A Closer Look at the Fiscal Woes of Illinois and Brazil

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Illinois prides itself as the state where Abraham Lincoln launched his political career. Before his time in politics, Lincoln was an entrepreneur in a small town in central Illinois. He borrowed heavily to purchase a general goods store that failed, leaving him $1,000 in debt—a staggering sum for an individual in the 1830s. Rather than skip or negotiate, Honest Abe spent years living simply and working several jobs to repay what he owed.

The Land of Lincoln would do well to recall this lesson in austerity from its most famous past resident. Illinois has endured a prolonged period of slow growth and mounting debt, and could be facing a slow grind like the one Lincoln experienced.

Illinois' fiscal problems are legion. They defy both simple explanations and simple remedies. The state's financial problems have grown gradually over the span of decades, and unwinding them will take a similarly prolonged length of time.

The root of Illinois' current fiscal situation is the pension program for its employees. Defined-benefit pensions are not necessarily bad. They have been the norm for many government jobs, but Illinois has chronically underfunded its pensions. Resources in the various plans will not be sufficient to support the growing stream of retired state workers.

The underfunding started in the 1990s, with the adoption of a pension funding plan that assumed generous future contributions. In the intervening years, various circumstances prevented the fulfillment of this plan. As a consequence, the state's pension funding ratio is consistently among the lowest of all states.