Illinois’ budget from the inside: A conversation with State Budget Director Tim Nuding

Donna Arduin is an Illinois Policy Institute senior fellow and a partner at Arduin, Laffer & Moore Econometrics, a group that advises federal, state and municipal leaders, as well as political candidates and private-sector clients, on economic, fiscal and state policies.

Gov. Bruce Rauner appointed Tim Nuding director of the Governor’s Office of Management and Budget in January 2015. Before Rauner appointed him to his current role, Tim served as the chief of staff for the Illinois Senate Republicans for six years.

Tim and I made up the governor-elect’s budget transition team, and spent December and January of 2015 working with state staff to work out from underneath a multibillion-dollar budget deficit (in addition to over $4 billion in unpaid bills from prior years) to put together a balanced budget in upcoming fiscal years – no easy task.

In late 2015, Tim and I had the chance to sit down and talk about the state of Illinois’ finances. I recorded the conversation, and transcribed it so Illinoisans can get a better feel for how to move forward with solutions to Illinois’ economic and budget challenges.

DONNA: Tim, there may be no one more aware than I how serious a budget director’s responsibility is to taxpayers.

Shortly after Gov. Rauner assumed office, and over halfway through the 2015 fiscal year, you inherited a $1.6 billion budget hole, and the governor’s office worked with the Legislature to resolve that problem within the first few months of the Rauner Administration. What caused the [$1.6 billion budget hole], and how did it get resolved?

TIM: At the end of the legislative session prior to the gubernatorial election [in 2014], the Legislature had passed, and then-Gov. Pat Quinn had signed into law, a budget that they all knew was out of balance. That fact was admitted by legislators in a floor debate when they passed the budget, and was acknowledged by Gov. Quinn when he signed the budget. They had willfully underfunded critical programs like funding for state prisons and other critical areas knowing they would have to come back later in the year and increase the spending allocations. Also, borrowed funds had been counted as revenue in order to artificially inflate revenue estimates. Worse yet, as we began to work with agencies during the transition, we were appalled to learn that agencies had been directed by the prior administration to simply spend at normal rates, as though there was no deficit. No corrective action was taken. This exacerbated the problem and left fewer options to reduce spending later after Gov. Rauner took office.

Recognizing the situation, on the first day in office, Gov. Rauner issued an executive order curtailing spending in many areas of state government. He took immediate corrective action. In addition, we asked the Legislature to approve several tools to help close the deficit. After several months of good-faith bipartisan negotiations, we reached an agreement with the Legislature to cut spending in many areas, including Medicaid and state-government bureaucracy. The plan also included the reallocation of resources from other state funds into the state’s main checking account. These actions, taken together, closed the $1.6 billion hole without raising taxes. It was a credit to everyone involved, and is an example of government functioning well.

I’m pleased to report that, although the final numbers from the comptroller’s office are not official, we believe those numbers will reveal that the corrective actions we took in cooperation with the Legislature resulted in a balanced budget for fiscal year 2015.

Having said that, Illinois is still carrying a backlog of billions of dollars in unpaid bills due to prior years’ unbalanced budgets, and that issue needs to be resolved.

DONNA: Why doesn’t Illinois have a budget?

TIM: Simple. The Legislature has not passed a balanced budget. Last spring, the Legislature passed a budget plan. It was wildly out of balance, a fact admitted openly by those who voted for it.

So, in a break from the practices of some past governors, Gov. Rauner actually vetoed the unbalanced budget. Honestly, it was refreshing to see an Illinois governor veto an unbalanced budget. Illinoisans haven’t been accustomed to that. Since the governor’s veto, the Legislature has not passed an alternative budget.

DONNA: Why didn’t the governor just veto the budget down to a level that was affordable? Couldn’t he have done that?

TIM: This is a claim that a lot of Democrats that supported the unbalanced budget have made. Because of the way the budget was presented, that approach was not feasible. I’ll explain. The Legislature locks in a lot of state spending in various big-spending areas by state law – state law that can only be changed by the Legislature. So, vetoing appropriations in those areas would not have resulted in savings, because the spending is controlled by law, not by appropriation. Since those laws weren’t changed to reduce costs, simply reducing the line items would have done nothing to cut costs. It would have resulted in higher backlogs of unpaid bills. The budget would not have been balanced at all.

So by leaving many spending laws intact, the Legislature effectively prevented the governor from making vetoes in those areas. What was left was a more than $4 billion out-of-balance budget that mostly protected areas such as Medicaid, state-employee pension payments, and payments to cities and counties, while leaving funding for our schools exposed to the veto pen. And be assured, the Democratic majority structured it this way by design. They knew exactly what they were doing. They were daring the new governor to veto funding for schools. It was politics.

As a result of this approach, where the Democrats protected almost every other area of the budget, the only true option the governor had with his veto pen was to slash funding for schools by billions of dollars in order to balance the budget. Because education is the governor’s top priority, that was not an approach consistent with his values or his priorities. Therefore, he signed the education-funding bill and outright vetoed the rest of the budget, asking the Legislature to send him a balanced budget. The Legislature hasn’t passed an alternative budget since.

