Here’s why Moody’s is warning of an Illinois death spiral

Illinois’ weak economic growth and population loss may signal the beginning of a financial death spiral.

The number of Illinoisans fleeing their home state has garnered the attention of Moody’s Investors Service, an agency that assigns ratings to government debt. In Moody’s U.S. Public Finance Weekly Credit Outlook, released Jan. 5, the credit agency pointed out that Illinois’ weak economic growth and consistent population loss are credit negative – which means the agency thinks Illinois’ credit outlook isn’t good. Government data shows that Illinois’ population is bleeding out to other states and that wealthier Illinoisans in particular are leaving fastest. These are the kind of negative indicators that lead agencies like Moody’s to issue downgrades.

Moody’s notes that population flight and tepid economic growth will complicate efforts to enact a balanced budget and keep up with mounting pension funding pressures.

There are good reasons for Moody’s warning. As they note, Illinois’ population flight is unlike the exodus from any other Midwestern state. Illinois is the only shrinking state in the region.

In fact, on a per-capita basis people are fleeing Illinois more than three times faster than Michigan, the next-worst state in the Midwest.

Furthermore, the Moody’s analyst who wrote the analysis noted that it’s normal for Midwestern states to have some degree of out-migration, writing:

“Net domestic migration … is not uncommon in the Midwest”

However, Illinois’ out-migration is different. The analyst noted that:

“Many of the top states for those leaving Illinois are nearby or adjacent states”

It is true that Illinoisans are leaving for nearby states, not just for the south and west. The most recent year of Census Bureau state-to-state migration data show that Indiana is the leader in attracting Illinoisans, gaining 20,000 more people than they lose to Illinois. Border states Wisconsin, Iowa and Missouri also make the top six.

Illinois loses population to every state in the Midwest, making up half of the state’s estimated migration losses for 2015.

Moody’s points out that economic growth is essential to stem the losses, writing that “stronger economic growth in the state clearly would lure more job-seekers from the outside, bringing Illinois’ flow of exiting and arriving migrants closer to balance.”

Finally, the analysis points to the possibility of Illinois entering an economic and financial death spiral. The analyst writes

“Perhaps more important, population loss can be a cause, as well as an effect, of economic deterioration. A self-reinforcing cycle of population loss and economic stagnation could greatly complicate Illinois’ efforts to stabilize its finances. Not only is Illinois caught in a political stalemate over how to address fallout from a tax cut that took effect two years ago, but its operating budget faces a long-term challenge from steadily mounting pension funding requirements.”

Preliminary numbers from the Commission on Government Forecasting and Accountability show that state tax revenues might be in decline on a year-over-year basis. If this is true, Illinois is either entering a recession or is experiencing so much out-migration that the tax base is disappearing. IRS data show that it is increasingly high-income Illinoisans who are leaving.

Illinois needs to first protect homeowners by enacting a permanent property tax freeze. Then, the state must aggressively slash spending by changing collective bargaining agreements with government unions and amending the constitution to allow for reforms to pension benefits. Finally, economic growth and business investment needs to be encouraged by fixing the state’s workers’ compensation system along with other regulatory reforms.

Illinois is approaching a tipping point where the possibility of collapsing into an economic death spiral is real. Taxes are already driving out residents and more taxes to pay for government spending will drive out even more residents as the state population continues to shrink.

Without real reform, Illinois will end up like a failing cable company that is losing customers and responds by raising service rates on remaining customers, causing even more to leave. It’s a losing strategy and will simply quicken the stampede of Illinoisans fleeing to surrounding states.