As budget tightens, report finds Illinois better prepared for recession than in recent past

[December 11, 2024]  By Ben Szalinski

State lawmakers will face a projected budget deficit and slowing revenue when they return to Springfield in January, but a new report shows fiscal decisions made in recent years have put Illinois in a better position to handle a recession than any time in recent decades.

No state is immune from the negative effects of an economic downturn, but Illinois is more prepared today than it was for the Great Recession of 2007-2009 or the COVID-19 recession of 2020, according to a new report from the Illinois Economic Policy Institute and University of Illinois Urbana-Champaign’s Project for Middle Class Renewal.

The report analyzed nine indicators of progress, such as fund balances and past due bills, that would help the state weather a future economic downturn.

“Illinois is better positioned to overcome challenges and withstand the forces that trigger recessions than at any other point in recent history,” ILEPI economist Frank Manzo told Capitol News Illinois.

The main reason Illinois is more prepared is because it eliminated its backlog of unpaid bills in the years since the state’s budget impasse ended in 2017. The backlog had reached nearly $17 billion at the height of the two-year impasse between Republican Gov. Bruce Rauner and Democrats in the General Assembly. But it now sits generally between a $2 billion to $3 billion range, putting it in line with a standard 30-day billing cycle.

Illinois has enjoyed nine credit upgrades collectively from the three major credit rating agencies since the impasse, as bills are now paid by the comptroller when they arrive each month.

“Those higher credit ratings allow the state to borrow money at lower interest rates, which save money for Illinois taxpayers. Lower General Fund deficits and better credit ratings put Illinois in a much better position to reduce the depth and severity of the next recession,” the report stated.

A healthier reserve fund also provides the state with more money to fund operations if revenue dips. The Budget Stabilization Fund, more commonly known as the “rainy day” fund, had a balance of $2.2 billion as of Dec. 2. That’s a major improvement from 2007 when the fund had just $276 million available, enough to fund the state for four days, according to the report. But researchers also said Illinois should follow a Fitch Ratings recommendation to set aside $3 billion to $5 billion in reserves.

Researchers also credited the state’s recent decisions to increase annual payments into state pension funds when surpluses allowed for it. In fiscal years 2022 and 2023, the state contributed $700 million more in total to its pension funds than was required by law, helping to slow the growth of unfunded liabilities.

The pension systems were collectively funded at 46% at the end of fiscal year 2024, according to the Commission on Government Forecasting and Accountability. That’s an improvement from 44.6% funded last year and the highest ratio since 2021 when the state enjoyed strong investment returns. However, unfunded pension liabilities grew by $1.5 billion in FY24 to $143.7 billion. The liability has continued to grow after briefly declining in 2021.

The pension payment required by law each year, meanwhile, will consume about 19 percent of the state’s general revenue spending in FY25.

“While the condition of the state-funded retirement systems poses challenges for the financial well-being of Illinois and hinders the State’s ability to invest in public services and infrastructure, marked improvements in funding, including supplementary contributions during the Pritzker Administration, indicate that Illinois is better prepared for a recession than it has been at any time since 2008,” the report said.

Still, a separate report from COGFA showed Illinois lags the nation in new job growth when compared to pre-pandemic job levels in fall 2019. The state has recovered all the jobs lost during the pandemic, but has only added about 29,000 jobs since October 2019, an increase of 0.5% compared to the national rate of 4.9%, according to COGFA Chief Economist Benjamin Varner.

The Illinois State Capitol building in Springfield. (Capitol News Illinois file photo by Jerry Nowicki)

The Champaign-Urbana and Bloomington metropolitan areas are the only ones in Illinois to surpass the national job growth rate since the pandemic, logging growth numbers of 8.4% and 7.3% respectively, according to COGFA. The Champaign area, with the University of Illinois’ main campus, benefited as a hub of government employment while Bloomington has seen new manufacturing growth.

The Chicago area saw 0.3% growth and made gains in the private education and health services sector, but lost hospitality jobs. The Kankakee metropolitan area saw the largest decline since 2019 with total employment down 5.2%.

Researchers with ILEPI and UIUC also noted Illinois has a new tool to mitigate job losses when the next recession hits. Illinois implemented a work-share program that allows employers to temporarily reduce employees’ hours and receive partial unemployment benefits to help avoid layoffs. It was created in 2015, but the state didn’t implement it until 2021. NPR Illinois previously reported it could have saved up to 124,000 jobs and reduced unemployment costs by $1 billion during the 2020 recession.

Replenishing the state’s unemployment insurance trust fund after the pandemic, increasing investments in public education, passing an infrastructure bill, climate resilience projects and embracing a Medicaid expansion under the federal Affordable Care Act all help create jobs and financial security for residents, which creates more stability in the state’s economy, according to the report. Job creation establishes a “foundation for recovery,” Manzo said.

But the report also suggested state lawmakers should review Illinois’ tax structure. Researchers wrote the state’s flat income tax structure and local reliance on property taxes is more resilient than other tax systems to a recession, but the lack of robust sales taxes on services creates more vulnerability.

The report suggests a flat tax reduces volatility in a recession, UIUC professor Robert Bruno said, but he added the report does not conclude that it is the best overall structure for a state’s economy and budget.

“The more volatile the tax structure, the more, if you will, at risk the state is to negative impacts of a recession,” Bruno told Capitol News Illinois.

What matters most is how states spend tax revenue, such as if it’s spending on critical services and infrastructure or shoring up the “rainy day” fund and pensions, Manzo said.

Early fiscal year 2026 estimates from the governor’s office, meanwhile, project a potential budget shortfall of $3.2 billion if the state doesn’t decrease spending or raise revenue.

Read more: Pritzker’s budget office projects $3.2B deficit in early look at upcoming fiscal year

Tax revenue for the state continues to lag this year, according to COGFA’s November report. Corporate income taxes have dropped by 15.3% in fiscal year 2025 through November compared to the first five months of fiscal year 2024. Personal income tax receipts have risen by 6.4%, but sales tax receipts have seen little growth and are down $8 million this year compared to FY24. Analysts said they’re hopeful holiday shopping will boost sales tax receipts.

The state’s revenue total so far in FY25 also remains $291 million behind this point in FY24, mostly thanks to $633 million of one-time federal money the state received last year but is not receiving this year – an expected drop. State revenue is up $342 million excluding the loss of those federal funds.

Capitol News Illinois is a nonprofit, nonpartisan news service that distributes state government coverage to hundreds of news outlets statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.