Pritzker must address multi-billion-dollar deficit amid federal funding uncertainty

[February 15, 2025]  By Ben Szalinski

SPRINGFIELD — The relative ease of budgeting following the pandemic thanks to federal aid and strong tax revenue surpluses for the state appears to be over.

Gov. JB Pritzker will present his seventh budget proposal Wednesday as the state faces a projected $3.2 billion revenue shortfall for fiscal year 2026, which begins July 1. Federal pandemic aid has all been allocated and the economy has slowed, leaving tax revenue projections relatively flat for the coming years.

On top of these changes to the fiscal wind pattern in Illinois, states now face more uncertainty about the future of federal funding that makes up a sizable portion of state budgets and vital state programs. President Donald Trump’s desire to significantly scale back federal funding in general leaves states like Illinois wondering just how much money will be available to cover long-standing programs.

There are also inevitable requests for more spending. Advocacy groups come to Springfield every year asking lawmakers to increase funding for their priorities.

The challenge

The Governor’s Office of Management and Budget projects a $3.2 billion deficit for fiscal year 2026 if no changes are made to revenue or spending policies, with revenue ultimately remaining flat at $53.4 billion. That annual projection released in November also warned that “the ability to fund new programs will be severely limited.”

It’s not unusual for GOMB’s annual projections to show deficits in future years. The office historically takes a conservative approach, and projections can change by the time Pritzker delivers his proposal on Feb. 19. Lawmakers and the governor typically figure out how to navigate deficits each year, partially because they have to: the Illinois Constitution requires lawmakers to pass a balanced budget.

Revenue is set to remain relatively flat next year, in part because one-time sources are disappearing. Federal pandemic aid has ended, and the Department of Revenue underwent a “true-up” process to fix a miscalculation of “overpayments” to local governments, which ended up boosting current year revenues that won’t carry over to next year.

GOMB’s report also reflected spending increases that are required by law in FY26, such as $350 million more to K-12 education, $440 million more for pensions, $1.1 billion more for health care as one-time federal reimbursements expire, and general spending increases throughout state government.

In the short term, data from the legislature’s Commission on Government Forecasting and Accountability shows revenue is up 2.8% through January compared to FY24. But the report also shows signs of slowing revenue in certain categories. Corporate income tax receipts are down 14% compared to last year and sales taxes are roughly flat, partially because some proceeds from sales taxes collected on motor fuel have been diverted to infrastructure costs.

Closing the gap

Lawmakers faced a roughly $891 million deficit entering last year’s spring session, according to GOMB’s fall 2023 report, and Democrats resorted to targeted tax hikes on businesses to fill the gap.

Legislators worked late into the night at the end of May to pass a budget, with some Democrats opposing the plan over spending concerns.

This year’s hole figures to be even more challenging for lawmakers. Pritzker has characterized significant tax increases as a method for raising revenue as “a last resort.”

“It’s very important that we live within our means in this state and that we not resort to tax increases as a way to balance the budget,” Pritzker said in January.

But that doesn’t mean spending cuts will be the answer. “Efficiencies” will be the focus of the governor’s budget, Deputy Gov. Andy Manar said at a news conference earlier this month.

“You’re going to see a focus on making sure that we can reassure the people of the state that the tax revenue that’s generated from a growing economy … is being put to good use,” Manar said. “So there won’t be a focus on new revenue coming up in the budget address.”

Outside of shooting down tax increases, Pritzker has largely stayed quiet on how he will propose addressing the deficit.

But the GOMB report warns lawmakers that across-the-board cuts are easier said than done. The report pointed out upwards of 40% of general fund spending is locked up in legally required appropriations and another 24% is on education.

Republican lawmakers have their own ideas, chiefly eliminating funding for programs that serve Illinois residents who are living in the U.S. without legal permission.

“If he’s looking for places to cut, he should start with the billions of dollars that go toward lavish benefits for illegal immigrants,” House Republican budget leader Rep. Amy Elik, R-Godfrey, said at a news conference earlier this month. “Illinois cannot continue to shoulder the financial burden of free government handouts to illegal immigrants while costs for our own citizens skyrocket.”

Republicans frequently cite figures similar to the one Elik mentioned, but actual spending amounts are harder to calculate.

