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CTBA looks at the new budget: The future isn’t bright

Friday, Jun 11, 2021

* Center for Tax and Budget Accountability…

This past February, Governor Pritzker proposed a General Fund Budget for FY 2022 that essentially held spending on public services level in nominal dollars level with FY 2021. Which means if that budget passed as proposed, total General Fund spending on services in FY 2022 would have ended up being less in real, inflation-adjusted terms than in FY 2021.

At the time, CTBA described the proposal as “sobering,” because it would effectively constitute a year-to-year cut in real General Fund spending on education, healthcare, human services and public safety, given that 95 cents of every dollar of General Fund spending goes to those four, core service areas.

However, on March 11, 2021, which was shortly after the proposed budget was announced, President Joe Biden’s administration secured passage of the American Rescue Plan Act (the “ARPA”). Under ARPA, Illinois is targeted to receive $13.7 billion in federal funding, as part of a national relief package designed to help state and local governments cope with fiscal challenges created by the pandemic, including $7.5 billion to assist the state government.

ARPA came on the heels of various federal initiatives that passed in 2020—like the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)—which were also intended to help state and local governments cover pandemic related costs. Combined, Illinois state government received some $13.2 billion under these federal relief packages, which the state has the authority to spend over fiscal years 2021, 2022, and 2023.

Without this financial support from the feds, the General Assembly would not have been able to increase year-to-year spending on K-12 Education in FY 2022 by $300 million, after flat funding it last year.

Meanwhile, Illinois enacted state legislation that, beginning in FY 2022, will generate an estimated $666 million in new General Fund revenue annually, through the elimination of various tax expenditures that had primarily benefited corporations. (For more information about why elimination of these tax expenditures made sense, see CTBA’s report, Recommended Changes to Illinois Tax Expenditures, FY 2022.

Yet, despite obtaining the aforesaid new federal and state funding, and the promising year-to-year increase in education funding, the FY 2022 General Fund budget that passed into law over Memorial Day weekend still holds overall net spending on core services in FY 2022 to an amount that’s $100 million less in nominal dollars than in FY 2021. Which means that, after adjusting for inflation, General Fund spending on services in FY 2022 is now scheduled to be $688 million less in real terms than in FY 2021.

This was done in an attempt to get the enacted FY 2022 General Fund close to having an “on-budget” balance, which simply means that, without accounting for any carry-forward deficit that remains at the end of FY 2021, in-year projected spending and revenue for FY 2022 will be equivalent. The attempt came close, with projected total General Fund spending for FY 2022 coming in at $41.64 billion, which is $200 million below the $41.85 billion in projected revenue for the year.

Trying to achieve an “on budget” balance between revenue and expenditures is of course a fiscally responsible thing to do. But, as CTBA has emphasized previously, what it takes to get there is sobering.

That is because, without both enhancing state General Fund revenue by $666 million, and receiving the substantial federal aid outlined previously, Illinois would not have been able to keep spending on core services essentially flat in nominal dollars on a year-to-year basis in FY 2022, unless decision makers were willing to increase the already significant, as in $6.4 billion, “accumulated deficit” in the state’s General Fund. An “accumulated deficit” typically represents the dollar value of unpaid bills that remain outstanding at the end of a fiscal year.

The reason Illinois keeps struggling to maintain General Fund spending on core services over time is simple: the state’s existing mix of taxes and their respective structures are so flawed, they simply do not work in a modern economy, and instead have created a “structural deficit.” A “structural deficit” exists when annual revenue growth is not sufficient to cover the cost of providing the same level of public services from one fiscal year into the next adjusting solely for changes in inflation and population—even during a normal, non-pandemic economy.

Which means when the pandemic ends and enhanced federal financial assistance ends with it, Illinois will not have the fiscal capacity to continue enhancing its investment in education—or indeed to continue investing adequately in any of the four core service areas—without enactment of the structural tax policy reforms needed to create long-term revenue generation that grows with the economy.

* Related…

* Proposed state budget keeps agriculture funding nearly flat

- Posted by Rich Miller        

24 Comments »
  1. - Candy Dogood - Friday, Jun 11, 21 @ 9:07 am:

    So what they’re saying is we’ve got a Revenue problem?

    If only the CTBA had $50 million to get their message out.


  2. - Numbers Guy - Friday, Jun 11, 21 @ 9:18 am:

    But Governor Pritzker said the passed budget “addresses the historical structural deficit.”


  3. - City Zen - Friday, Jun 11, 21 @ 9:34 am:

    Word search on “pension” came up empty.


