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 Springfield lawmakers are about to receive an estimated $7.55
billion lifeline from Congress.
It represents a chance to prevent tax increases during an economic crisis and to
cancel any previously planned cuts in government programs for vulnerable
Illinoisans. It is also an opportunity to enact pension reform and other
structural spending reforms needed to improve Illinois’ long-term financial
health.
Squander this moment, and crisis-level deficits will return when federal aid
expires.
On Feb. 10, U.S Rep. Raja Krishnamoorthi introduced legislation in Congress that
would grant $350 billion in unrestricted federal aid to state and local
governments, including tribal governments and the territories. If the
legislation passes and is signed by President Joe Biden, as expected, Illinois
will see $7.55 billion in federal aid go to the state and $5.68 billion to local
governments, with $1.83 billion of that reserved for the city of Chicago. All
told, the bill would add $13.23 billion to the $10.8 billion in state and local
government aid received by Illinois to date.
Including all types of federal stimulus spending, across the
private and public sectors, $108.4 billion in federal aid has been disbursed in
Illinois (see Appendix A for details). While most of that sum is for health care
spending, business loan programs, direct checks to individuals and other private
sector stimulus, such stimulus nonetheless bolsters government revenue
collections.
Illinois revised its fiscal year 2021 revenue projections up by $2.2 billion
from April 2020 to November 2020. Income and payroll support for the private
sector meant more consumer spending and worker earnings, leading to
higher-than-expected income and sales tax receipts.
Absent federal assistance, Illinois’ financial outlook was as bad as it has ever
been and worse than any other state in the nation. In November 2020, Gov. J.B.
Pritzker’s office announced a $3.9 billion budget deficit for the current fiscal
year 2021. The governor provided few details on how he intended to close it,
apart from $711 million in announced service cuts and $2 billion in additional
borrowing. Pritzker must also propose a balanced budget for fiscal year 2022,
which has an expected $4.8 billion deficit, in the annual budget address on Feb.
17.
Closing the deficit without tax hikes or cuts to core government services will
now be significantly easier. To close the deficit, Pritzker’s administration had
previously threatened across-the-board tax hikes and service cuts. Specific
proposals included a small business tax hike worth as much as $1 billion, up to
a 20% increase in state income tax rates and 15% reductions in all program
spending.
Pritzker has blamed the state’s dire fiscal condition on voters’ rejection of
his progressive tax hike amendment, on Congress’ failure to provide unrestricted
state bailouts earlier and on COVID-19’s effect on revenues. On the other hand,
Illinois House Republican Leader Jim Durkin, R-Western Springs, called the
situation a “self-inflicted budget disaster.”
Durkin is right.
Illinois would have no budget deficit if Pritzker and lawmakers in the General
Assembly had done just two things differently in the budget passed last May: 1)
reformed pensions for $2.4 billion in structural savings, and 2) kept spending
flat, rather than increasing it by nearly $2.4 billion. The $4.27 billion in
savings from those two measures – after deducting $511 million in higher pension
spending to avoid double counting – would have more than offset deficits this
year and made a huge dent for fiscal year 2022.
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Instead, Pritzker approved a budget that relied on
fantasy revenues. The governor’s budget relied on $5 billion from a
proposed federal bailout that Pritzker had advocated, but which
never passed Congress. His budget also included $1.26 billion in
“fair tax” revenues for fiscal year 2021, and $3 billion in future
years, even though voters had not approved the tax plan.
Independent experts warned against the state’s
reliance on these uncertain revenues. For example, credit ratings
agency S&P Global Ratings pointed out that Pritzker’s latest budget
“does not include measures to meaningfully address structural
instability.” S&P also said, “Illinois has a history of leaving
difficult fiscal choices to future budgets, and to the extent that
expected federal aid does not materialize and the state does not
adjust expenditures to reflect available resources, the fiscal 2021
budget could weaken the state’s credit trajectory.”
Illinois has failed to balance its budget for 20 years. The last
time the state ended a fiscal year in the black was 2001.
Illinois’ 20-year history of spending beyond its
means is the reason the state is so desperate for federal aid to get
through its current budget crisis.
Pritzker has consistently attempted to blame COVID-19’s effect on
state revenues for the current deficit, claiming time and time again
that every state is facing similar problems and only a federal
bailout can close the gap. However, state revenue collections
actually exceeded earlier expectations in fiscal year 2020 and
Illinois was one of several states that saw a year-over-year
increase of 1.8%.
Illinois revenue collections for fiscal year 2021 have exceeded
expectations in the budget, leading Illinois to be one of just nine
states to revise its estimate in a positive direction mid-year.
The $7.55 billion in flexible aid Illinois is
expected to receive from the latest COVID-19 legislation from
Congress more than offsets the state’s total expected revenue losses
over three years.
Illinois’ fiscal crisis was built through decades
of bad fiscal policy, not caused by COVID-19. It will take several
years of commitment to fiscal discipline and transformational
changes to repair it.
Lawmakers should now turn their attention to the state’s
worst-in-the-nation pension crisis. The only realistic path to
balancing Illinois’ budget while protecting programs for the state’s
most vulnerable residents starts with a constitutional amendment to
allow pension reform.
A constitutional amendment to allow pension reform that preserves
workers’ earned benefits and allows for changes in unaccrued
benefits, such as the 3% compounding automatic annual benefit
increases, would make the system more sustainable and make pensions
more secure. A “hold harmless” pension reform plan developed by the
Illinois Policy Institute would save the state roughly $2.4 billion
the first year and more than $50 billion through 2045, while fully
eliminating the debt over that time.
Pension reform would ensure Illinois’ scarce resources are invested
in programs Illinoisans need most during the pandemic and in
spending that delivers the best return on investment for taxpayers.
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