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February 27, 2015

Governor Releases FY16 Budget Proposal

On February 18, 2015, Governor Rauner delivered his first budget address to a joint meeting of the General Assembly.  The Governor's proposed budget for fiscal year 2016 (FY16) totals $65 billion, of which $28.4 billion is General Funds.  The proposal would result in a 9.7 percent decrease from FY15 enacted General Funds appropriations.  Various budget documents prepared by the Governor's Office of Management and Budget are available at www.budget.illinois.gov, including a list of associated performance measures and indicators for each of the agencies. 

The budget proposal includes reductions across a variety of programs and services in an effort to balance the budget following the partial sunset of the state income tax rate increase on January 1, 2015.  Income tax revenue is forecast to drop by nearly $2 billion in FY16, primarily because of the rate reduction (from 5 percent to 3.75 percent for individuals and 7 percent to 5.25 percent for corporations). 

This Policy Update reviews components of the Governor's budget proposal relevant to implementation of GO TO 2040 recommendations for regional mobility, efficient governance, human capital, and livable communities. 

Regional Mobility

Overall funding for the Illinois Department of Transportation (IDOT) would be reduced from an enacted level of $2.78 billion in FY15 to a recommended level of $2.57 billion in FY16.  However, increased revenues from the current  state motor fuel tax and motor vehicle registration fee revenue, coupled with operational efficiencies, would result in $1.85 billion for road construction, a proposed $120 million increase compared to FY15.  Additionally, the Governor proposes establishing a Safety Oversight Agency at IDOT that would focus on transit commuters in northeastern and southwestern Illinois.  Moving Ahead for Progress in the 21st Century (MAP-21), the federal transportation authorization law, for the first time expanded transit safety oversight to the Federal Transit Administration.  Among various provisions, MAP-21 requires certain states, including Illinois, to establish Safety Oversight Agencies.

The budget proposes several cuts to programs focused on specific geographic areas. As such, the Governor proposes eliminating the $8.5 million reduced-fare subsidy for Pace paratransit services, the northeastern Illinois bus service for customers with disabilities.  The proposed budget would also make two major changes to state funding for the Regional Transportation Authority (RTA): lowering the rate of the state's transfers to the Public Transportation Fund (PTF) and eliminating the $17.6 million subsidy for reduced fares.  Currently, the state matches 30 percent of total RTA sales tax and Chicago real estate transfer tax revenue and transfers that amount to the PTF.  The Governor's budget proposes lowering the matching rate to 20 percent, resulting in a $127 million reduction in state support for transit in northeastern Illinois.  However, the budget proposes fully funding the debt service for the RTA's Strategic Capital Improvement Bonds at $131 million.  Finally, the proposed budget reduces Amtrak's operating subsidy by $20 million, from $46 million in FY15 to $26 million in FY16.  Because federal law requires state support of certain intercity passenger rail corridors, such a reduction in Amtrak operating subsidies could lead to reduced levels of service.

Efficient Governance

The Governor proposes several tax policy changes as part of the FY16 budget recommendation, although just one of the proposals was included as a part of the budget plan.  The State Budget Law requires that the Governor's budget recommendation be based solely on revenue sources, rates, and levels that exist or have passed the General Assembly as of the date of the budget proposal submission.  As such, tax policy proposals that modify revenue levels and tax rates can only be made in tandem with the budget recommendation.   

The Governor proposes expanding the sales tax base to additional services as well as restructuring the state motor fuel tax.  These proposals mirror GO TO 2040 recommendations to increase the state motor fuel tax rate and index the rate to an inflationary measure, followed by implementation of a long-term replacement, and expansion of the sales tax base to additional services. 

The proposal to halve the state income tax revenue disbursed to counties and municipalities would reduce transfers out of the state's General Fund to the Local Government Distributive Fund by $634 million.  State statute provides that counties and municipalities receive the revenues based on their share of the state's population.  Reductions in state revenue disbursements to counties and municipalities in the CMAP region would total $417.3 million under the proposal.  CMAP recently analyzed municipal reliance on state income tax revenues.  In the CMAP region, the average non-home rule municipality relied on state income tax disbursements for 13.5 percent of their revenue in 2012 compared to an average 7.8 percent reliance for home rule municipalities. 

