CHICAGO – As Gov. Pat Quinn prepares to deliver his latest budget proposal, there’s no overstating how ugly Illinois’ financial condition is.
Outside analysts in recent months have used phrases like “a deep hole,” a “downspin” and “not fiscally sustainable” to describe it. The New York bond houses have given Illinois the worst credit rating of any state in the nation.
The grim outlook persists despite recent efforts to improve it, from a 67 percent state income tax hike passed in the waning hours of the legislative session two years ago to last year’s $1.6 billion in Medicaid cuts.
When Quinn presents his latest plan today, he’ll have few good options. His office already has projected a cut of about $400 million to education and cuts to public safety and economic development.
“We expect the governor is going to have a very difficult time,” said Laurence Msall, president of the Civic Federation, a Chicago-based watchdog group that analyzes and makes recommendations on fiscal issues.
It begs the question: How did the state get here? And why is it so bad?
No single factor will constrain Quinn more than the state’s pension crisis. Lawmakers have been going around and around on the worst-in-the-nation problem for years without a solution, and nothing has done more damage to the state’s finances.
Because lawmakers skipped or shorted payments to public-employee retirement funds for decades, the accounts now are about $97 billion short of what’s needed to fully meet the state’s liabilities. Illinois now is playing catch-up on the payments, but each year the cost grows. In 2008, the payment took up 6 percent of the state’s general funds budget. In the fiscal year that starts July 1, it will be close to $7 billion– more than 16 percent of the general funds budget.
Quinn had set a January deadline for lawmakers to fix the problem in hopes of seeing some budget relief. But the options – from raising the retirement age to freezing cost-of-living adjustments and shifting the cost of teacher pensions to local districts – have been politically challenging for lawmakers, who instead opted to let the problem fester.
That means the Democratic governor’s budget proposal today will account for the full amount the state will owe the pension funds next year. What that does to other areas of the budget, from state parks to prisons or financial aid for college students, could be a powerful motivator for legislators to act.
For years leading up to the recession, Illinois lawmakers balanced the state’s books through “budget gimmicks” that allowed them to spend money they didn’t have, a task force led by former Federal Reserve Chairman Paul Volcker concluded last year. Officials anticipated higher-than-realistic revenues and didn’t account for unpaid bills from current or previous years when approving a new budget.
Under Gov. Rod Blagojevich the state also took more than $1 billion from special funds – accounts created for specific purposes, often with their own revenue stream – and used the cash elsewhere, a practice commonly known as a “sweep.” As those practices continued, Illinois accumulated multibillion-dollar deficits and a backlog of unpaid bills.
The state has been unable to get caught up, much less get ahead, on what it owes vendors such as social service agencies and health care providers. When the bills are paid, they cost more due to late penalties.
So far this fiscal year Illinois has spent $5 billion to pay down bills from prior years, according to Comptroller Judy Baar Topinka. The current backlog is more than $9 billion, and growing.
Quinn has said he doesn’t approve of sweeping or borrowing from special funds, so it’s unlikely he’ll call for doing so in the coming budget year. But legislators have eyed the funds in the past, and could do so again.
A lagging economic recovery
A report prepared by Moody’s analytics in January found that after a promising start to the recovery, Illinois is one of a handful of states in danger of slipping back into recession. The main culprits, Moody’s found, are slow job growth and a soft housing market.
Those factors are leading state officials to be conservative when projecting revenues for the coming budget year, Jim Muschinske, revenue manager for the Illinois Commission on Government Forecasting and Accountability, told a House committee last month. The commission predicted the next fiscal year “will be saddled with continued struggles related to employment gains and overall unspectacular economic performance.”
Even if the economy takes off, Muschinske said, it took Illinois a long time to get to where it is, and it will take a long time to get out.
“Clearly, things are not going to turn around overnight,” Muschinske said.
Looming over any budget discussion is one date: Jan. 1, 2015. That’s when the individual income tax increase that lawmakers approved in 2011 is set to expire. The increase has generated about $6 billion per year.
Quinn’s main focus has been on solving the pension problem, and with him facing re-election in 2014 it would be politically unwise to bring up the subject of extending the tax increase beyond 2015.
But at least one legislative leader, Rep. Lou Lang, a Democrat from Skokie and deputy majority leader in the House, already has proposed making the tax hike permanent as a way to deal with the pension crisis, and other lawmakers have talked about it.
It remains to be seen whether there will be a significant push for it this year.