Expected $7.5 billion in federal aid won’t fix Illinois budget crisis without structural reforms

Expected $7.5 billion in federal aid won’t fix Illinois budget crisis without structural reforms

Illinois needed federal aid far more than other states because of pension crisis inaction, as well as an irresponsible pandemic budget. Bailouts won’t protect taxpayers or services for vulnerable Illinoisans, but reforms can.

Springfield lawmakers are about to receive an estimated $7.55 billion lifeline from Congress.

It represents a chance to prevent tax increases during an economic crisis and to cancel any previously planned cuts in government programs for vulnerable Illinoisans. It is also an opportunity to enact pension reform and other structural spending reforms needed to improve Illinois’ long-term financial health.

Squander this moment, and crisis-level deficits will return when federal aid expires.

On Feb. 10, U.S Rep. Raja Krishnamoorthi introduced legislation in Congress that would grant $350 billion in unrestricted federal aid to state and local governments, including tribal governments and the territories. If the legislation passes and is signed by President Joe Biden, as expected, Illinois will see $7.55 billion in federal aid go to the state and $5.68 billion to local governments, with $1.83 billion of that reserved for the city of Chicago. All told, the bill would add $13.23 billion to the $10.8 billion in state and local government aid received by Illinois to date.

Including all types of federal stimulus spending, across the private and public sectors, $108.4 billion in federal aid has been disbursed in Illinois (see Appendix A for details). While most of that sum is for health care spending, business loan programs, direct checks to individuals and other private sector stimulus, such stimulus nonetheless bolsters government revenue collections.

Illinois revised its fiscal year 2021 revenue projections up by $2.2 billion from April 2020 to November 2020. Income and payroll support for the private sector meant more consumer spending and worker earnings, leading to higher-than-expected income and sales tax receipts.

Absent federal assistance, Illinois’ financial outlook was as bad as it has ever been and worse than any other state in the nation. In November 2020, Gov. J.B. Pritzker’s office announced a $3.9 billion budget deficit for the current fiscal year 2021. The governor provided few details on how he intended to close it, apart from $711 million in announced service cuts and $2 billion in additional borrowing. Pritzker must also propose a balanced budget for fiscal year 2022, which has an expected $4.8 billion deficit, in the annual budget address on Feb. 17.

Closing the deficit without tax hikes or cuts to core government services will now be significantly easier. To close the deficit, Pritzker’s administration had previously threatened across-the-board tax hikes and service cuts. Specific proposals included a small business tax hike worth as much as $1 billion, up to a 20% increase in state income tax rates and 15% reductions in all program spending.

Pritzker has blamed the state’s dire fiscal condition on voters’ rejection of his progressive tax hike amendment, on Congress’ failure to provide unrestricted state bailouts earlier and on COVID-19’s effect on revenues. On the other hand, Illinois House Republican Leader Jim Durkin, R-Western Springs, called the situation a “self-inflicted budget disaster.”

Durkin is right.

Illinois would have no budget deficit if Pritzker and lawmakers in the General Assembly had done just two things differently in the budget passed last May: 1) reformed pensions for $2.4 billion in structural savings, and 2) kept spending flat, rather than increasing it by nearly $2.4 billion. The $4.27 billion in savings from those two measures – after deducting $511 million in higher pension spending to avoid double counting – would have more than offset deficits this year and made a huge dent for fiscal year 2022.

Instead, Pritzker approved a budget that relied on fantasy revenues. The governor’s budget relied on $5 billion from a proposed federal bailout that Pritzker had advocated, but which never passed Congress. His budget also included $1.26 billion in “fair tax” revenues for fiscal year 2021, and $3 billion in future years, even though voters had not approved the tax plan.

Independent experts warned against the state’s reliance on these uncertain revenues. For example, credit ratings agency S&P Global Ratings pointed out that Pritzker’s latest budget “does not include measures to meaningfully address structural instability.” S&P also said, “Illinois has a history of leaving difficult fiscal choices to future budgets, and to the extent that expected federal aid does not materialize and the state does not adjust expenditures to reflect available resources, the fiscal 2021 budget could weaken the state’s credit trajectory.”

Illinois has failed to balance its budget for 20 years. The last time the state ended a fiscal year in the black was 2001.

Illinois’ 20-year history of spending beyond its means is the reason the state is so desperate for federal aid to get through its current budget crisis.

Pritzker has consistently attempted to blame COVID-19’s effect on state revenues for the current deficit, claiming time and time again that every state is facing similar problems and only a federal bailout can close the gap. However, state revenue collections actually exceeded earlier expectations in fiscal year 2020 and Illinois was one of several states that saw a year-over-year increase of 1.8%.

Illinois revenue collections for fiscal year 2021 have exceeded expectations in the budget, leading Illinois to be one of just nine states to revise its estimate in a positive direction mid-year.

The $7.55 billion in flexible aid Illinois is expected to receive from the latest COVID-19 legislation from Congress more than offsets the state’s total expected revenue losses over three years.

Illinois’ fiscal crisis was built through decades of bad fiscal policy, not caused by COVID-19. It will take several years of commitment to fiscal discipline and transformational changes to repair it.

Lawmakers should now turn their attention to the state’s worst-in-the-nation pension crisis. The only realistic path to balancing Illinois’ budget while protecting programs for the state’s most vulnerable residents starts with a constitutional amendment to allow pension reform.

A constitutional amendment to allow pension reform that preserves workers’ earned benefits and allows for changes in unaccrued benefits, such as the 3% compounding automatic annual benefit increases, would make the system more sustainable and make pensions more secure. A “hold harmless” pension reform plan developed by the Illinois Policy Institute would save the state roughly $2.4 billion the first year and more than $50 billion through 2045, while fully eliminating the debt over that time.

Pension reform would ensure Illinois’ scarce resources are invested in programs Illinoisans need most during the pandemic and in spending that delivers the best return on investment for taxpayers.

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