The Governor proposes to amend the Property Tax Extension Limitation Law (PTELL), which would affect local government revenues but not the state budget.  Under the proposal, increases to property tax extensions in taxing districts covered by PTELL would not be allowed for two years unless voters pass a referendum allowing for an increase.  If enacted, this proposal would affect all non-home rule local governments in the CMAP region, including the six collar counties, 149 municipalities, all townships, all school districts, and all special districts.  On average, non-home rule municipalities in the CMAP region relied on property tax revenues for 27.4 percent of their overall revenues in 2012.  GO TO 2040 encourages local decisions that make effective use of land, generate good jobs, and trigger sustainable economic activity.  The ability of communities to achieve these goals may be impeded by the combination of additional limitations on their ability to impose a property tax and reductions in state revenue sharing with local governments. 

The budget recommendation also mentions creation of the Local Government Consolidation and Unfunded Mandates Task Force via Executive Order 15-15.  The Task Force would identify opportunities to consolidate or streamline local governments and local government functions and examine unfunded state mandates placed on local governments.  This Task Force would follow completion of the Local Government Consolidation Commission, which released a report in 2014 that made recommendations focused on eliminating barriers to consolidation and resolving discrepancies in state statutes governing local governments.  GO TO 2040 recommends that local governments should explore ways to coordinate or consolidate services through collaborative and responsible decision making.  Several local government consolidation efforts are already underway in northeastern Illinois

Human Capital

Proposed funding levels for human capital and economic development programs remain largely similar to those of previous years.  General Funds support for the Department of Commerce and Economic Opportunity (DCEO) has been reduced; however most of the agency's budget relies on federal funds.  The Governor's proposal includes $275 million in workforce development spending, with cuts to energy efficiency programs, the Office of Coal Marketing and Development, and the Summer Youth Job program.  The budget does not propose any reforms that would focus the state's economic development incentive or job training programs on industry cluster development.  Changes to workforce and industry cluster development, however, could result from the recent passage of the Workforce Innovation and Opportunity Act, along with DCEO's strategic plan update.

Livable Communities

The Governor's budget would reduce overall funding to the Illinois Department of Natural Resources (IDNR) from an enacted level of $258 million in FY15 to a proposed level of $243 million in FY16.  Much of this reduction would come from operational efficiencies within the department, as well as reductions to conservation police, forestry grants, and state museums.  The budget would modestly increase appropriations from the Natural Areas Acquisition Fund (NAAF) and Open Space Lands Acquisition and Development Fund (OSLAD).  NAAF supports the acquisition and management of natural areas, while OSLAD helps local governments acquire and develop sites for parks and open space.  The budget proposal also appears to increase funding for the state water supply planning program, from an enacted $5.59 million in FY15 to a recommended $6.9 million in FY16.

Looking Forward

The budget proposal includes some provisions to support efficient governance in Illinois, such as providing estimates of outcomes tied to spending levels.  However, it stops short of fully endorsing performance-based funding for the prioritization of the state's capital investments. 

Moreover, the budget's funding levels for some programs are inconsistent with the principles of GO TO 2040, and the overall decrease in funding would affect many program areas that support the plan's policies.  Notably, the proposed reductions in mass transit funding are directly in conflict with GO TO 2040's recommendation to increase support for public transportation.  The proposed changes to the Public Transportation Fund are particularly troubling; reducing the state's matching rate of regionally generated sales tax revenues from 30 percent to 20 percent represents a significant, ongoing reduction in operating support to the Chicago area's transit system.

While not directly employed to balance the budget due to statutory limitations on the framework of the budget recommendation, the elements of the proposal suggest a need for broader tax policy reform.  These elements, such as broadening the sales tax base and restructuring the state motor fuel tax, may provide a starting point for discussions on developing tax policy reforms that would improve the efficiency of the tax system while providing adequate revenues. 

At its January 2015 meeting, the CMAP Board approved a set of legislative principles and agenda for the 99th General Assembly.  CMAP will advocate for the positions outlined in those documents and will continue to monitor legislative activity in Springfield throughout the session.