"This budget represents a way to make
sure we stop spending money we don't have, stop paying for things we
can't afford and start setting the right priorities that put the
taxpayers first," Gov. Blagojevich said. "If we embrace this plan,
we can end the cycle of structural deficits without forcing the
hardworking people of our state to pay more in taxes. And if we
embrace this plan, we can give the people of Illinois a budget they
can believe in.
"Over the last
two years, we've dug ourselves out of the worst fiscal crisis in our
state's history. We did it by bringing major structural changes to
the way government works -- $3 billion in less spending outside
education and health care, 20 fewer state agencies, and the smallest
work force in 30 years. That's a good start. But, setting the right
priorities can't just include more money for schools and health care
or streamlining state government or not raising taxes. The right
priorities take into account both today and tomorrow."
The governor outlined major reforms
to address three state government programs with rapidly growing
costs that threaten the state's future: employee pensions, Medicaid
and employee health insurance. Soaring costs in these three areas
account for the estimated $1.1 billion deficit in fiscal 2006: $470
million in increased pension costs, $480 million in increased
Medicaid costs and $160 million in increased costs for employee
The 1970 Illinois Constitution
guarantees pension benefits for existing employees. Despite that
guarantee, the state never met its full annual commitment to the
pensions in any given year -- with the exception of 2004, after
issuance of the governor's $10 billion pension obligation bond. In
1995, the Legislature tried to solve the funding problem by passing
a 50-year funding plan to get the pensions up to a 90 percent funded
level by 2045. However, instead of catching up on its pension
liability, the state fell even further behind. In fact, in the time
between when the 1995 law was signed and when Gov. Blagojevich took
office in 2003, the state's pension liability increased by another
$23 billion, thus raising the pension liability to $43 billion.
Illinois currently has the largest unfunded pension liability of any
state in the nation.
Last year, the governor appointed a
pension reform commission to tackle both short-term and long-term
pension funding issues. Commission members represented business,
legislative, labor and civic communities. They conducted more than
two dozen public hearings and debated the merits of all pension
reform options. In February of this year, the commission issued its
recommendations for long-term structural reforms.
"The pension reform plan I'm
proposing comes in large part from the commission's
recommendations," the governor said. "But, our proposal does not
completely mirror its recommendations. In some areas, I felt that
some of their ideas went too far and placed too much risk and not
enough reward on the men and women who work for our state. But, make
no mistake about it -- the pension commission is right. We have to
change and reform the way the pension system works.
"The ideas I'm proposing can save
our pension systems more than $100 billion over the next 40 years.
And, by reducing the cost of our overall pension obligation, we will
reduce the state's costs by $55 billion over the next 40 years. It
means we can save $750 million this year and even more in recurring
savings every year going forward."
State University Retirement System:
Some members of the State University
Retirement System receive an average of 9 percent interest,
regardless of how their investments actually perform, compared with
6 percent interest members of the other four state retirement
systems receive. The governor proposes bringing the SURS interest
rate in line with the state's other retirement systems, which could
save $10 billion over the next 40 years.
SURS members also benefit from a
little-known option in which their contributions are matched at
unusually higher rates. No members of the other state pension
systems receive this perk. The governor proposes treating all
pension system members the same by eliminating the SURS plan
provision -- a reform that could save another $2.5 billion over the
next 40 years.
End-of-career salary increases:
Under the current system, school
districts sometimes give teachers, faculty and school administrators
disproportionately large salary increases in the final years of
their career. The pension benefits for teachers, faculty and school
administrators are based on the salary they earn in their final four
years of their career. So, when they receive disproportionately
large salary increases at the end of their careers, the state ends
up paying a lot more in pension benefits than it would have
The governor explained if a local
school district wants to award large end of career raises, it can;
but the local district should assume the majority of the costs. The
governor proposes capping end-of-career raises at 3 percent per
year, for purposes of determining the state's share of pension
benefits only. This reform would save $17 billion over the next 40
Other pension reforms:
Seventy years ago, it was decided
that police officers in the line of duty should receive additional
pension benefits under an alternate formula because of the hazards
associated with their job and because they do not receive Social
Security. But, over the years, these additional benefits were
extended to additional categories of state employees. In fact,
today, one-third of all state employees receive those additional
benefits. The governor proposes that the state return to the
original intent of the law for all new hires who are not police
officers. This reform would save $1.5 billion over 40 years.
Second, most retirement plans start
paying benefits at the age of 65. But Illinois starts paying
benefits at age 60 if an employee worked for the state for at least
eight years. If an employee worked for the state for 30 years, the
employee can retire at the age of 55 and start receiving full
benefits. The governor proposes, for new employees only, that if
employees work for the state for 35 years, they would receive full
benefits at the age of 60. And, he proposes that employees who work
for the state for at least eight years would start receiving
benefits at the age of 65. These changes are expected to save the
state $5.5 billion over the next 40 years.
