State of Illinois FY2025 Recommended Operating and Capital Budgets: Analysis and Recommendations

State of Illinois FY2025 Budget Cover

May 14, 2024

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EXECUTIVE SUMMARY

The State of Illinois has made significant progress on stabilizing its finances, ending each of the past four fiscal years with budget surpluses. Those surpluses were driven by several factors: strong revenue performance via a strong economic recovery from COVID-19 and the State’s enactment of budgets in better structural balance than past practice. The State has also prioritized payment of outstanding debt including COVID-related borrowing, interfund borrowing, the Unemployment Insurance Trust Fund and increased pension contributions while continuing to build up reserves through its contributions to the Budget Stabilization Fund and sustaining a normal bill payment schedule. Revenue growth has slowed in fiscal year 2024, but one-time revenue increases have nevertheless helped produce better-than-projected revenue performance overall. Together, prudent choices and improved revenue performance have moved the State from a crisis orientation to a more stabilized financial position. However, looking forward, there is more work to do.

The proposed FY2025 budget represents the first year the State has had an initial budget deficit to close since the start of the pandemic. Based on current projections, the State’s revenues are expected to come in lower than projected expenditures in FY2025, resulting in a deficit of $970 million. The Governor’s proposal introduces a number of tax changes and enhancements that would close the budget deficit if approved by the General Assembly, thereby bringing the budget into technical balance. While the Civic Federation understands the need for revenue enhancements to balance this year’s budget, we note that further tax increases could prove unsustainable for taxpayers given the State’s already high tax burden.

Given signaling from the General Assembly that the proposed tax increases may not have enough support to pass, the Governor asked agency leadership teams to prepare for a budget scenario with $800 million less in revenue.1 This prudent anticipatory step will help assure a technically balanced budget for FY2025. The Civic Federation supports some of the State’s long-term investments included in the proposed FY2025 budget, including an increase to the Evidence-Based Funding (EBF) formula for P-12 education and increased appropriations to the Monetary Award Program (MAP) grants for college students. We also recognize and commend the State’s leadership in efforts to support the ongoing migrant crisis in various forms and levels of collaboration with Cook County and the City of Chicago. However, the Governor and Illinois General Assembly will need to balance these and other important programs against other competing priorities, particularly should the proposed tax revenues not be approved.

Given its more sustainable financial position, the logical next step for the State is to convene a public process to evaluate how discretionary spending choices are made and its overall revenue structure in order to better foster its regional competitiveness and overall economic growth. To achieve structural balance in future budgets and alleviate the burden on Illinois taxpayers, the Civic Federation recommends that the State re-evaluate its tax structure to align better with the modern economy to make Illinois’ tax rates more competitive with peer states and set Illinois up for future revenue growth. Again, while much progress has been made, there is more the State can do to address its fiscal challenges through strategic and long-term financial planning in order to alleviate the need for short-term funding solutions in future budgets.

The Civic Federation offers the following key findings on the Governor’s recommended FY2025 State Budget:

  • The $52.7 billion proposed General Funds operating budget is a 4.5% increase from estimated year-end FY2024 spending of approximately $50.4 billion—excluding FY2024 supplemental appropriations of $1.2 billion.
  • Agency spending (excluding pension contributions and transfers out of the General Funds for debt service and other purposes) will increase by $1.9 billion, or 4.9%, from the FY2024 year-end estimate to $40.4 billion.
    • The FY2025 budget includes proposed supplemental FY2024 agency appropriations of $1.2 billion, including:
      • $430 million to the Department of Healthcare and Family Services;
      • $346.8 million to the Department of Human Services; and
      • $188.3 million to the Department of Central Management Services.
      • The remaining appropriations are allocated to other agencies including the Department of Innovation and Technology, Department of Corrections, Department on Aging and Department of Children and Family Services.
    • After accounting for the FY2024 proposed supplemental appropriations, agency spending represents an increase of $685 million, or 1.7%, from the prior year estimate.
  • General Fund revenues are proposed at approximately $53.0 billion for FY2025, an increase of $779 million, or 1.5%, from the FY2024 year-end estimate of $52.2 billion.
  • The State is projected to end FY2025 with a $128 million surplus after a proposed $170 million contribution to the rainy day fund.
  • The Governor’s proposed budget fully meets the State’s 50-year pension funding plan by making the statutorily required General Funds pension contribution of $10.1 billion in FY2025. It also proposes increasing the 50-year funded ratio goal from 90% to 100%, which will add three additional years to the funding payment plan and extend its end date from FY2045 to FY2048. The proposal to reach 100% funding would therefore pay off the remaining $33.6 billion in unfunded liabilities that would have remained after FY2045 and proposes making additional payments to the pension funds between FY2030 and FY2040 by using revenue freed from the retirement of the backlog and pension obligation bonds that are paid off in those years.
  • The State has paid down a total of $11 billion in debt between FY2022 and FY2025, which includes:
    • COVID-related borrowing;
    • Interfund borrowing;
    • Delayed health insurance bills;
    • Unemployment Trust Fund debt; and
    • Supplemental contributions to the Pension Stabilization Fund.
  • FY2025 is projected to end with $447 million remaining in accounts payable, or outstanding bills. This is a major improvement from the larger backlog of bills in past years and represents a normal bill payment schedule, with the caveat that a significant portion of prior past due payables were settled with bonds, with approximately $3 billion in principal remaining.
  • The State of Illinois received approximately $8.4 billion in Coronavirus State Fiscal Recovery Funds and Coronavirus Capital Projects Funds, all of which had been allocated by the end of June 2023 toward debt repayment, revenue replacement and programs and initiatives led by a variety of State agencies.

The Civic Federation supports the following aspects of the Governor’s recommended FY2025 budget:

  • The State’s improved financial condition;
  • Making statutorily required pension payments;
  • Proposal for a new pension funding plan; and
  • Proposal to evaluate Tier 2 pensions.

The Civic Federation has the following concerns about the Governor’s recommended FY2025 budget:

  • Spending pressure points in the FY2025 budget;
  • Proposed revenue enhancements;
  • The effect of the permanent elimination of the grocery sales tax on local governments; and
  • The combined fiscal and operational crisis facing the public transit systems in Northeastern Illinois.

The Civic Federation offers the following recommendations to the Governor and Illinois General Assembly:

  • Develop a long-term financial plan;
  • Review and evaluate the effectiveness of all existing tax treatments;
  • Develop a tax structure for a sustainable future;
  • Identify additional offsetting revenue sources for local governments if the grocery tax is eliminated;
  • Sustain a rainy day fund that meets best practice standards; and
  • Reform the governance and funding structure of public transit in Northeastern Illinois.

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1Jerry Nowicki, “Analysis: ‘Significant enough’ opposition to Pritzker’s revenue plan leads to call for cuts,” Capitol News Illinois, May 9, 2024. See also Memorandum from the Office of the Governor to Agency Directors, May 8, 2024.
 

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