Past Due: Tax And Pension Fix Won’t End Illinois’ Budget Crisis

Nov 19, 2014

Unfortunately, even if the winner of the contest for governor is able to resolve what are arguably the two most pressing fiscal issues the state faces, Illinois’ budget would still be in deep trouble.

Listen to Dunn's interview about her column with Rachel Otwell: 

If you have been following the race for governor in Illinois, you may be a bit tired of hearing about two topics: income taxes and pensions. Much of the conversation has centered on how the candidates would handle the temporary income tax increase and retirement benefits for public employees. Should the income tax be allowed to sunset in January as scheduled? Should it be held at the current rates? Should it be allowed to step down gradually to cushion the blow to revenue? Will the Illinois Supreme Court uphold a law that would cut pension benefits? If not, how does Illinois address its $100 billion unfunded liability? Unfortunately, even if the winner of the contest for governor is able to resolve what are arguably the two most pressing fiscal issues the state faces, Illinois’ budget would still be in deep trouble.

The construction of the budget for the current fiscal year is going to make next fiscal year’s plan even more difficult to tackle. Lawmakers took a pass on extending the current income tax rates or making the cuts needed to offset the lost revenue when the rates roll back in January. Instead, the budget relies on $650 million borrowed from other state funds. That money will have to be returned with interest next fiscal year. So those putting together the plan for Fiscal Year 2016 will not only have to figure out how to pay back the loans but also how to cover the ongoing costs that the borrowing is paying for this year.

The FY 15 budget does not fully fund state operations. The governor’s budgeting office reported to the Chicago-based Civic Federation that the budget would not cover $470 million in costs, including some payroll expenses. The shortfall will require that lawmakers approve and the governor sign into law more spending for the current fiscal year or some programs will be shut down. In a recent analysis of the budget, the Civic Federation also estimates that if nothing changes, the state’s backlog of unpaid bills would grow by $390 million to a total of $6.4 billion at the end of the fiscal year.

That may sound bad, but the future prognosis for the Illinois budget is even worse.

Richard Dye, an economist with the University of Illinois’ Institute of Government and Public Affairs (IGPA), decided to quantify the state’s long-term budget problems because he was concerned that policymakers were not doing enough looking ahead to tomorrow as they are making budget choices today. He and the team at IGPA’s Fiscal Futures project, of which Dye is the co-director, first set out to get a clear view of the state’s budget — a task that is much more difficult than you might expect. The part of the budget that is typically in the spotlight is spending from a group of funds that are lumped together and referred to as the General Revenue Fund. But there are more than 700 state funds, and the same spending item can skip and jump from fund to fund over the years. This makes it hard to track spending and revenue over time. “It was impossible to get from the state government a consistently defined measure of the state budget,” Dye says. “The first thing we realized is that we had to build the budget history ourselves.” So the group focused on 20 spending categories and 20 revenue categories and used them to get a comprehensive history. Then, they combined that knowledge with other factors, such as economic and demographic data, to project the state’s fiscal future. What they saw was deficits.

The best-case scenario for the state’s ledger would leave Illinois with a $5 billion deficit in 2025. That outcome would only be possible if the current tax rates were made permanent and the Illinois Supreme Court upheld reductions to retirement benefits for public employees. The first of those possibilities is unknown at this point, and the second seems downright unlikely, given the Supreme Court ruling that barred the state from cutting retiree health care benefits. If the taxes roll back and the pension changes are tossed, the deficit in 2025 could be as big as $14 billion, similar in size to the hole the state discovered it faced after former Gov. Rod Blagojevich was impeached and removed from office.

Dye says that when the group started the project, he expected that what they would find would be “troubling,” but he says, “I was astonished at how bad it was.” There are several causes for the problem, including skipping pension payments to meet operating costs and relying too often on one-time revenues. He says that even prudent economists wouldn’t begrudge lawmakers and governors from using these methods in rare years when there is a large and unexpected drop in revenue. “If you had a particularly bad year, you don’t want to alter your commitment to school kids or whatever. You want to figure out a way to get through that year.” But along the way, Illinois began counting on bad practices, such as shifting bills to the next fiscal year and borrowing from state funds, as a matter of course. Then came the 2008 economic collapse, and Illinois’ bag of budget tricks was running low. Dye says that the recession and the accompanying revenue losses “clobbered a lot of states, but hit Illinois particularly hard because there was no cushion.”

Solving the problem cannot be done through pension changes, increased taxes, economic growth or cuts alone. It will take a combination of these options. Dye and the rest of the Fiscal Futures team are not advocating for any particular solution. Dye says they are just trying to raise the alarm and push for more transparent budgeting practices so the state does not end up in this situation again. “As soon as you start talking about solutions, the focus is on the solutions not on the magnitude of the problem.” He says that at this point, it doesn’t seem like many in government are willing to talk about how severe the situation is, and most voters are probably not aware. “On the campaign trail, neither candidate [for governor] is going to admit to how bad things are because then they would have to be more specific and reveal more harshness in what their sets of solutions are.” But he says the public will start to realize when it begins to affect them and those they know. “There will be some sort of triggering event that will start to get people’s attention.” When that happens, the urge will be to point fingers. “Once you realize how bad it is, you want to devote attention to blaming.” Dye says he has had to fight that impulse himself. But, he says, politicians of all stripes helped Illinois into this overwhelming hole, and the productive thing to do now is to work together to climb out. And change the way the state makes budgets, so it never falls in again.

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Please welcome Dusty Rhodes to our staff. Some readers may recognize her name from her work at Illinois Times, where she focused on Springfield city government and law enforcement.

Most recently, she has been at the University of Illinois Urbana-Champaign, first as a graduate student, earning a master’s degree in journalism with an emphasis in multimedia, and then as an editorial associate with the university’s news bureau.

Rhodes started her journalism career at the Dallas Morning News producing long-form features for the Sunday magazine. She moved to Alaska to work for the Anchorage Daily News, where she started out writing for the lifestyles section and, later, the city section and page one. She then returned to Dallas to write for the Dallas Observer, where she focused on civil rights. About the time she became a mom, she took a job as the investigator for a prominent civil rights law firm, and worked there for nine years before returning to journalism at Illinois Times.

She brings these experiences — as a reporter, a mom and a critical observer of a variety of bureaucratic systems — to her new job as Education Desk reporter for WUIS and Illinois Issues. She will contribute stories about education, both on the radio and in the magazine.

Illinois Issues, November 2014