Posted on November 01, 2012 2:01 PM
Report on Fiscal Condition of Illinois Urges Quick Action
The current fiscal condition of the State of Illinois requires immediate action, according to a report released this October from the State Budget Crisis Task Force. In June 2011, former New York Lieutenant Governor Richard Ravitch and former Federal Reserve Board Chairman Paul Volcker formed this task force to study the fiscal sustainability of six states: California, New Jersey, New York, Texas, Virginia, and Illinois.
The report’s primary conclusion is that the State of Illinois “cannot simultaneously continue current services, keep taxes at current levels, provide all promised benefits, and make needed investments in education and infrastructure” unless it makes tough choices right away. The report takes a deep dive into the fiscal challenges of Illinois and offers a number of recommendations for immediate action. The report focuses not only on the State’s unfunded pension liability and Medicaid spending growth, but also the “misuses” of state borrowing, nontransparent budgeting practices, an eroding tax base, and ad-hoc, rather than performance-based, infrastructure prioritization.
State of Illinois pension funding problems are well-known. According to the report, its unfunded liability is $85 billion and growing, the worst of any state in the U.S. The State’s employer contributions have failed to keep pace with annually required amounts for decades, and to cover the payments during FY 2010 and FY 2011, the State sold pension obligation bonds instead of including the required contributions to the systems in its annual operating budget. By FY 2015, regular state contributions plus the debt service on the pension obligation bonds are projected to take up a quarter of the State’s resources. The report recommends that Illinois must make pension reform a priority. A number of reforms were floated in the last legislative session to no avail, including a bi-partisan proposal put forward by House Speaker Madigan, House Minority Leader Cross, and Senate President Cullerton to shift the responsibility for contributions to the teachers’ and state university retirement systems to the universities and school districts where they are employed.
On Medicaid, the report acknowledges that while “big strides” have been made to control costs (which had been rising close to 7 percent of the annual budget between 2007-10, according to the report), serious challenges still remain. The new federal health care law requirements will encourage additional Medicaid enrollment, which may increase the State burden given the reduced federal matching rates for new recipients who were previously eligible, but were not enrolled before the reform. The report recommends that Illinois should avoid ballooning costs by working with the federal government to implement reforms.
The report also critiques the State’s budgeting process, which obscures the State’s long term assets and liabilities by using inconsistent time periods and fund sources. Illinois conducts limited multi-year planning, often counts borrowing for operations as “revenue,” and shifts expenditure items from the General Fund to numerous other funds from year to year (making it difficult to track changes over time). The report issues a number of recommendations for “revamping the State’s Fiscal Toolkit,” including the implementation of accrual accounting, which would report changes in assets and liabilities rather than balancing current cash receipts.
The report also details the State’s narrow and eroding tax bases, including the sales tax, the income tax, and the motor fuel tax. The discussion of the sales tax centers on the relatively low number of services included in the tax base. As also discussed in a previous Policy Update, the sales tax base diminishes as the consumption of services grows relative to consumption of goods included in the tax base. In addition, because retirement income is exempt, the individual income tax base erodes as the senior population grows. Lastly, the State’s 19 cent gas tax rate has remained flat since 1991, eroding revenues over time. CMAP and its Regional Tax Policy Task Force have also analyzed these issues. The task force’s advisory report recommended broadening the state’s tax bases to align with the changing economy and demographics.
On transportation infrastructure, the report points out that while pension, Medicaid, and debt obligations continue to “crowd out” these investments, Illinois has also failed to develop priorities or criteria for selecting capital projects in a time of diminishing resources. The report points out that “new capital projects (and new sources of revenue to fund them) are often proposed on an ad-hoc basis. Despite the size of its capital program and the challenges that it faces, the State of Illinois does not develop a capital improvement plan to explain the prioritization of projects in the capital budget or provide an overall needs assessment for state-owned assets.” CMAP supports the implementation of performance-based funding for capital projects, having released an issue brief and, more recently, a formal proposal on this issue.
CMAP and GO TO 2040 emphasize the importance of clear investment priorities to support our workforce, our communities, and our infrastructure. These investments are vital for northeastern Illinois to remain economically competitive in the 21st Century. However, as the State Budget Crisis Task Force makes clear, the State’s ability to make these investments will be increasingly affected by rising pension obligations, Medicaid costs, debt service payments, nontransparent budgeting, and a shrinking tax base. It is vital for the State of Illinois to regain its fiscal footing, and CMAP will be monitoring reform proposals on these issues as they take shape in the upcoming months.