  4. - Flyin' Elvis'-Utah Chapter - Friday, Jun 11, 21 @ 9:37 am:

    “Word search on “pension” came up empty.”

    As it should.

    Unless you’re a GOP candidate for governor looking to con a few wealthy donors.


  5. - Cubs in '16 - Friday, Jun 11, 21 @ 9:39 am:

    ===Word search on “pension” came up empty.===

    Just like the argument that ripping off pensioners will make everything rainbows and unicorns.


  6. - A - Friday, Jun 11, 21 @ 9:51 am:

    Oh man. Back to this again. So much jealousy out there


  7. - Hoss - Friday, Jun 11, 21 @ 10:13 am:

    Can we expand the sales tax base to capture a portion of our service economy?


  8. - Facts Matter - Friday, Jun 11, 21 @ 10:22 am:

    I don’t want to help make their argument for them, but CTBA should understand and explain that the majority of the $666 million in “new” state revenues for the FY 22 budget year is nothing more than a shift of tax revenues to FY 22 from later years. Over $300 million of that amount is from a suspension of net operating losses. The amounts not used during the 3 year suspension will be used in later years to reduce revenues.

    Another $100 million or so of the “new” revenues for FY 22 result from decoupling from federal 100% expensing and going to depreciating the capital assets over their useful life. Again, this increases revenues for FY 22, but reduces revenues in subsequent years when the depreciation deductions are taken.

    From a tax policy standpoint, it makes little sense to make these kinds of changes to increase revenues in a year when the state is receiving significant financial assistance while reducing revenues in subsequent tax years when the state will not be receiving the federal financial assistance.


  9. - ESR - Friday, Jun 11, 21 @ 10:27 am:

    “Trying to achieve an “on budget” balance between revenue and expenditures is of course a fiscally responsible thing to do.”

    Yes, the noble sense of fiscal responsibility. It’s not like there is any other reason, like a constitutional one?


  10. - Oswego Willy - Friday, Jun 11, 21 @ 10:33 am:

    ===Trying to achieve an “on budget” balance between revenue and expenditures is of course a fiscally responsible thing to do.===

    One of the real learned things from the Rauner first two years is how little can actually be cut to lower costs versus what is legally obligated to dole.

    We learned higher education, social services, among others are available for serious cuts, but what is interesting is that those looking to find the “waste, fraud, and abuse” or “bloat” angles… they only need to see those two years of no budget to grasp what’s actually… cut-able.

    There is a strong need for revenues, there needs to be a weaker look (as to the strength of the argument) at reamorizing debt (kicking the can, ugh) but with an aggressive twist that could maximize greater revenue.


  11. - City Zen - Friday, Jun 11, 21 @ 10:51 am:

    ==Can we expand the sales tax base to capture a portion of our service economy?==

    Yes, but sales taxes are considered regressive. If we can’t tax grandma’s income, we certainly aren’t equipped to tax her trip to the beauty salon either.


  12. - anon2 - Friday, Jun 11, 21 @ 11:01 am:

    == sales taxes are considered regressive ==

    On food and clothing that’s true. Certain services, however, are used only by upper-income customers, since people living paycheck to paycheck can’t afford them in the first place. In short, depending upon the services that are taxed, extending the sales tax to services does not have to fall disproportionately on those with the least ability to pay.


  13. - Candy Dogood - Friday, Jun 11, 21 @ 11:24 am:

    ===One of the real learned things from the Rauner first two years is how little can actually be cut to lower costs versus what is legally obligated to dole.===

    I don’t know if the people who need to learn from this lesson the most are really interested in an education on the topic.


  14. - Disappointed Female Suburban - Friday, Jun 11, 21 @ 11:49 am:

    Pat Quinn’s adorable serpentine representation of the state’s most critical fiscal issue has been lamented as half-assed and juvenile… but Squeezy’s a lot catchier than actuarial analysis.


  15. - Oswego Willy - Friday, Jun 11, 21 @ 11:57 am:

    === I don’t know if the people who need to learn from this lesson the most are really interested in an education on the topic.===

    Horse… water… drink.

    Happy Friday.


  16. - JJJJJJJJJJ - Friday, Jun 11, 21 @ 12:01 pm:

    ==City Zen==

    Walk me through what changes to the pension system would help get us out of this. I do have a few ideas. Maybe consolidate some of the first responder funds? Maybe reduce benefits to new hires? Maybe offer a wildly popular buyout program?

    Oh shoot I’ve just now been informed that we’ve done all of those things and that the new pension obligation is on a downward trajectory. Huh. Would ya look at that.


