FY18 budget impacts on state finances, regional transportation, and local governments
The Illinois General Assembly enacted a series of budget bills on July 6, 2017, overriding the Governor's veto and ending the state's two-year budget impasse. Among changes to income tax deductions and credits, Public Act 100-0022 permanently increases the personal income tax rate from 3.75 to 4.95 percent and the corporate income tax rate from 5.25 to 7 percent, effective July 1, 2017. On the expenditure side, the Fiscal Year (FY) 2018 appropriations in Public Act 100-0021 reduce general funds (General Revenue Fund, Common School Fund, and Education Assistance Fund) spending, including a 5 percent across-the-board cut to most state agencies. Public Act 100-0023, which enacts other policy changes to implement the budget, provides for special fund transfers and pension system reforms that are assumed to reduce general funds expenditures. The passage of a FY18 budget has thus far staved off a further downgrade of some of the state's bonds to "junk" status. Such an action by credit rating agencies would increase public borrowing costs and further constrain state finances. But, the state -- and many local jurisdictions -- still incur high interest rates to issue bonds, increasing the cost of capital projects and services at all levels.
This Policy Update will discuss how the new budget addresses the state's backlog of unpaid bills and pension liabilities, and impacts transportation and local governments in the CMAP region and across Illinois.
Limited measures to address bill backlog and pension liabilities
The income tax increase included in the FY18 budget will not produce an instant infusion of cash for the state. In fact, the Comptroller's office has indicated that it will take time to receive new revenues and pay off the state's bills. As of July 14, 2017, Illinois's tab of unpaid bills, or the general funds payable backlog, stood at $14.9 billion. This figure includes payments owed to local governments and the Regional Transportation Authority (RTA), among other agencies that provide critical services in northeastern Illinois.
Expenditure reductions also include $1.5 billion in assumed general funds savings from changes to the state's retirement systems. The Commission on Government Forecasting and Accountability reported that unfunded pension liabilities for the state's five retirement systems increased by $33 billion from FY12 to FY16, reaching $129.8 billion and a funded ratio of 37.6 percent at the end of FY16. Among others, FY18 contributions to the retirement systems will include $6.4 billion from general funds and $250 million from the Road Fund, most of which will go toward paying down unfunded liabilities.
Restarting construction and flat transportation appropriations
Because lawmakers did not pass a budget by June 30, 2017, the Illinois Department of Transportation (IDOT) shut down construction projects statewide. A previous CMAP Policy Update discussed the potential impact of the shutdown, which lasted for a week. The suspension of work in the middle of construction season affected 900 active projects across Illinois. The American Road and Transportation Builders Association estimated the shutdown will cost the state $34 million. Now that an FY18 budget is in place, IDOT has informed contractors that construction can resume. However, not all projects will restart immediately, as contractors may need to prepare work sites, mobilize crews, and rent equipment again. Stopping and restarting projects will likely extend the time needed to complete a project, prolonging congestion due to the ongoing construction.
While most other state agencies saw reductions to their budgets in Public Act 100-0021, the appropriations package maintains funding for IDOT consistent with FY17 levels. State and federal pass-through funds are included in the budget for metropolitan planning and research purposes, supporting CMAP and the 15 other metropolitan planning organizations in Illinois. The budget further provides appropriations close to FY17 levels for Amtrak ($52.0 million), RTA free and reduced fare reimbursement ($17.6 million), and PACE Paratransit ($8.4 million). However, the budget also includes a reduction in funding for the region's transit system. Public Transportation Fund (PTF) distributions, which includes the state's statutorily required 30 percent match to the RTA sales tax and Chicago real estate transfer tax (estimated at $424.4 million), will fall by 10 percent for FY18 only.
Relatedly, funds accruing to the PTF will no longer pass through the General Revenue Fund (GRF), potentially resulting in more timely payments. In addition, the budget shifts some expenditures from GRF to the Road Fund, including the first $100 million accruing to the PTF and $131 million in debt service assistance for the RTA's Strategic Capital Improvement Program bonds.
The FY18 budget continues underinvestment in the system and does not address the state's long-term transportation investment needs. The region's federal and state transportation revenues have grown slower than construction costs due to improved vehicle fuel economy and changing driving patterns. The state needs to modernize traditional funding mechanisms, adopt new revenue sources, and broadly use performance-driven criteria for transportation investments. The FY18 budget package does not incorporate any of these critical reforms.
