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Saturday, December 5, 2009

Robbing Peter to Pay Paul in Illinois

There's an intra Democratic party confrontation here in Illinois with implications for the Governor's race.

Comptroller Dan Hynes said today that he won't sign off on Democratic primary rival Gov. Pat Quinn's plan to borrow $500 million to help pay down the state's backlog of unpaid bills.

Quinn fired back, saying Hynes was playing with people's lives by refusing to sign on to the borrowing plan."There's a human toll to the comptroller declining to support cash flow borrowing here. Human beings are a stake here, individuals who are counting on public health a safety services, child advocacy services, services for seniors and employees who here at the holidays need a paycheck. So I think it's incumbent on everybody in government to work together on this issue," Quinn said.

There are several undercurrents here. First, both Hynes and Quinn are currently running against each other in the Democratic primary for Illinois Governor. Second, what Quinn wants is for Dan Hynes, the State's Treasurer, to approve a plan to have the state issue bonds, or effectively borrow money, to pay its bills and make up its deficit shortfall. It just so happens that the shoe was on the other foot in 1992 and it was Pat Quinn who then vetoed a similar proposal as the State's Comptroller when then Governor Edgar asked for exactly the same thing.

The basic principle is simple here. The state of Illinois has a major budget shortfall is having major troubles paying its bills. Governor Quinn already raised taxes to try and alleviate the shortfall. The state is still well short. Now, he wants to borrow to make up the shortfall. Now, if you have bills and you don't have money, and then you simply max out your credit card to pay the bills, that's robbing Peter to pay Paul.

In other words, you are simply adding another creditor to pay your current creditor. You aren't solving anything. That's what Pat Quinn would like to do. The state doesn't have enough money to pay its bills so he wants to borrow more money to pay those bills. Worse yet, he uses the same tired scare tactics to sell his point: doctors, nurse, teachers and cops will lose their jobs if his scheme isn't passed. He said the exact same thing when he raised the state's income tax by 50%.

He can do all this because the state engages in Enron like accounting. Illinois, like most states, has a balanced budget amendment. So, how does issuing bonds, yet another debt, to pay other debts, balance a budget? It's because there are gimmicks in the budget system. In this case, the only debt to this year's budget would be the payment on the bonds. That may even be zero since there may not even be a payment due. On the other hand, the asset would be the entire worth of the bond. That's because the entire worth of the bond would go into the state's coffers this year. The state's budget is done on a cash flow level. Of course, the yearly payment on the bond would be locked as a debt for every year remaining. Meanwhile, the asset could be used only this year.

It's gimmicks like this that have caused the state to have a bigger and bigger shortfall yearly. It uses gimmicks to balance the budget. These gimmicks place strains on future budgets and voila. Meanwhile, pols often claim that without them teacher, cops and nurses will lose their jobs. Of course, no state ever went bankrupt paying teachers, cops, and nurses. They went bankrupt through waste, fraud and abuse. That's what's happening in Illinois but Quinn, like all pols, fails to see any cuts there.

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