  17. - Grandson of Man - Friday, Jun 11, 21 @ 12:12 pm:

    “Walk me through what changes to the pension system”

    The IPI wants to put everyone in a 401(k). The issue is not to turn the public sector in to the more-insecure private sector (what the IPI wants), with historically low unionization rates and fewer defined benefit pensions, but the reverse, for the private sector to be more like the public, or at least like Illinois public employees.


  18. - JJJJJJJJJJ - Friday, Jun 11, 21 @ 12:29 pm:

    It is not at all obvious that a 401k system would be less expensive than the current tier 2 pension system. But, I would love to read more if you have it.


  19. - Oswego Willy - Friday, Jun 11, 21 @ 12:33 pm:

    === It is not at all obvious that a 401k system would be less expensive than the current tier 2 pension system. But, I would love to read more if you have it.===

    - RNUG - has written chapter and verse on the subject.

    You could Google his comments on the subject.


  20. - Charlie Wheeler - Friday, Jun 11, 21 @ 1:12 pm:

    Point of Information re Illinois Constitution and balanced budgets

    The constitution requires the governor to submit a budget in which proposed expenditures “shall not exceed funds estimated to be available for the fiscal year.” The constitution further requires the General Assembly to make appropriations for the fiscal year “which shall not exceed funds estimated by the General Assembly to be available during that year.” Article VIII, Section 2.

    For FY 2022, the General Assembly’s general funds appropriations are estimated to exceed funds available by $210 million, according to CTBA cited above.

    Moreover, the constitution does not specify general funds; rather, the language would seem to include all appropriations from all 700+ funds maintained by the comptroller and treasurer. For FY 20, the most recent available, the comptroller’s annual “Traditional Budgetary Financial Report” showed a $5.751 general funds deficit on a budgetary basis to begin FY 21. However, the same report showed a $3.329 billion surplus in all appropriated funds on a budgetary basis to begin FY 21. That would seem to indicate the FY 20 budget met the constitutional requirement that appropriations not exceed available funds.

    Respectfully,

    Charlie Wheeler


  21. - City Zen - Friday, Jun 11, 21 @ 1:24 pm:

    ==t is not at all obvious that a 401k system would be less expensive than the current tier 2 pension system.==

    Depends on how you value risk and portability and how long “current” remains current. A 401k plan might indeed cost more but the value to the state of totally absolving itself of future funding beyond the current year might make it worth that cost.


  22. - Oswego Willy - Friday, Jun 11, 21 @ 1:29 pm:

    Charlie Wheeler always brining us back to the honest discussion

    === Depends on…==

    No. It doesn’t. You know it too.

    - RNUG - has asked and answered this dozens of times… to his credit.

    === I don’t know if the people who need to learn from this lesson the most are really interested in an education on the topic.===

    An evergreen comment to the foolish thinking on pensions too.


  23. - Ebenezer - Friday, Jun 11, 21 @ 1:34 pm:

    The best reason for a 401(k) type system is that the political system has demonstrated over decades that it is incapable of reasonably funding pension commitments when they are incurred.

    I am for any system that requires the full cost of the workforce to be recognized while they are doing the work.


  24. - JS Mill - Friday, Jun 11, 21 @ 1:42 pm:

    The CTBA has been on this for 20 years. Had anyone with the ability to influence change listened we would have been well on our way to fiscal health. But that takes the will to do what is obviously right. Increase the sales tax base strategically and phase it in over time. Add a graduated income tax. Allow for property tax relief if the money is there for public education since we are the biggest part of your tax bill. Martire said between 10 and 25% was possible, guarantee 10%.

    =A 401k plan might indeed cost more but the value to the state of totally absolving itself of future funding beyond the current year might make it worth that cost.=

    That is what Tier 2 does over time. In the decade since its’ inception, Tier 2 has reduced the year over year cost of the pensions roughly $500 million based on an estimate I saw 2 years ago.

    What Tier 2 or a 401k do not do is eliminate the LEGACY DEBT. If the debt payments did not exists we would have a surplus state budget all other factors staying the same. If the state had covered its obligations for the last century (in much smaller more manageable numbers) there would have been NO fiscal crisis in Illinois.

    The idea of a 401k in the private sector comes with an employer match. Given the fiscal history of Illinois and the nature of those willing to steal from public employees when times get tough, who would actually believe the state would make its match.

    I am guessing (and it is just a guess) that folks who want public employees to move to a (more expensive given the addition of SSI)401k don’t feel like public employees deserve the same match that is standard in the private sector. If they were being honest.


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