Illinois flunks new nationwide fiscal report card

Illinois flunks new nationwide fiscal report card

The Land of Lincoln received the lowest possible grade in budget forecasting and legacy costs.

Illinois has not produced a balanced budget in over a decade.

With startling frequency, legislative leaders such as House Speaker Mike Madigan have allowed lawmakers to paper over their spending problem with expensive borrowing and other budgeting gimmicks.

A new fiscal report card shows that while massive unfunded liabilities and short-term tricks aren’t unique to Illinois, the Land of Lincoln still scores among the worst in the nation when it comes to healthy budgeting.

A new study by the Volcker Alliance, a nonpartisan organization promoting education in public policy, attributes letter grades to five separate categories – “budget forecasting,” “legacy costs,” “budget maneuvers,” “reserve funds” and “transparency.” In each category, states received grades for fiscal years 2015, 2016 and 2017, as well as a three-year average grade.

Illinois received a three-year average grade of a D or lower in three of the five categories. In fact, Illinois was just one of four states to incur a D- grade. It received two.

Prior to calculating the three-year averages, Illinois was one of only two states in the nation that earned a D or lower in all but one category as of 2017.

Among surrounding states, Illinois is the only state other than Kentucky that didn’t receive an overall A grade in at least one category.

These outcomes don’t reflect glowingly on Illinois, to say the least. But when considering the criteria behind such poor marks, Illinois’ low grades should come as no surprise.

Budget forecasting: D-

Budget forecasting, as defined by the analysis, determines “whether and how states estimated long-term revenue and expenditure trends.”

In other words: the mathematical coherence of state budget projections.

One approach some states have taken to strengthen their estimates is using consensus revenue forecasting, which provides that a preliminary budget forecast be produced collaboratively between executive, legislative and third parties.

While Illinois forecasts revenues, it does not require an inter-branch consensus before putting budgets to a vote, resulting in inevitable budget miscalculations and a state of fiscal credibility that seems to be in a state of gradual decline.

This trajectory is reflected in the study’s calculus. While the report shows Illinois starting off on moderate footing with a C grade in fiscal year 2015, subsequent years see the Land of Lincoln paralyzed by a D-, the lowest grade provided by the study.

To boot, one under-appreciated budgeting obstacle hindering Illinois’ finances is the increased out-migration of its overtaxed residents. Unless taxable personal incomes lost to outbound population are factored into the state’s estimates, Illinois’ budget forecasts are all the more destined to generate an imbalance.

Budget maneuvers: D 

A government bound by a budget structure that doles out more than it takes in has bad incentive to employ short-term “budget maneuvers” to temporarily paper over long-term liabilities. This picture is familiar to Illinoisans – and so are its consequences.

“A basic tenet of budgeting is that one-time revenues should fund only one-time expenditures and that recurring revenues should cover obligations that come due every year,” the report notes.

Illinois has failed at this basic arithmetic. Springfield has repeatedly sought relief through short-term fixes to fulfill the recurring obligations of government worker pensions, climbing interest payments, spiraling government worker benefits and skyrocketing public sector union pay raises.

Illinois was shown to use one-off loans to plug the hole of ongoing liabilities in each fiscal year examined by the study.

Legacy costs: D-

Public employee retirement obligations and health care benefits, defined by the Volcker Alliance report as “legacy costs,” are balanced budgets’ greatest enemy. And Illinois is by no means exempt.

Far from it, every Illinois household is currently $56,000 in the hole for the state’s $130 billion in unfunded pension liabilities. One needn’t even factor the additional $56 billion of state retiree healthcare costs to get a sense of the severity of Illinois’ fiscal crisis.

Illinois was mired in a two-year-long budget impasse that began in 2015. But as indicated by the D- mark for fiscal year 2015, the state’s budgetary dysfunction stems from well before then.

Indeed, Illinois hasn’t passed a truly balanced budget since 2001. Former Gov. Rod Blagojevich notoriously diverted billions away from the state’s 2003 pension bond sale to buttress spending sprees. And while many would argue that his successor, Gov. Pat Quinn, continued this trend, this would be too charitable. Quinn kicked Blagojevich’s excesses up a notch, resulting in the downgrade of Illinois’ credit rating 13 times between 2009 and 2014. 

Reserve funds: C

Sometimes referred to as “rainy day funds,” reserve funds are designed to aid states in managing periods of occasional fiscal instability. The instability plaguing Illinois’ finances, however, have long since trespassed “occasion” and arrived at something closer to dangerous perpetuity.

Unfortunately, these reserves aren’t an option for Illinois. Indeed, according to the study, Illinois stands alongside just five other states that “had either no cash in their rainy day fund or no formal rainy day fund in operation in fiscal 2017.

While the Budget Stabilization Fund serves as Illinois’ nominal “rainy day” reserve, sufficient funds have yet to be allocated. According to the statute’s own language, it was designed with the “purpose of reducing the need for future tax increases, maintaining the highest possible bond rating, reducing the need for short term borrowing, providing available resources to meet State obligations whenever casual deficits or failures in revenue occur, and providing the means of addressing budgetary shortfalls.” It’s failed on all counts.

In short, before the fund was established in 2004 Illinois didn’t have a designated emergency fund; more than a decade after conceiving one, it still doesn’t.

Had Illinois established a proper reserve fund, however, the discipline with which the General Assembly would have managed it is unclear. While the Illinois Constitution requires that expenditures remain in balance with its general fund, state lawmakers have ignored it.

With a letter grade hovering upward of D+, this category almost tempts minor excitement for the disenchanted Illinoisan. But there’s little to be gleaned from the report to persuade readers that the C grade wasn’t the result of a technicality.

The questions asked by the study’s authors to determine this score, with the exception of one, all involve rainy day funds – an instrument unexercised by Illinois.

Transparency: B

At the very least, the Volcker Alliance report card reassures us that what Illinois lacks in solvency, it makes up for in transparency.

In the study’s final category, Illinois received its highest mark.

While the Prairie State was marked down for undisclosed deferred infrastructure replacement costs each fiscal year measured, Illinois’ transparency grade was rescued for maintaining a consolidated budget website that same period.

But the website was only part of it. Illinois’ availability of state debt tables also served to boost its scores above average in this category.

While statewide performance in this category offers a welcome moment of encouragement for Illinois statewide, it sadly has yet to catch on in its largest municipality. Indeed, dozens of Chicago city aldermen are currently fighting tooth and nail to achieve the fiscal transparency of legislation before City Council votes.

Notwithstanding the above-average mark, Illinois still has a long way to go. Of more than 900 bills Illinois signed into law between January 2015 and January 2017 during Illinois’ 99th General Assembly, a mere 27 – that’s 2.9 percent – arrived containing fiscal notes detailing the new law’s projected costs. This is because the state only requires that price tags be tied to legislation that pertains directly to revenues and debt impact. The expenses of carrying out all other policies are allowed to glide through the General Assembly unknown.

On balance, these scores are alarming.

Illinoisans would be wise to call not just for long-overdue spending reforms, but procedural changes in the budgeting process as well.

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