Mixed effects on state disbursements to local governments and local taxes
Illinois disburses various state revenues to local governments based on criteria outlined in state statute. Additionally, the state collects many locally imposed sales and excise taxes on behalf of local governments. Public Act 100-0023 includes several changes that will reduce the revenue available to the local governments that rely on those sources.
Municipalities and counties in Illinois receive a share of the state's income tax revenues through the Local Government Distributive Fund (LGDF) based on their population relative to the state's total population. Municipalities and counties will continue to receive 10 percent of all income tax generated under the rates in effect before January 2011; thus, the additional revenues generated by the income tax increase will all accrue to the state. In addition, Public Act 100-0023 implements a temporary change to LGDF disbursements, reducing payments by 10 percent for revenues generated during FY18.
Under the Act, local income tax disbursements will no longer pass through the GRF, and will instead directly go to the LGDF. The change is intended to result in municipalities and counties receiving these funds during the month they are collected, rather than two months later. To the extent that the Illinois Office of the Comptroller has sufficient cash at hand, August disbursements will include revenues generated from both June and August 2017, and September disbursements will include revenues generated from both July and September 2017. In subsequent months, disbursements will return to normal.
Statewide, 6,545 local governments (such as counties, townships, municipalities, school districts, community colleges, and special districts) receive personal property replacement tax disbursements based on statutory criteria. The disbursements totaled $1.5 billion in FY17. The FY18 budget appropriates $103.5 million for community college operating costs out of these revenues, thereby reducing the remainder available for disbursement to local governments under the regular criteria.
Furthermore, starting in FY18, the state will begin charging a 2 percent service fee for collecting the RTA sales tax, home rule and non-home rule sales taxes on behalf of counties and municipalities, Metropolitan Pier and Exposition Authority sales tax, several other local taxes, as well as state sales tax disbursements to the RTA. Previously, the state had charged various administrative fees on a smaller set of taxes collected on behalf of local governments, such as the county motor fuel tax, municipal telecommunications tax, and automobile renting tax. The new fees, which the Illinois Department of Revenue estimates at $60 million per year, will be transferred to the Tax Compliance and Administrative Fund. Due to the service fee, local governments and the RTA will receive less of the sales tax revenues they generate.
Most of these provisions affecting local governments result in a reduction in revenues, thus further constraining local government resources, particularly at the municipal level. However, Public Act 100-0023 includes a provision that allows home rule municipalities to issue bonds backed with state disbursements. This opportunity will likely lower borrowing costs for municipalities able to take advantage of the provisions. Home rule municipalities could issue these bonds in lieu of general obligation bonds, or use the provision to refinance general obligation bonds.
Overall, many of these policy changes make reductions to state disbursements to local governments, while failing to enact reforms to disbursement criteria to enhance the efficiency and the equity of the system and facilitate positive regional economic outcomes. Home rule municipalities now have a new statutory tool to lower financing costs, but many small non-home rule municipalities that already face significant resource constraints will not be able to take advantage of this development.
Although Illinois has ended its two-year budget impasse, the adopted budget plan for FY18 does not address long-term transportation investment needs nor does it provide necessary reforms to modernize or improve equity in the state tax system. GO TO 2040 recommends broadening tax bases, including expanding the income tax base to retirement income and the sales tax base to additional services. In addition, to adequately support the state's transportation infrastructure, the state will need to enact new and enhanced revenues, such as an increase in and long-term replacement of the state motor fuel tax and an implementation of additional user fees such as express toll lanes.
Resource constraints at the state level are having an effect on local governments and the communities they serve. State government provides funding to support transportation, housing, environmental, and community development programs, among other services that are vital to supporting quality of life in the region. To mitigate future impacts of declining state resources, local governments may need to consider such options as employing innovative revenue sources and collaborating with other local governments to share services or consolidate.
One of the ON TO 2050 Alternative Futures focuses on the effect of constrained public resources. Please explore this future in August, attend a forum to discuss how it may affect our region, and offer feedback on strategies the region should pursue to continue to thrive.