When COVID-19 hit Illinois, there was enough emergency cash on
hand to run the state for about 15 minutes. Illinois’ Comptroller Susana Mendoza
is pushing House Bill 4118 to work toward making sure the rainy-day fund has
something in it during the next crisis.
“It’s the fiscally responsible thing to do,” Mendoza said in a statement
reported by Bond Buyer.
Illinois and New Jersey were the states least prepared for a recession prior to
the COVID-19 crisis, Illinois after decades of poor financial performance.
Mendoza said Illinois must do a better job to prepare for future emergencies and
rebuild its rainy-day fund.
The bill to implement her plan was filed on Aug. 5 by state Rep. Michael Halpin,
D-Rock Island. It would trigger monthly transfers into the Budget Stabilization
Fund and Pension Stabilization Fund whenever the bill backlog is less than $3
billion and the state’s reserves are less than 5% of the general funds budget.
Mendoza estimates a backlog lower than $3 billion is the point when the state
pays its bills within a 30-day cycle, a customary business practice.
The bill creates an identical requirement to make a $200 million payment to the
state’s pension stabilization fund when the backlog drops below $3 billion. The
pension stabilization fund was created in 2006 based on the premise the state
could solve its pension crisis by making supplemental payments whenever the
legislature produced a budget surplus of at least 1%. The state has run deficits
each year since 2001 and the fund currently sits empty.
While an automatic trigger for rainy-day fund deposits is fiscally responsible,
an automatic trigger for higher pension payments is the wrong way to address
that crisis.
Illinois state and local governments already spend the largest share of their
revenue on pensions of all 50 states, more than double the national average. But
despite its first-in-the-nation spending, Illinois also carries the largest
pension debt burden and has the biggest gap between what it currently pays and
what it would take to stop the debt from growing.
The solution to Illinois’ pension crisis is a constitutional amendment to allow
the growth of future benefits to be brought in line with what Illinois’
governments, and their taxpayers, can truly afford. Throwing more money at a
broken system will simply mean further crowd out of valuable government services
that have already been cut by 14% as pension spending has exploded by 533%.
On its own, the new rainy-day fund procedures proposed in Mendoza’s legislation
would be a big improvement.
Illinois has historically struggled with its finances in multiple ways: rising
pension debt, fund sweeps and borrowing schemes, and run-away spending because
of unsustainable pension costs. Those are a few of the contributing reasons for
the state’s 21 years of unbalanced budgets and poorest-in-the-nation credit
rating, despite recent upgrades.
Another manifestation of the state’s financial woes is its poor preparation for
emergencies such as the COVID-19 pandemic. In March, fiscal watchdog the Volcker
Alliance gave Illinois a D for reserve funds. The report noted the state’s
minimal rainy-day fund balances left it especially vulnerable to financial
disasters. During the COVID-19 pandemic, Illinois was the only state to borrow
from the Federal Reserve; it had to do so twice for a total of $3.2 billion.
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When the crisis first hit in March 2020, Illinois
had $1.19 million in emergency funds: enough to run the state for
about 15 minutes. At one point in 2020 the reserve fund was down to
$60,000, less than a single state household’s median income and
enough for 30 seconds. Mendoza said the fund increased to $9.3
million currently but noted it was miniscule in comparison to
Illinois’ $42 billion budget for fiscal year 2022 and enough to
operate for a little less than two hours.
The U.S. state median was 28.5 days’ worth of
general fund spending at the start of fiscal year 2021, a Pew
Charitable Trusts article in May found. Experts recommend states
save 5 to 10% of their annual general revenues in their rainy day
funds. HB 4118 keeps the state goal of having 5% of its general
funds revenues held in the budget stabilization fund, but
strengthens procedures for reaching that goal.
Judging by the state’s financial record, maintaining a bill backlog
less than $3 billion will be a challenge. The $16.7 billion record
for the bill backlog was reached in 2017 during the state budget
impasse. Mendoza told rating agencies in April Illinois’ backlog
reached a years-long low of $3.5 billion, but it would still not be
enough to trigger rainy-day deposits under the proposed legislation.
As of Aug. 27, the backlog was again growing and reached $3.85
billion.
The drop in the bill backlog is less meaningful than it might seem
for two reasons. First, much of the debt has been moved to other
forms of short-term debt through bonds sold to lower the bill
backlog, interfund borrowing and recent borrowing from the Federal
Reserve. Second, the improvement rests on the back of a flood of
federal aid that will run dry within a few years.
With related debt added to the bill backlog, state projections show
short-term debt on track to exceed the prior $16.7 billion peak by
June 2023.
Reducing the bill backlog is still a positive
development, because it means vendors won’t be left waiting without
payment as long and because the state will pay lower interest on
other forms of short-term debt than it does on the backlog. Under
state law, most bills not paid within 90 days accrue interest of 1%
per month and health care bills accrue 9% interest per year if not
paid within 30 days.
Illinois must adopt significant financial reforms, starting with
allowing people to vote on an amendment for structural pension
reform. If enacted, the rainy-day fund rules will not take effect
until fiscal year 2024. This would allow lawmakers time to adopt
pension reform and other budget measures needed to end the state’s
two decades of spending beyond its means.
Only when the state is responsibly aligning its revenues and
expenditures in the long term can it hope to end short-term debt and
give taxpayers confidence it is ready to face the next unknown
emergency. |