Strong Medicine Needed to Cure Illinois’ Fiscal Ills

February 10, 2017

The Institute for Illinois’ Fiscal Sustainability at the Civic Federation today released its annual Roadmap, with recommendations to restore fiscal balance to Illinois.

Illinois has gone more than 19 months without a full-year, comprehensive budget. This prolonged delay— unprecedented in recent history—is the result of a political struggle between Democratic legislators who control the General Assembly and a Republican Governor who took office in January 2015.

A stopgap appropriations package provided partial relief for most areas of government that had received little or no State funding: higher education, human services and agency operations. But it did not cover employee group health insurance, which has not obtained general operating funds since the deadlock began. The stopgap expired on December 31, 2016.

With the State continuing to accrue expenses that exceed revenues, the total backlog of unpaid bills rose to $10.9 billion at the end of December 2016. State group health insurance bills accounted for about $3.9 billion of the total, with some of the claims nearly two years overdue.  If Illinois authorized enough additional spending to cover FY2017 services at close to historical levels, more than 40% of projected FY2018 revenues would need to be used just to pay outstanding bills and other commitments. Balancing the FY2018 budget through cuts alone would require a more than 26% reduction in net agency expenditure from projected FY2017 maintenance levels, and more than 18% from FY2015 levels.

The delay in acting on the State’s fiscal problems means that the measures taken now need to be more dramatic and the resolution of the crisis will take longer. The Civic Federation offers the following recommendations to begin stabilizing the State of Illinois’ financial position:

  • Limit spending growth to 1.7% per year through FY2024, using the Governor’s estimated maintenance spending level in FY2017 as the base.
  • Increase the individual income tax to 5.25% from 3.75% and to 7.0% from 5.25% for corporations. The State should be in a position to lower the individual tax rate to 5% on January 1, 2022. The burden of the increase on low-income residents should be alleviated by expanding the earned income tax credit by 50%.
  • Broaden the income tax base by eliminating the tax exemption for retirement income, excluding only federally tax-exempt Social Security income. The State can no longer afford to provide this generous exemption, which is out of line with most other states.
  • Enact a new service tax including a broad-based definition of consumer services and a firm business-to-business transaction exemption. The State should also exclude medical services. In conjunction with this change, the State should lower the general sales tax rate for goods and services from 6.25% to 5.5%. This should be accomplished by lowering the state portion from 5% to 4.25%, without lowering the 1.25% share for local governments.
  • Limit business tax expenditures that the State can no longer afford and that do not provide sufficient public value to justify their cost. The State should cap the retailer’s discount for sales taxes at $200 per month per retailer, eliminate the E-10 ethanol incentive, decouple from the federal domestic production activities deduction from corporate income tax and eliminate the continental shelf exemption from taxable income.
  • Consolidate the Chicago Teachers’ Pension Fund with the downstate and suburban Teachers’ Retirement System. There is no good public policy reason for Illinois to maintain two separate funds for public school teachers’ pensions. Chicago Public Schools should continue to be responsible for paying the normal cost of its plan, while responsibility for paying all of the normal cost of the TRS system should be shifted over three years to school districts outside of Chicago. Consolidation would provide more equitable pension funding for all teachers and help stabilize CPS finances.
  • Consolidate and Streamline Government Units in Illinois. The State of Illinois has by far the highest number of local governments in any state, at 6,963. The multiplicity of local units of government, many of which are funded predominantly by property taxes, is often cited as a reason for high property tax rates in Illinois. In addition to recommending the merger of the Chicago and State Teachers’ Pension Funds, the Civic Federation supports the following: consolidating local pension funds, merging the offices of the Illinois Comptroller and Treasurer, authorizing townships to be dissolved by referendum, consolidating property tax administration roles in Cook County and dissolving the Illinois International Port District.
  • Borrow to Clear the Unpaid Bill Backlog. In order to eliminate the backlog of unpaid bills, save on interest penalties and restore confidence in the State’s finances, the Civic Federation recommends borrowing to pay off the accumulated bill backlog during FY2018. If the other recommendations in this Roadmap are adopted, the Civic Federation estimates that $8.96 billion in proceeds will be necessary to bring the backlog to zero by the end of FY2018. The bonds should amortize as quickly as possible, ideally within five years. This recommendation is contingent upon a balanced budget, a credible plan to maintain fiscal sustainability, restriction of the bond proceeds to eliminating the bill backlog and the payment of debt service with revenues not otherwise needed to balance the budget.
  • Make supplemental pension payments corresponding to the debt service savings associated with retiring pension obligation bonds beginning after backlog bond debt service ends in FY2024 and continuing until returns are sufficient to bring all five State retirement systems to 100% funded status by FY2045.
  • Work toward building a rainy day fund equal to 10.0% of General Funds revenues to cushion the budget from the next economic downturn. Legislation must explicitly indicate when deposits will be made and in what amount and the circumstances under which withdrawals will be allowed.

Once the State pays off its unpaid bill backlog and begins to make progress toward building a rainy day fund, it should consider some of the following measures that would give the State’s finances more long-term sustainability:

  • A constitutional amendment limiting the pension protection clause to accrued benefits;
  • A constitutional amendment allowing a graduated individual income tax;
  • A reduction in the interest the State pays on overdue bills;
  • A return of the lapse period to two months from six; and
  • A phase-out of Section 25 liabilities and other practices that allow current years’ costs to be paid from future years’ appropriations.

The Civic Federation released its plan amid a recent flurry of budget-related activities. Despite the initiatives, there is still no clear end in sight to the budget impasse.

In January Senate leaders introduced a package of bills designed to break the deadlock. The sweeping, bipartisan proposal includes income tax increases, supplemental appropriations for FY2017, casino expansion, borrowing to pay down the backlog of unpaid bills and reforms for school funding, pensions and workers’ compensation.

The plan appeared to stall on February 8, when Senate President John Cullerton pushed ahead with votes on four components of the package. Three of the less controversial bills—aimed at streamlining State purchasing rules, making it easier to eliminate small units of government  and reducing borrowing costs for home-rule governments by creating lockboxes for revenue—passed with no Republican votes. The fourth bill, to reduce pension benefits for some State workers, failed on a vote of 18 to 29, with opposition from both Democrats and Republicans.

However, Senate leaders said the setback was not fatal. Republican Leader Christine Radogno said she urged her members to vote “present” on the bills because several pieces of the package are still being negotiated.

In another move to end the impasse, Illinois Attorney General Lisa Madigan on January 26 asked a court in St. Clair County to lift an order that has allowed State workers to be paid despite the lack of a State budget. The court order was issued in July 2015, in response to a request from public employee unions. In the court filing, the Attorney General argued that the payment of workers had allowed State government to function and alleviated pressure on State officials to resolve the stalemate.

The Attorney General’s court document cited an Illinois Supreme Court ruling in a separate case in March 2016 that held that State employee wages under collective bargaining agreements may not be paid without legislative appropriations. According to a subsequent op-ed piece, she delayed acting until after the expiration of the stopgap spending plan in order to give officials time to enact a full-year budget.

Governor Bruce Rauner, who had opposed stopping workers’ paychecks during the budget impasse, criticized the Attorney General’s filing. The Governor also said he would veto a bill, which was approved by a House committee on February 8, to appropriate State workers’ salaries through the end of FY2017.

In a video to State workers, Governor Rauner said the expiration of the appropriations on June 30, 2017 would risk a government shutdown and be used by Democrats to push through a substantial tax increase. Instead, the Governor said he supported another bill, which would authorize continuing, permanent appropriations for workers’ salaries.

The Governor is scheduled to release his recommended budget for FY2018 on February 15.