Third, right now all state retirees
receive an automatic 3 percent increase on their pensions every
year, regardless of how the market performs and no matter how much
the cost of living actually increases. The governor believes a
fairer and more fiscally responsible approach is to tie the annual
cost-of-living increase to a formula based on the consumer price
index, capped at 3 percent. This change, for new hires only, would
save $19 billion over the next 40 years.
Finally, to avoid runaway pension
costs in the future, the governor proposes a new requirement
mandating that all new pension benefit proposals be accompanied by a
specific revenue stream to pay for them.
"The proposals I've outlined today
are fair, reasonable and responsible. They are designed to link
benefits to present-day reality," the governor said. "These changes
are necessary to avert a looming crisis. And they are far preferable
to watching the state one day go broke as we struggle and fail to
pay our pension contributions. I'm asking you to join me in making
Each year, Medicaid costs have grown
by nearly 10 percent. The increases are attributed to the rising
cost of providing health care to people who need it. While some
states have dealt with increasing costs by kicking people off health
care rolls, Gov. Blagojevich during his first two years in office
provided health care to more people who need it. In order to keep
advancing, the governor explained that the state should approach the
Medicaid program more like private insurance programs -- including
working with doctors to prescribe more generic drugs and keeping
hospital payments at current levels.
The governor also explained that the
state can save money by taking advantage of the new federal
prescription drug benefit. After the federal government passed the
new Medicare prescription drug law last year, some states shifted
all their Medicaid-eligible seniors to the new federal program. The
massive shift requires the federal government to assume the cost of
providing prescription drugs for low-income seniors, but the
governor pointed out that too many seniors can end up falling
through the cracks because the new federal program is complicated
and contains gaps in coverage.
So, the governor proposes moving
Illinois seniors on Medicaid to the federal program but also
providing them with a safety net. Under the federal program, if
there is an increase in out-of-pocket spending for seniors, whether
it's a deductible or co-pay, the state of Illinois will make up the
difference. This change is expected to save the state $26 million in
this year's budget and more than $50 million next year.
group health insurance
Over the last four years, the cost
of the state employee group health insurance program grew by 11
percent each year. When state employees visit the doctor or a
hospital, the state is actually charged an average of 45 percent
more than private insurers for the same treatment.
For these reasons, the governor is
directing the Illinois Department of Public Aid -- newly named the
Illinois Department of Healthcare and Family Services -- to
negotiate for its more than 59,000 employees a state payment rate
that is more in line with what the private sector pays.
Additionally, the governor is ending
the inefficient practice of each state agency negotiating separately
for health care services. The governor directed the newly named
Department of Healthcare and Family Services to pool the buying
power of every state agency and handle the negotiations with health
care providers, from insurers to hospitals to drug companies. This
reform could save the state up to $45 million each year.
[to top of second column in
Finally, the governor proposes
requiring retirees who are eligible for the federal prescription
drug benefit to take advantage of it. This change could save another
$15 million each year.
"The reforms I just outlined, from
pensions to Medicaid to employee health insurance, are important,
and they will help us save more than $900 million," the governor
said. "They will help balance our budget this year and give us the
opportunity to keep our state moving forward. This year's budget
offers an opportunity to bring long-term fiscal stability to
achieve fiscal stability, the governor outlined four ways to make
government more efficient and more effective: Make sure the state
doesn't spend money it doesn't have; consolidate state assets into
one place; question whether the state needs to do everything it's
currently doing; and discontinue the practice of unexamined spending
of taxpayers' money. The following are initiatives to achieve these
you go: Gov. Blagojevich explained that the real problem facing
the state of Illinois isn't a lack of revenue, it's uncontrolled
spending. To tackle this problem, the governor urged lawmakers to
adopt a "pay as you go" system. This would require anyone who
proposes new spending, including governors, constitutional offices
and lawmakers, to also identify how the state would pay for it.
Nine other states already have "pay as you go" systems.
system review to reduce recidivism: Every time a crime is
committed, it costs the people of the state -- from human costs to
prison costs to law enforcement costs. Currently, nearly 55
percent of inmates return to the prison system, and it costs
$21,000 each year to house an adult inmate in Illinois. In 2004,
the state reopened the Sheridan Correctional Center as a national
model drug treatment facility, providing 950 inmates with drug
treatment and job training that they would not receive otherwise.
The results, so far, are promising. The recidivism rate is down 55
percent. To replicate this success, the governor will convene a
group of civic leaders and elected officials to review the prison
system and develop ways to reduce recidivism. The governor asked
the Rev. Jesse Jackson and Peoria County State's Attorney Kevin
Lyons to chair this commission.
- State agency consolidation: Since
Gov. Blagojevich took office in 2003, nearly 20 state agencies and
departments have been consolidated. Consolidation leads to fewer
administrative costs, greater efficiency and better coordination.
To potentially realize even more savings, the governor will
assemble a working group to look at how many state agencies are
needed and whether more can be consolidated.
and health care
Consolidating functions within state
government to achieve greater efficiency is not limited only to
state agencies. The governor proposes using the similar pooling
concept in regard to special funds in order to endow education.
