Analysis of the State of Illinois FY2019 Enacted Budget

The Illinois General Assembly passed a budget for fiscal year 2019 on May 31, 2018 and Governor Rauner signed it into law on June 4, 2018. The Institute for Illinois' Fiscal Sustainability has since then continued to analyze the enacted State of Illinois budget, releasing periodic updates via the IIFS blog. All of the enacted budget content is gathered on this page for readers’ convenience.

 

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Illinois Passes Budget on Time; Fiscal Challenges Remain

Originally published June 8, 2018

After three years of political gridlock and missed deadlines, the Illinois General Assembly passed a budget for the coming fiscal year on the last day of its regular spring session. Governor Bruce Rauner promptly signed the budget amid bipartisan celebration.

Although the $38.5 billion budget for fiscal year 2019 is roughly balanced on paper, concerns persist about whether the revenue and spending estimates are realistic. The budget assumes savings of $382 million from a new pension buyout plan that has not been vetted in public hearings. The State continues to book nearly $300 million from the sale of its main office building in Chicago—a sale that was first proposed by the Governor almost three years ago.

Even if such assumptions are borne out, the FY2019 budget does not address Illinois’ biggest fiscal challenges, including a backlog of unpaid bills that currently stands at $7.5 billion. It is unclear how the budget might affect the State’s $130 billion unfunded pension liability because actuarial reviews of the new pension plan have not been made available to the public.

The lack of drama surrounding the budget for FY2019, which begins on July 1, 2018, was in sharp contrast to the past several years. Governor Rauner took office in January 2015, the same month that temporary income tax rate increases were automatically phased out. The Republican Governor made pro-business reforms a condition for approving higher taxes, but Democrats who control the General Assembly did not agree to those terms.

As a result, full budgets for FY2016 and FY2017 were never enacted. Six days into FY2018 and over the Governor’s veto, the General Assembly enacted a budget for the current year that nearly returned income tax rates to their pre-2015 levels.

Because of the tax increase that added about $4.5 billion to FY2018 revenues, developing the FY2019 budget involved fewer challenges than the previous years’ budgets. Still, the Governor’s FY2019 budget proposal in February faced criticism for several cost-cutting proposals, including a plan to shift pension costs to local school districts and a continued reduction in funding for local governments. Negotiations began in earnest in mid-April, when Governor Rauner asked General Assembly leaders to appoint representatives to participate in budget discussions with his staff.

The resulting budget package consists of an appropriations bill and a budget implementation bill with statutory changes needed to put the budget into effect. The measures were passed overwhelmingly by the Senate on May 30 and the House on May 31 and signed by the Governor on June 4.

The following table compares the enacted FY2019 General Funds budget with the Governor’s FY2019 budget proposal and shows the most recent available estimates for FY2018.

FY2018 Update

Both revenue and spending figures for FY2018 will be revised by the end of the current fiscal year. On the revenue side, budget officials said combined individual and corporate income tax receipts for FY2018 are expected to be about $500 million above earlier projections due mainly to federal tax changes. In addition, $200 million of borrowing from other funds that was budgeted for FY2018 has been shifted to FY2019.

Expenditures will increase in FY2018 because of $1.2 billion in supplemental appropriations, including $405 million for the Illinois Department of Corrections to cover 2017 bills for day-to-day prison operations. The supplemental appropriations also include $63 million for wages owed to union workers since 2011. The American Federation of State, County and Municipal Employees (AFSCME) had temporarily agreed to defer previously negotiated wage increases because of the State’s fiscal problems, but the raises were never paid. After the Illinois Supreme Court ruled that paying the back wages required a legislative appropriation, the General Assembly in 2016 passed a bill to pay the wages but Governor Rauner vetoed it.

Even though these revisions would increase the FY2018 operating deficit by about $900 million, officials have said that the additional appropriations were generally accounted for in the backlog of unpaid bills. Absent other changes, the additional revenue would decrease the previously projected backlog by about $300 million.

FY2019 Revenues

The FY2019 enacted budget projects $38.5 billion in revenues. While the budget contains no new revenue sources or increases in existing rates, it does rely on the FY2018 income tax increase from 3.75% to 4.95% for individuals and from 5.25% to 7.0% for corporations. Rates temporarily rose to 5.0% from 3.0% for individuals and 7.0% from 4.8% for corporations in 2011 before partially rolling back in January 2015.                                                       

The estimated FY2019 revenue amount is $556 million higher than the estimate contained in the Governor’s budget proposal. Of this amount, $200 million reflects the return of excess amounts in the Income Tax Refund Fund to the General Funds. Another $200 million represents additional interfund borrowing authority. The FY2018 budget authorized $1.2 billion of interfund borrowing. In February the Governor’s office estimated that only $600 million of it would be used in that fiscal year and included the remaining $600 million in its projection of FY2019 revenues. The General Assembly now predicts that only $400 million will be used by the end of FY2018, and has thus shifted $200 million in revenues to FY2019.

