Thursday, Feb. 17


Gov. Blagojevich proposes major reforms to ensure solvency in FY 2006 and beyond

Governor's $43.56 billion operating budget balances $1.1 billion structural deficit without raising income or sales taxes, reforms pension system, Medicaid and employee health insurance

Governor's plan further streamlines state government, invests more money in schools and health care          Send a link to a friend

[FEB. 17, 2005]  SPRINGFIELD -- Gov. Rod Blagojevich unveiled a $43.56 billion fiscal 2006 budget plan Wednesday that puts the state on a road map to fiscal solvency. The governor's budget includes major reforms to eliminate the state's structural deficit, invests more in schools, provides health care to more people who need it, builds roads, builds schools, cleans the environment and funds mass transit, without raising the income tax or sales tax.

"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 health insurance.

Pension reform

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 otherwise.

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 years.

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 these changes."


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.

Employee 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.

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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 Illinois."

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 goals:

  • Pay as 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.

  • Prison 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.

Education 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."

Capital program

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.

Mass transit

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.

Natural resources

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 department.

= = =

In 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 government operates.

"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 misplaced priorities?

"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 governor's office]

[Transcript of the governor's budget speech]

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