State of Illinois FY2022 Recommended Operating and Capital Budgets: Analysis and Recommendations

May 13, 2021

Click here to read the full report.
Click here to read the press release for this analysis.

EXECUTIVE SUMMARY

The Civic Federation considers the Governor’s FY2022 budget recommendation to be a reasonable one-year short term response to pandemic-stressed financial and economic situation. It has many positive elements, such as holding most areas of agency spending flat at a time of uncertain revenues and it makes the full statutorily required pension payment. In addition, it appropriately shifts some capital funds to the operating budget for one year.

Unfortunately, however, the budget does not begin to address the State’s long-term structural problems, such as its massive unfunded pension liabilities. The Civic Federation does not find eliminating business tax treatments during a recession to be sound fiscal policy. Raising taxes in a recession on businesses or individuals is counterproductive to achieving an economic recovery. Reducing state assistance to cash strapped local governments makes it harder for them to meet their obligations in a time of fiscal distress and may well force property tax increases.

Now that the State of Illinois will be receiving $8.1 billion in revenue support from the federal American Rescue Plan Act, it has more options available to close its budget deficit. Therefore, the Civic Federation could support the Governor’s FY2022 proposed budget if it were revised to remove the business tax changes. The revenues needed to fill that gap could instead come from federal stimulus funds as a one-time revenue source to match the historic and short-term drop in revenue due to the pandemic. Stimulus funds primarily should be used to stabilize the State’s financial position. They should not be used to add expensive new recurring programs that do not have a recurring revenue source.

While the Civic Federation had supported the Governor and other state leaders’ intention to use a portion of the federal American Rescue Plan Act (ARPA) funds to pay off the remaining MLF borrowing and reduce unpaid bills,[1] recent interim Treasury Department guidance appears to prohibit that use.[2] The Office of the Illinois Comptroller on May 12 sent a letter to the Treasury Department seeking clarification on the debt provisions of the interim guidance.[3] Therefore, the Civic Federation urges the State of Illinois to approach spending ARPA funds with an eye toward the future and how the budget will be impacted when the funding expires in 2024. Shoring up the State’s financial position to the extent possible under federal rules in addition to using the funds to provide aid to struggling residents and businesses will ensure that the State will be able to provide much needed services after ARPA.

The Civic Federation offers the following key findings on the governor’s recommended FY2022 Budget:

• The pandemic has significantly impacted the State’s revenue collection and expenditures, but the economy has performed better than expected in late 2020 and early 2021, which reduced the projected budget deficit for FY2022 from $5.5 billion to $2.6 billion.
• The Governor’s proposed budget was released before the passage of the American Rescue Plan and therefore does not incorporate the billions of dollars in revenue replacement support the State of Illinois is expected to receive.
• General Funds revenues of $41.7 billion and expenditures of $41.6 billion generate an operating surplus of $120 million, but this result depends on the approval and implementation of $932 million in business tax treatment changes.
• Proposed General Funds expenditures decrease by $1.8 billion, or 4.2%, to $41.6 billion in FY2022 from $43.4 billion in FY2021. This is due to a large decrease in transfers out from the amounts required in FY2021 to pay back the June 2020 and part of the December 2021 MLF borrowing.
• Net agency expenditures are nearly flat, increasing by $67 million, or 0.2% from FY2021.
• Proposed General Funds revenues decline by nearly $1.8 billion, also because of no MLF borrowing included in the FY2022 budget. However, FY2021 revenues were also artificially high because of approximately $1.3 billion in FY2020 income tax revenue that was shifted into FY2021 because of an extension in the income tax deadline from April 2020 to July 2020.
• Statutorily required pension contributions grow by $739 million or 8.6% in FY2022 over FY2021 levels and are fully funded in the proposed budget.
• Group health payments in the General Funds are projected to decline due to benefit changes negotiated with unions and changes to rates and contract terms negotiated with insurers.
• General Funds revenues are increased by about $182 million due to the proposed 10% reduction in income tax and sales tax transfers to local governments and transit districts.
• If the $120 million budgetary surplus is realized, the unpaid bill backlog will total nearly $5.6 billion at the end of FY2022.

The Civic Federation has the following recommendations on the FY2022 state budget:

• Use federal stimulus funds to balance the budget in lieu of business tax changes.
• Review and evaluate the effectiveness of all existing business and other tax treatments.
• Consider Civic Federation ideas for consolidating and streamlining government in Illinois.
• Develop a Long-Term Financial Plan.

Click here to read the full report.
Click here to read the press release for this analysis.