Chicago Columnist Illinois Review · Political Strategist Analyst · Expert Advisor Institute for Truth in Accounting

SEIFFE:  Ninja Governor, Subprime State

May 26, 2009

By Ralf Seiffe

This week, our leaders in Springfield will finish their short-selling of Illinois and complete the legislative season. The deals and understandings will materialize as the political class empowers itself with new rules and legal tools mostly designed to ossify their positions of power. Of these initiatives, none is more important to them than the proposal to increase the state’s income tax by 50%.

There are many reasons to reject the increase including the malignant effect on business activity and the fallacy that increasing taxes cures habitual overspending. But the most important reason to reject the governor’s plan is that it would reward the legislators’ serially bad behavior with more resources. In fact, their performance has more in common with mortgage deadbeats than with a responsible state government. 

One central cause for the nation’s financial melt- down is the collapse of real estate prices. In turn, an important reason for that disintegration was the availability of easy, federally-guaranteed money that attracted borrowers whose credit would otherwise disqualify them from funding. These unqualified applicants used all manner of fraud to convince lenders to provide mortgages. Ninja loan applications (No Income, No Job or Assets) filled banks and quasi-governmental institutions’ balance sheets with sub-prime mortgages created by combining equal parts of easy credit and borrowers’ lies. 

This doesn’t seem to be much different than the situation in Springfield. After a generation of ever-increasing tax revenues, the General Assembly came under the same delusion as real estate flippers who could not conceive of a time when prices would recede. So, like those attendees at “no money down” real estate seminars, Illinois’ leaders created the fiscal equivalent of long-term, adjustable rate mortgages in the form of entitlements, early retirements and willful ignorance of the state’s accruing expenses. Just like the speculators believed that home prices would continue on their logarithmic growth, Illinois’ political class operated on the theory that taxes would always rise, too. 

Our leaders share other disappointing characteristics with the deadbeat borrowers, too. Illinois has a constitutional requirement that allows the General Assembly to spend only the money “available” to it. The purpose of this provision is to keep the legislature from obligating future generations for current spending. Like the ninja borrowers, however, the legislature uses accounting and budgeting tricks to keep the state’s true financial condition concealed. In Illinois, the fiscal wizards in Springfield have come to believe that money “available” includes funds that can be borrowed, essentially evading the constitutional purpose of prohibiting one generation from obligating the next. 

In addition, our leaders have found a huge source of spendable cash by using accounting principles that ignore accruing pension and welfare costs that disguise the real costs of running government. To call such budgets “balanced” is no different than a ninja borrower who lies to his banker about his income and expenses. 

Since the economy has begun to recede, debtors who obtained credit to support opulent lifestyles cannot refinance or make their payments on existing debt. Similarly, the unsustainable nature of Illinois’ extensive obligations to its employees and public welfare clients has been revealed—but not caused-- by the recession. The governor claims the state is in trouble because of the fading economy but his reasons are as phony as a ninja borrowers’ loan application. The real reason is that years of extra-constitutional spending and entitlements for favored constituencies has caught up with the state. They call it the “structural deficit” but it’s really something else. It’s the effect of politicians who feel so entitled to office that they are willing to obligate our children to pay the tab for their current spending schemes. It’s not structural, it’s embezzlement. 

So we now have a governor, a speaker of the house and a senate president who are coming to the people and asking for a bigger share. They need it because they spent the last increase (and the lottery money and the gambling money) on living expenses. And even that wasn’t enough—the state’s credit card is maxed out at more than $100 billion according to the respected Civic Federation. The markets have noticed and Illinois’ credit rating has been downgraded. Our governor looks like a ninja borrower with a sub-prime property, looking for a bail-out. 

Despite these inconvenient facts, Mike Madigan and Pat Quinn are taking Rahm Emanuel’s advice and making sure not to waste this crisis. Using the cover of the recession, they will attempt to bamboozle the public and raise income taxes. If successful, they will reward themselves for the ill-advised and perhaps illegal spending policies that have effectively bankrupted Illinois. The moral hazard this would create is reason, and reason enough, to reject the tax increase. 

Readers interested in the learning more about state governments’ accounting practices should visit www.truthinaccounting.org and download “The Truth About Balanced Budgets: A Fifty State Study”. Also, The Civic Federation of Chicago has a number of very informative studies on the fiscal condition of Illinois at www.civicfed.org.

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois, and is a political analyst and columnist for the Illinois Review. Mr. Seiffe is also an Expert Advisor with The Institute for Truth in Accounting.

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