DONNA: Previous deficits have now added up to a backlog of unpaid bills of $4-5 billion, is that correct?

TIM: The latest report my office issued reflects a backlog of unpaid bills worth over $6 billion at the end of November 2015. Over the last decade, levels of unpaid bills have fluctuated, reaching as high as approximately $10 billion several years ago. Delaying bill payments has been a budget gimmick used in Illinois for years. Instead of cutting spending or raising revenues, elected officials have simply paid bills at a slower pace in order to make budgets appear balanced. It would be like letting your monthly utility or cable bills pile up on your kitchen table because you don’t have the money to pay them in a timely manner. It’s a form of borrowing that Illinois government has used to avoid making difficult decisions in the past. And it has cost Illinois taxpayers an incredible amount of money in interest costs over the last decade and a half. Illinois law requires the state to pay its vendors up to 12 percent interest on late bills. This is called the “prompt payment interest penalty,” and the state of Illinois has spent over $1 billion in prompt-payment interest in the last 15 years.

Gov. Rauner is interested in lowering that 12 percent interest rate to something closer to market value once we pay down the existing backlog. One of the governor’s transformational goals is to work with the Legislature to pay off this backlog of bills and then remove the loopholes in state law that currently allow Illinois to delay bill payments.

DONNA: After working on several states’ budgets, I told you that I found Illinois’ fiscal practices stunning when I began to work with you during Gov. Rauner’s transition. Most states, unlike the federal government, are required to end their fiscal years in balance. Even more tragic is that Illinois taxpayers had to endure a “temporary” tax increase that did not pay off the bill backlog.

It is understandable, then, that the governor wants to get something to help our economy out of another tax increase. But the budget situation has many concerned. We are hoping you can clarify a confusing situation.

The state does not have a full, enacted budget, but the courts have ordered a great deal of spending. In addition, the state is accumulating liabilities that will eventually have to be paid. There exists a great deal of confusion about the size of the deficit that is being racked up during the budget gridlock between the governor and politicians in the House and Senate.

If the state continues on its current path for the rest of the fiscal year, how large will the budget gap be at the end of the fiscal year?

TIM: First of all, this is difficult to predict because the dynamics change every week. The fact of the matter is that in the absence of a balanced budget passed by the Legislature, the judicial branch has taken over a large part of the state’s checkbook and has mandated spending at unaffordable levels. Without a budget in place, a significant amount of spending is occurring as a result of what I refer to as the three Cs: court orders, consent decrees and continuing appropriations.

Court-ordered and consent-decree spending is mandated by the Illinois courts despite the fact that the Legislature has not provided any spending authority for these items. These orders cover items such as state-employee payroll, Medicaid spending and certain human-services programs. Continuing appropriations encompass state spending that is required by existing law regardless of whether the Legislature passes a budget. This includes items such as payments to cities and counties, state grants to local transit districts, state debt-service payments and the required huge payments to the state’s pension systems.

At this time, the budget office is estimating that the three C’s will result in spending of around $32 billion on an annual basis this year, an amount almost equivalent to the estimated revenue the state is projected to bring in this fiscal year.

In addition to the three Cs, some services are being provided in areas where appropriation authority does not currently exist. Those bills will eventually have to be paid. The largest example is the state- employee group health insurance program. At this time, the state is obligated to provide these benefits regardless of whether there is a budget in place. This could easily amount to over $1.6 billion on an annual basis.

Given all of these factors, among others, it is easy to create a scenario where spending could exceed available revenues by $4 billion or more, and that would increase the state’s bill backlog to almost $10 billion. Remember, this is happening because the Legislature has not passed a balanced budget. The best way to ensure the deficit doesn’t grow is for the Legislature to pass a balanced budget. Doing so within the next month or two would go a long way toward reducing the size of that projected deficit and would put Illinois on a path to fiscal solvency. Never in the history of Illinois has the Legislature denied the people of this state a budget for this long.

DONNA: You have already taken actions this year to save money. How much have you, without assistance from the General Assembly, reduced the gap?

TIM: It’s important to note that over the last couple of decades, the Legislature has taken a significant amount of budget authority out of the hands of the executive branch of government. The areas of the budget where the governor has the power to unilaterally reduce spending are limited. For example, Medicaid payment rates and benefit levels are set in state law. That represents a very large part of the state budget that is controlled by the Legislature. The state shares state tax revenues with local governments as mandated by law. And the state’s contributions to the state pension systems are set by law. Just those items combined represent a significant portion of all state spending, and that spending cannot be reduced without approval of the Legislature.

The governor’s budget office has taken action to reduce spending in areas within our control. Many capital projects have been delayed or canceled. Social-service programs have been reduced or eliminated. Layoffs are being implemented. Agriculture programs, recycling programs, coal-technology programs, energy programs and natural-resources programs have been curbed, suspended or eliminated. We have closed state facilities. We’ve reduced payment rates for certain services. The governor has unveiled a plan to close the Thompson Center in Chicago to save costs, and that plan is moving forward. We have implemented cost controls in the state-employee group health insurance program and are pressing for further cost savings in that expensive program.

