When states can’t pay their bills

WHEN STATES CAN’T PAY THEIR BILLS…. Over the holiday weekend, one of the more distressing items I saw was a New York Times piece on Illinois’ finances. Its significance to the national economy cannot be overstated.

While states like California are notorious for their budget problems, Illinois seems to be in a league of its own, and its problems keep getting worse. At this point, the Land of Lincoln is struggling to pay its bills, can’t approve measures to close its deficit, and doesn’t know what to do with its underfunded, “spectacularly mismanaged” pension system.

The results are genuinely ugly. Schools are laying off teachers and scrapping extra-curricular activities; drug, family and mental health counseling centers have slashed their work forces; pharmacies waiting for state payments are closing; and state colleges and universities have been told to borrow against state payments that might come eventually.

In the bigger picture, there are two broad takeaways here. The first is the conflicting priorities of more services and lower taxes.

… Illinois is caught between blue state convictions about social safety nets and a red state aversion to taxes. For years, the Democratic-controlled legislature has passed budgets that are, in effect, in deficit. Lawmakers routinely skip around the state’s balanced-budget law, with few consequences. (Republicans are near monolithic in voting against any tax increases and borrowings. When one broke ranks to try to keep the pension solvent, he was stripped of a committee position, reducing his pay and pension.) […]

The state’s income tax burden is not terribly high — Illinois ranks in the bottom half of states — and its government is not terribly large. (The budgets in New York and California, per capita, are much larger). Even if the state cut out all family and human services spending, more than half of the budget deficit would remain.

Illinois is going to have to raise taxes to close the gap, but with Republicans’ embracing Norquistism with both arms, Dems are left to either cut social services — hurting struggling families in the process — or come up with a ridiculous budget scheme to keep the state going.

The second is that the federal government can help the economy by helping states like Illinois.

As the recession has swept over states and cities, it has laid bare economic weakness and shoddy fiscal practices. Only an infusion of federal stimulus money allowed many states to avert deep layoffs last year.

The federal dollars are nearly spent. Last month, local governments nationwide shed more than 20,000 jobs. Should the largest struggling states — like California, New York or Illinois — lay off tens of thousands more in coming months, or default on payments, the reverberations could badly damage a weakened economy and push housing prices down still further.

“You’re not seeing these states bounce back, and that could be a big drag on the national economy,” said Susan K. Urahn of the Pew Center on the States. “It could be a very tough decade.”

Republicans and some Blue Dogs have refused to expand state aid, regardless of the consequences. When hundreds of thousands of state workers are unemployed, they should know who to thank.