The enacted budget does not include the Governor’s proposal to forgive the debt to the other State funds. However, it is still unclear whether the State’s other funds can sustain this level of borrowing on an ongoing basis or whether this measure is best characterized as a one-time revenue source.

The enacted budget reduces the holdback of income taxes from the Local Government Distributive Fund and sales taxes from public transit funds to 5% from its FY2018 level of 10%. This will result in an estimated $98 million for local governments and reduce State revenues accordingly. Additionally, the collection fee for locally imposed sales taxes is reduced from 2% to 1.5%. Since this fee goes into a special fund for administering collections, the reduction does not affect the General Funds budget.

The enacted FY2019 budget, like the Governor’s proposed budget, the proposed and enacted FY2018 budgets and the proposed FY2017 budget, relies on $300 million in proceeds from the sale of the James R. Thompson Center in Chicago. As in the FY2018 budget, the State is assuming $60 million in expenses relating to the building’s sale and relocation of State employees. However, the enacted budget assumes that only $30 million of this expenses will occur during FY2019, for a net budgetary impact of $270 million. Legislation authorizing the sale was passed by the General Assembly in May 2017, but has not yet been delivered to the Governor for signature. Even if the bill is enacted, it is unclear whether the sale will occur during FY2019 at the expected price.

FY2019 Expenditures

The enacted FY2019 budget includes General Funds spending of $38.5 billion, an increase of $896 million, or 2.4%, from $37.6 billion in the Governor’s proposed FY2019 budget.

Pensions

The Governor’s budget proposed reducing statutorily required General Funds pension contributions by $363 million by shifting certain pension costs to school districts, public universities and community colleges. (The $101 million portion of that amount relating to higher education expenses would have been reimbursed through increased operating funding in FY2019.) Instead, the enacted budget saves a projected total of $445 million through the following changes affecting the State’s three largest retirement systems:

• Automatic annual increase (COLA) buyout:[1] Tier 1 members, who receive the most generous pensions, will have an opportunity to get an upfront cash payment into a private retirement account in exchange for agreeing to a lower automatic annual increase in their benefits. Upon retirement, these employees will give up the 3% annual compounded benefit increases now paid to Tier 1 retirees and instead receive yearly increases of 1.5% of their base pension amount. In exchange, they will get a lump sum payment equal to 70% of the difference between the value of their benefits with the higher and lower annual increases. Assuming 25% of those eligible choose to take the buyout, savings to the State are estimated at $382 million in FY2019.
• Inactive member buyout: Inactive Tier 1 and Tier 2 members, who are no longer employed at their State pension-eligible jobs but are qualified for State pensions, will be able to receive 60% of the current value of their benefits as a lump sum payment into a private retirement account. State savings in FY2019 are assumed to be $41 million if 22% of those eligible participate.
• Lower cap on pension spiking: Additional pension costs due to salary increases above 3%—rather than 6%—would be paid for by local school districts, universities and community colleges. The State is expected to save $22 million in FY2019 due to the cost shift.

The pension buyouts will be financed by selling up to $1 billion in bonds through FY2021, when the buyout offers end. The estimated State savings are net of debt service costs; officials expect savings on the difference between the assumed rate of return on pension investments of 6.75% to 7% and the interest rate paid on the bonds.  

The budget legislation directs the pension funds to implement the buyout plans “as soon as practical,” so it is not clear when they will take effect. The Teachers’ Retirement System, which covers teachers outside Chicago, says on its website that the implementation will take time and does not provide a starting date.

Questions have been raised about the significant savings projected from the COLA buyout, and in particular about assumptions concerning the number of employees who will choose to participate. Legislation with different COLA buyout provisions received a hearing in a House committee in February 2018 but never came up for a vote. 

Education

General Funds appropriations for preschool to secondary education increase by $72 million to $8.4 billion in the FY2019 enacted budget from $8.3 billion in the Governor’s budget. The enacted budget provides about $352 million for the new education funding formula, just above the $350 million annual target increase in the legislation enacted in August 2017 and proposed by the Governor for FY2019. The enacted budget includes a $50 million increase from FY2018 for early childhood education, compared with an increase of $10.5 million in the Governor’s budget.

Higher education receives $1.79 billion in General Funds appropriations in the FY2019 enacted budget, compared with $1.96 billion in the Governor’s proposal. However, $206 million in the Governor’s budget was additional funding to offset the proposed shift of pension and health insurance costs to universities and community colleges. Without that additional funding, the enacted budget represents a $40 million increase from the Governor’s proposal, including a 2% increase over FY2018 for universities and community colleges and $25 million for a new merit-based scholarship program for universities.