Two specific programs that have drawn Republican ire provide health benefits for noncitizens regardless of legal residency status. The Health Benefits for Immigrant Adults and Health Benefits for Immigrant Seniors provide Medicaid-style benefits to noncitizens age 42 and older.

Gov. JB Pritzker delivers his annual State of the State and budget address in the Illinois House Chamber on Wednesday, Feb. 21, 2024. (Capitol News Illinois photo by Jerry Nowicki)

The programs unexpectedly stretched the state budget in spring 2023 when costs were projected to potentially reach $1 billion. Lawmakers enacted new restrictions, including giving the governor authority to pause enrollment, and projected program costs are now at $558 million in the current fiscal year. Enrollment in the programs, meanwhile, has remained paused.

The state also spent hundreds of millions of dollars in recent years on migrants arriving on buses sent by Texas and other Republican-led states, but that problem appeared to largely subside in 2024.

Federal funding uncertainty

Trump added a new wild card to an already challenging budget year when his Office of Management and Budget directed federal agencies to suddenly stop disbursing many federal funds. The directive was quickly walked back and put on hold by a federal judge but caused a day of confusion in state government. It also opened new questions about how much the state can count on federal funding during Trump’s presidency.

“It’s hard to plan for devastation, which is what it would be,” Pritzker told reporters in Springfield on Jan. 30. “We’re doing our best to put together a budget that is balanced. We’re doing our best to think about the contingencies that we might have to have as eventualities because of what we think might be coming from the Trump administration.”

Federal funding supports numerous areas of state operations, including major programs. The FY25 budget counts on $18.5 billion in federal operating funds, representing nearly 15% of the operating budget. The federal government provides another $2.7 billion for capital funds.

The federal funding gives the state resources to carry out several vital programs, particularly for health care and education. Pritzker said he fears cutting off or severely reducing that funding will have detrimental effects.

“If they decide to cut off Medicaid, that’s 50% of the cost of each person that’s covered and the result will be we can’t cover the other 50%,” Pritzker said on Jan. 30. “We just can’t; the numbers are too astronomical.”

Illinois also has 90% of costs covered by the federal government for the Medicaid expansion program in the Affordable Care Act. The expansion group includes people under age 65 with incomes up to 138% of the poverty level. If the federal government cuts that off, Illinois has a trigger law that would end coverage for more than 900,000 people in the expansion group, according to the U.S. Centers for Medicare and Medicaid Services.

Spending priorities

The Chicago area’s public transportation agencies face a collective $730 million annual funding shortfall beginning in 2026 as federal pandemic relief expires. Broader talks about transit reform are expected to happen this spring, which could provide further upward budget pressures.

About 17% of the transit systems’ funding comes from the state, according to the Chicago Metropolitan Agency for Planning, but advocates say the state should be responsible for more funding. Similar systems in other large U.S. cities receive about a quarter to half of funding from their states.

Rider fares currently cover a substantial portion of operation costs under state law. A variety of options for addressing the shortfall, including tax increases, have been suggested, but no dominant proposal has emerged.

Some state agencies are also asking for funding increases in FY26. The State Board of Education requested a $653 million increase in funding for PreK-12 public schools, which makes up about 20% of the state’s entire general fund spending. If the requested increase is approved, it would bring the state’s total general fund spending on public education to just over $11 billion.

The state’s Evidence-Based Funding formula would receive the minimum statutorily requested $350 million increase, while a program that reimburses school districts for the cost of providing transportation to students with disabilities would receive a $112 million increase. And Pritzker’s Smart Start Illinois initiative for early childhood education would receive $75 million more.

The Illinois Board of Higher Education asked for a 4% increase, or $108.8 million in funding, to continue supporting the state’s higher education strategic plan, A Thriving Illinois.

The increase would allot $50 million more to the Monetary Award Program, or MAP grants, and a 2% increase in operating funding to public universities and community colleges, adult education, and career and technical education programs.

Attorney General Kwame Raoul recently joined a fourth multistate lawsuit against the Trump administration since the president took office in late January. Pritzker said Tuesday he fully endorses Raoul’s recent legal efforts, and that they are “important and necessary.” And although Raoul has yet to ask the General Assembly for financial help, he says these lawsuits are draining his office’s resources.

Capitol News Illinois reporter Jade Aubrey contributed.

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.