Currently, there are 650
special-purpose funds that serve limited interests and exist with a
cash surplus. The governor proposes pooling the balances in the
special-purpose funds and using what the funds do not need to help
schools. Each special fund would perform exactly the same function
it currently does, and each would retain enough cash to support
ordinary operations plus a reserve of extra money just in case a
need arises for additional dollars.
By pooling the remaining fund
balances, the state would create the School Endowment Fund. This
fund would invest the $420 million balance, over a three-year
period, in K-12 education and early childhood education. After three
years, a new surplus balance will build up and that balance, over
time, can also go to schools. This proposal does not apply to road
funds, bond funds, pension funds, debt service funds, federal trust
funds, or local government funds and others.
During the first two years of this
administration, the state has invested $1.1 billion in new school
funding. In fact, Gov. Blagojevich has invested more in education
during his first two years, despite facing historic budget deficits,
than Gov. George Ryan did in the first two years of his term, at a
time when the economy was thriving, and more money than Gov. Jim
Edgar did in the first five years he was in office. Including the
fiscal 2006 proposal, Blagojevich will have increased education
spending by more than $2 billion.
"Using the existing, unneeded
balances of the special-purpose funds is a way to use our existing
resources to help our schools," the governor said. "I know it took
decades to create all these funds. I know each fund has its
supporters and that some will not want to see the surplus go to
schools. But, in tough times, you have to set priorities. And our
priority is education."
In order to meet the needs of
Illinois schoolchildren, the governor urged legislators to also pass
a capital spending program. A recent survey conducted by the Capital
Development Board found that Illinois schools reported that they
need more than $6 billion in new construction. The governor proposed
reauthorizing the school construction program in his capital plan, a
$500 million investment. The governor also proposes investing $50
million in a new program for school maintenance.
There are numerous examples of road
projects and other infrastructure needs that highlight the demand
for a capital program as well.
A new component of the governor's
capital proposal includes an initiative to help clean up the state's
environment. The governor supports earmarking 10 percent of any
capital bill the legislature authorizes for projects that help the
environment. The projects include cleaning up contaminated sites at
Lake Calumet, improving water quality through the Conservation
Reserve Enhancement Program or extending the brownfields program.
In order to pay for the capital
program's debt service, the governor proposes a 75-cent increase on
the cigarette tax and increasing the cigar tax. The two increases
would generate more than $150 million each year in new revenue. In
addition to funding the debt service on a capital bill, the governor
supports using a portion of the revenue to provide health care to
more people who need it, by increasing enrollment eligibility for
FamilyCare by 74,000 parents. The Illinois Department of Healthcare
and Family Services expects that 56,000 of those eligible will
enroll in fiscal 2006.
In an effort to help the Chicago
Transit Authority avoid service cuts and to help mass transit across
the state, the governor proposes closing the canned software
loophole. Illinois is the only state in the nation that allows a
handful of big corporations to avoid paying sales taxes on computer
software. Individuals pay sales tax on computer software as do
650,000 small businesses. By closing this unfair corporate tax
loophole, the state can generate $65 million to help the Chicago
Transit Authority and mass transit across the state.
The governor also announced he
supports a recommendation from Lt. Gov. Pat Quinn to close the tax
loophole on landfill gas. If the state closes this loophole, the
anticipated $17 million in new revenue generated would be used to
fund conservation programs and restore some of the reductions at the
Illinois Department of Natural Resources. The governor endorses this
as a realistic and reasonable way to restore funding to the
= = =
spirit of his "pay as you go" proposal, the governor summarized his
fiscal 2006 budget plan:
Pension, Medicaid and employee
health insurance reforms: These reforms would save $900 million in
fiscal 2006. The savings, combined with savings generated at the
Illinois Department of Central Management Services, better tax
enforcement and increased federal revenues, would be used to
eliminate $1.1 billion structural deficit.
School Endowment Fund: The
governor proposes using the pooled surpluses from special funds to
provide $140 million for K-12 education and early childhood
education in fiscal 2006.
The capital program and increased
enrollment in FamilyCare would be paid for by increasing cigarette
and cigar taxes.
- Closing two corporate loopholes
would fund mass transit and restore cuts at the Illinois
Department of Natural Resources.
"Five simple points are the
philosophy behind each of our budgets," Gov. Blagojevich said.
"Don't raise the income tax. Don't raise the sales tax. Invest more
in schools. Invest more in health care. And, reduce the size and
cost of government. By working together, we've been able to achieve
these goals. We've changed priorities and reformed the way
"Now we find ourselves at a seminal
moment. It's time to choose. Do we continue to shake up the system
and bring fundamental change to state government? Or, do we allow
ourselves to slide back into the old ways of waste, inefficiency and
"What I'm asking you to do is not
easy. It's hard. It means tough choices. It means having the courage
to say no to friends. But, it's necessary. And, it's the right thing
to do. Let's put aside the politics and trust the people. Let's
embrace the unique opportunity we all have, take the heat and make
the hard and difficult decisions, knowing that we're doing it to
make things better for the people of Illinois."
[News release from the
of the governor's budget speech]