We have implemented a new focus on ensuring that those individuals who are receiving benefits from the social-service programs are actually eligible for those programs by spending more time and resources on scrutinizing eligibility factors. These efforts have helped to reduce the number of individuals on the state Medicaid program in the governor’s first year. This activity is important to restore the integrity of our social-service programs and make sure scarce resources are being used to serve those who are actually eligible for these programs.

These actions are expected to save hundreds of millions of dollars in the current fiscal year, which will extrapolate to billions in savings over the next five years.

And there is a lot more we’d like to do, such as reforming the state’s pension systems, which would require the approval of the Legislature.

DONNA: Without an enacted budget, what will happen to higher-education funding and student assistance (MAP) grants?

TIM: Higher education is an area for which no appropriation authority exists and for which there are no court orders, consent decrees or continuing appropriations. Therefore, no state spending has happened to date in the area of higher education. Our higher-education system has survived on tuition income and other revenue sources for the last six months. To their credit, many institutions of higher education are taking actions to cut costs and become even more efficient. In order for higher education to receive state support in this fiscal year, the Legislature will need to pass a balanced budget.

DONNA: There are some who say the No. 1 issue facing the state is the budget deficit, and the governor should only focus on passing a budget. As the state budget director, do you agree?

TIM: The No. 1 issue facing Illinois is our inability to adequately compete with other states for jobs and economic development. That drives everything else, economically and fiscally.

Illinois has trailed most of the nation in the creation of jobs and opportunity over the last two decades. Since the year 2000, the 50 states combined have created almost 12 million net new jobs. Illinois has created no net new jobs. Zero. Think about that. Illinois has fewer jobs today than we had 15 years ago. That’s mind-boggling to me. If we don’t correct that problem, nothing else matters. … We will never balance the budget for the long term.

That’s the problem large parts of Gov. Rauner’s Turnaround Agenda are designed to address. The goal is to make us more competitive with other states so that we can retain and attract employers to Illinois, which will create jobs and the associated economic activity that comes with those new jobs and their wages. That helps the state budget by increasing tax revenues and decreasing the demand for government services.

DONNA: There is a feeling among some that enough is enough, and the governor should just agree to a budget and leave his Turnaround Agenda items for another day. Why not?

TIM: Because that approach doesn’t work. How do I know that? Because it didn’t work. Illinois just had a four-year case study on it. Taxes were raised by 67 percent in 2011, and the tax increase was in place for four years. At the end of those four years, Illinois still has many of the same problems it had before the tax increase was passed. At the end of those four years, Illinois still had a huge pile of unpaid bills. We still have the worst-funded pension systems in America. Our schools continue to struggle. Our largest city and economic engine, Chicago, and our largest school system, Chicago Public Schools, are in dire financial straits. During the four years of the tax increase, Illinois received several credit-rating downgrades, dropping us to the lowest-rated state in the nation. Again, while the tax increase was in effect, our financial position deteriorated, and the independent rating agencies punished us for it.

If we don’t structurally change things to make Illinois more competitive to create jobs and improve our economy, no tax increase, no matter how high, is going to fix these problems. History backs that up.

DONNA: We believe Illinoisans understand that it takes time to change the political and spending culture in Springfield, but are hopeful that our economy will eventually improve as a result of Gov. Rauner’s resolve. Aside from the Turnaround Agenda reforms to state regulations and local government taxing and bargaining, what are your long-term goals for fiscal certainty and solvency for Illinois?

TIM: It is my sincere desire to take some of the bad fiscal practices of the past and make them things of the past. I’d like to see spending and revenues aligned, not just for the next year, but for the long term. Illinois has a history of lurching from fiscal crisis to fiscal crisis, and we need to fix our structural deficit and set Illinois on a fiscal path that is sustainable, stable and predictable.

I’d like to be in a position to pay off the backlog of bills and then eliminate the provisions in state law that have allowed past governors and legislatures to push off bills and evade difficult decisions. This might seem a bit optimistic given the current fiscal situation, but I’d like to see Illinois build a significant balance in its “rainy day” fund so that Illinois can weather the storm of the next inevitable economic downturn without crisis governing.

DONNA: How do you like the job?

TIM: It’s a great challenge, and I consider it to be important work. I didn’t know Bruce Rauner prior to his being elected. During my work on his transition team I came to understand that he’s taking on this challenge for all the right reasons. He has nothing to personally gain from taking on this job as governor at this difficult time. He wants to reform Illinois’ broken political systems. He wants to help fix the deep problems of his home state and return Illinois and its people to prosperity. I’m convinced this is his sole motivation, and it’s why I agreed to serve in this administration. That inspires me.

As you know, Donna, I had a great job prior to taking on this challenge. I knew full well what I was getting into when I accepted the job as budget director. I knew the severity of our problems and I’m aware we aren’t going to change them overnight.

I know a lot of legislators on both sides of the aisle. I know many of them are also here for all the right reasons. I am optimistic that the governor and the Legislature can eventually come together, and turn the state around and subsequently turn the state’s finances around. Future generations of Illinoisans are depending on us to do that. That’s why I’m here.