Florida Defies Big-State Financial Curse

Although no state is perfect, large states can look to Florida as an example.

"Illinois is on fire." That's how Comptroller Susana Mendoza earlier this year described her state's financial situation. With no budget for two years until just last week, a $14 billion backlog in unpaid bills and $5.7 billion deficit, Illinois saw its latest Standard & Poor's credit rating come in just shy of junk status.

Large states like Illinois (49th in our brand-new Mercatus Center state fiscal health rankings), New York (39th), California (43rd) and Pennsylvania (45th) struggle financially compared to smaller states. Even business-obsessed Texas (23rd) has long-term, pension-fueled concerns. But at No. 1, Florida -- similar in size and economic potential to Illinois -- defies the big-state curse.

But first, how does an appealing and otherwise dynamic state like Illinois find itself in such trouble?

As in Puerto Rico and Detroit, the alarm bells have been sounding for years, if not decades. Illinois' unfunded pension liabilities -- generously calculated at $130 billion, but more accurately $345 billion when fully accounting for constitutional guarantees and uncertain investment returns -- are both a driving force and a symptom of something bigger explaining the difference with Florida.

That something bigger is basic state institutions that either make it easier or harder to govern them.

Illinois has hamstrung lawmakers by carving pension and health care liabilities into constitutional stone, leaving no easy fixes. Powerful public sector unions apply pressure to protect the status quo, regardless of financial reality or fairness. A history of political patronage and corruption lingers. No state is immune from these problems, but they're particularly thorny in Illinois.

The budget passed last week, which largely relies on an income tax increase, is the type of measure taken by lawmakers whose hands are tied. New tax dollars will provide the state with a temporary revenue infusion but will do nothing to address the underlying cause of Illinois' crisis -- and may make it worse.

When the tax burden grows on residents and businesses, those who can most afford to leave do just that. A downward spiral ensues -- with shrinking revenues and increasing pressure on government services. And people are leaving. Illinois has led the nation in population loss in every year since 2014.

Florida's fiscal institutions are supported by a different sensibility. It remains a destination state, with the population growing at about 1.7 percent annually since 2013. No doubt, some of that is due to its climate and natural amenities. But Florida also presents residents and businesses with other attractions: no personal income tax and no estate tax, and per capita spending among the lowest in the nation.

As economist Randall Holcombe notes, over the past 20 years, "Florida's state government has become increasingly lean" even as quality of life generally remains high.

Florida's fiscal leanness stems from some healthy practices: keeping a balanced budget, relatively low taxes and expenditures, and -- notably -- maintaining institutions that allow for both. Legislative term limits and the ability to amend the Florida constitution through citizen initiatives make it easier for policymakers to maintain fiscal responsibility.

That's not to say Florida has no room for improvement. A large retiree population puts pressure on government services, while the state's economy relies heavily on tourism, generally a source of lower-wage service jobs. But it lacks the structural impediments Illinois has.

A state cannot be a financial trap for businesses and residents. The politics are difficult, but if Illinois policymakers signaled that they are serious about long-term solutions -- through regulatory reform, sound tax policy and pension reform -- businesses and residents might stop the exodus.

Although no state is perfect, large states can look to Florida. Seeking novel ways to tax residents while overpromising on services is a recipe for failure.

Illinois' leaders may have the tools to truly put out this fire, if they can stand the heat.