We've spoken more than once about Illinois' financial woes in these pages, and Chicago's in particular. Now comes news that the situation is far worse than previously reported, because generally accepted accounting principles were not followed.
The State of Illinois recently reported its biggest annual financial loss ever. Instead of clear reporting on that, we’ve seen perhaps the most glaring example yet of how the state’s finances can be misunderstood, misreported and intentionally distorted.
The loss of $47 billion for the state’s 2018 fiscal year, shown in audited financial statements released late last month, is an astonishing number. For some perspective, that’s about $7 billion more than the entire, current annual budget.
But most of the regular press downplayed or entirely ignored the loss. Many even saw good news. A Reuters headline, for example, read “Illinois budget deficit shrank to $7.8 billion in FY 2018.” You can find similar headlines from across the state.
Why would media coverage differ so drastically from what the audited financial statements really said? Which is right?
Two factors account for the difference, and both should be understood. This is a lesson in how misunderstanding of our financial crisis is created and propagated.
First, the loss was shrugged off because it stemmed mostly from an accounting change, which we will explain below. But that’s only a partial excuse. In truth, the accounting change exposed a huge liability that has been all but ignored in the past. Second, most media reports seem to have blindly repeated a very misleading press release by the Illinois Comptroller that accompanied the financials.
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While the $42 billion loss didn’t occur in one year, it’s a growing monster that has been hidden for many years, unknown to most reporters and the public. Including it now as part of the state’s financial report card is an admission about how deficient previous reporting has been. The Governmental Accounting Standards Board couldn’t keep a straight face any longer as it watched governments like Illinois hide OPEB obligations, so it issued a new standard requiring better disclosure, which is now fully in effect.
The simple fact is that the state’s true condition is indeed a full $47 billion worse than most Illinoisans were told a year ago.
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The second reason why the 2018 loss wasn’t reported properly was misleading spin put on by Illinois Comptroller Susana Mendoza when she released the CAFR ... Mendoza cherry-picked an extremely unrepresentative element of the CAFR ... she referred only to the “general funds” to claim the deficit reduction. The general funds are only part of the picture, and they effectively count borrowed money as if it is income!
It’s like claiming you cut your losses in half by putting that half on a credit card.
There's more at the link, including a graph that visually displays the mess Illinois is in. Recommended reading.
So, if you're an Illinois taxpayer (or even if you just live there), your state's government has consistently lied to you about its financial health (or otherwise) by hiding liabilities that any honest accountant would have ensured were reported. What's more, when it was at last forced to own up about those unreported liabilities, its own financial controller obfuscated the issue by cherry-picking the most favorable item of data out of a report filled with unfavorable ones, and tried to "spin" the news in the government's favor. Clearly, she achieved at least some success.
Every Illinois taxpayer is on the hook for his or her share of that debt, as we've discussed in the past. If you live in Chicago, you're even worse off, because you've got to add that city's deficit load to the state's burden, and carry your share of both of them.
Other states are in pretty parlous financial condition (for example, California, New York and New Jersey), but Illinois is just about the worst of the worst. It's got three possible solutions:
- Get bailed out by the federal government (which I hope and pray doesn't happen, and it probably won't under the present Administration, but who knows what a future Democratic administration might do?);
- Default on its debt, which AFAIK it can't do legally;
- Tax the heck out of its citizens (over and above the very heavy tax burden they already face), to force them to pay the debts so recklessly and fecklessly incurred by its politicians.
Why would any sane person stay in a state whose government lies to them, its own citizens, about the burdens it's piling on their fiscal shoulders, higher and deeper every day?