Illinois’ rainy-day fund can operate state for about 15 minutes
With economic challenges driven by the coronavirus ahead, Illinois finds itself missing an important financial tool.
Whether or not the U.S. technically hits a recession as a result of the coronavirus, the economy will take a hit and lead to financial pain. In emergencies like this, state governments typically dip into reserves, or “rainy-day” funds, to cover shortfalls.
But Illinois only has enough cash in its rainy-day fund to last about 15 1/2 minutes.
Experts say states should have enough stored away in savings to cover about a month.
Rainy-day funds are important because they let state governments fund core services when economic downturns cut into expected tax revenue. Springfield’s spending habits and resistance to reform have made Illinoisans severely vulnerable in the event of a fiscal crisis – and lawmakers’ increasing reliance on volatile revenue sources only compounds the state’s exposure to risk.
Illinois received a grade of “D” for its reserve funds in the most recent report on state budgeting by the Volcker Alliance. Only Illinois and Kansas received that poor of a grade for 2019.
Illinois received the alliance’s lowest possible grade of “D-” for budget maneuvers, which means the state relied on gimmicks such as fund sweeps and borrowing between funds rather than covering recurring expenses with recurring revenues. It received “D-” as well for legacy costs, which refers to Illinois’ public employee pension debt that is somewhere between $137 billion by state estimates and $241 billion by an independent assessment.
Illinois is in especially poor fiscal shape when one considers how well other states recovered after the Great Recession. The Volcker Alliance noted some states were vulnerable.
“Across America, states have benefited mightily from the longest economic recovery since the mid-nineteenth century. Total state expenditures reached $2.1 trillion in fiscal 2019, equivalent to about 10% of U.S. gross domestic product, and states’ spending of their own funds, excluding federal transfers, was the highest since the Great Recession. The recovery is reflected in a widespread improvement in our third annual evaluation of the budgetary practices of all 50 states.
“But the advances are tempered by deeply rooted fiscal challenges in many states that will make it harder to balance budgets if the rebound – now over a decade old – slows or reverses course.”
Illinois has a history of failing to put money away, with the rainy-day fund hitting just $98,000 in June 2018. From 2005 to 2018, the fund averaged 0.8% of state expenditures. It’s generally recommended that states’ rainy-day funds hold between 5% and 10% of annual revenues.
Illinois may soon need reserves that it does not have to fiscally fight the coronavirus. Chicago’s independent restaurant owners already asked for tax relief Sunday after Gov. J.B. Pritzker barred sit-down customers at the state’s bars and restaurants – Ohio and Massachusetts imposed similar shutdowns.
The Illinois Constitution allows borrowing for an emergency of up to 15% of the state’s expected revenues, but the money must be repaid within a year. That gives Illinois close to $6 billion in potential borrowing power, not including interfund borrowing.
Big challenges are ahead for Illinois, with little certainty about what the state economy and state finances will look like in the near future. As Illinois recovers, state leaders should remember their obligations include not only reacting, but planning for stability and the inevitable rainy day.