in advance.

Future Solutions

Powell (2010) suggests that for Illinois State to get out of their massive budget deficit and pay up their mountain of unpaid bills, vast and wise steps and guidelines need to be followed. The evident and fundamental options of increasing taxes and cutting on expenditures won't be easy. Sitting back and doing nothing will even be worse as the liabilities will continue growing and the cost of borrowing will keep on rising. This will also negatively influence an individual's decisions to live and work in the Illinois state. It will also drive away potential investors and entrepreneurs who would have wished to start their businesses in Illinois. Declines in workers, investments, and jobs automatically lead to a diminishing economy, and the evil cycle continues over and over again (Cebula et al. 2002). Since the deficit has been partly brought by corruption, political patronage and reckless spending, tax reforms that focus on the rich at the benefit of the poor are only real solutions to the budget deficit in Illinois since political leaders, and big business owners are most to blame. The states flat rate of income tax, being the worst in the nation's history allows for the wealthy paying far less as compared to the lower and middle-income earners. Some ill-advised tax loopholes and breaks that were implemented to attract businesses and job to the state need to be scrapped since they have failed on their count.

Schuster, Adam (2018) says that another way of correcting the Illinois state fiscal crisis is through the implementation of a better budget forecasting. Since the states budgetary process involves a number of stakeholders, agreeing and predicting the amount likely to be raised in a year and knowing how much will go out of the states kitty is the best solution. This allows the state not to overspend on what they don't have. Switching to accrual-based accounting is another way of correcting the deficit. Since Illinois uses a cash-based system of accounting, experts suggest that accrual-based accounting would have worked since it includes the costs of current projects and activities in the current budget.

Works Cited

Bunch, Beverly S. "Budget deficits in the states: Illinois." Public Budgeting & Finance 30.1 (2010): 105-12

Cebula, Richard J., and James V. Koch. "Federal budget deficits, interest rates, and international capital flow: A further note." The Quarterly Review of Economics and Finance 34.1 (2002): 117-120.

O'Connor, James. The fiscal crisis of the state. Routledge, 2017.

Powell, Michael. "Illinois Stops Paying Its Bills, but Can't Stop Digging Hole." New York Times (2010).

Schuster, Adam. "Bad Budgeting Basics: How Illinois' Budget Process Hurts Taxpayers." Illinois Policy Institute, Spring (2018).