Human Services and Healthcare

General Funds appropriations for Human Services are $5.9 billion in the enacted FY2019 budget, an increase of $125 million from the Governor’s proposed $5.8 billion. The increase reflects the restoration of funding to a number of programs that the Governor had proposed to reduce or eliminate, including child care services, addiction prevention and treatment services and the youth employment program.

For Healthcare, the FY2019 enacted budget does not include savings of $175 million from reducing reimbursement rates for many Medicaid healthcare providers and eliminating program and rate changes enacted in FY2018. These changes would have required legislative and in some cases federal approval. The FY2018 amount in the table does not include $494 million in proposed supplemental appropriations for Medicaid.

Other Areas

The FY2019 enacted budget allocates $2.0 billion for group health insurance, compared with $1.45 billion in Governor’s FY2019 budget. The enacted budget’s higher number does not reflect the Governor’s proposed savings of $470 million from requiring workers to choose between increased premiums or reduced coverage. These changes relied on winning a court battle with AFSCME or statutorily removing health insurance from collective bargaining. The enacted budget also does not include the Governor’s proposed State savings of $105 million from shifting additional health insurance costs to public universities. (In the Governor’s budget, these costs were reimbursed in FY2019 by additional operational funding for universities.)

The Government Services area receives $1.5 billion in the FY2019 enacted budget, an increase of $490 million from $984 million in the Governor’s budget. The enacted budget restores $227 million in normal pension and retiree healthcare costs for the Chicago Teachers’ Pension Fund. Those costs were assumed by the State for the first time in FY2018 as part of the education funding overhaul, but the Governor had proposed to return responsibility for the costs to the Chicago Public Schools in FY2019. The enacted FY2019 budget also restores $129 million in State funding for health insurance for retired teachers and community college employees outside Chicago and reverses the Governor’s proposed spending reductions for constitutional offices, the General Assembly and the Illinois Supreme Court.

FY2019 Budget Balance and Backlog

The General Funds budget is roughly balanced with $38.52 billion in revenues and $38.51 billion in spending, resulting in a projected surplus of $11 million. This is less than the Governor’s budget proposal, which had projected a surplus of about $350 million. However, the enacted budget relies on fewer aggressive assumptions than the proposed budget did. The enacted budget fully funds State employee group health insurance, while the proposed budget relied on $470 million of prospective cost reductions. Nor does the enacted budget balance depend on shifting $619 million of net pension and health insurance expenses to schools, community colleges and universities, or reducing Medicaid reimbursements by $175 million, both of which had drawn significant opposition in the General Assembly.

However, the enacted budget does retain the assumption that the Thompson Center will sell for $300 million (netting the State $270 million in FY2019). Furthermore, like the proposed budget, the enacted budget does not account for the likelihood that Illinois will have to pay step increases to State employees who have not received them since the expiration of their contract in 2015. This cost could be in excess of $300 million.

Finally, the enacted budget introduces an aggressive assumption not included in the Governor’s proposal. The assumed $382 million in pension savings from the COLA buyout relies on a 25% participation rate by retiring employees and on successful implementation in FY2019.

Even if the budget achieves its stated balance at the end of FY2019, Illinois will still not have reduced the remaining backlog of bills during the fiscal year. The backlog, which peaked at $16.7 billion, was reduced by more than half during FY2018, largely thanks to the issuance of $6 billion in bonds. The interest cost of that borrowing is $1.9 billion over 12 years, but that is less than the steep interest penalties paid by the State on overdue bills.

However, the enacted budget does not anticipate any pay-down of bills in FY2019. Instead, the General Assembly passed a measure that could help alleviate the interest cost of outstanding bills. SB2858, if signed, would allow the State Treasurer to invest other State funds with the Comptroller, who would use the funds to pay of backlogged bills. The General Funds would pay a floating interest rate much lower than the 12% owed to vendors under the Prompt Payment Act or the 9% owed under the Timely Pay provisions of the Insurance Code. Proponents say the rates will likely exceed what the other State funds would have earned in more typical investments.

Following the enactment of the budget, S&P scuttled any hope for an upgrade to the State’s bond ratings, calling the budget “an extension of the status quo,” and noting the failure to address the bill backlog or unfunded pension liabilities. Neither of the other two raters has commented on the enacted budget, although even before passage Moody’s issued a warning about the State’s future fiscal stability as pension and debt service together approach 30% of state-source revenue.

Even so, the response from the ratings companies was muted compared to June 2017, when Illinois received downgrades to within one notch of junk by both S&P and Moody’s, and the companies warned of further downgrades if the State did not end its two-year budget impasse. By enacting full budgets for both FY2018 and FY2019 Illinois has avoided downgrades since then.

 

 

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How the State of Illinois FY2019 Enacted Budget Will Affect Local Governments

Originally published June 14, 2018

Illinois Governor Bruce Rauner presented his FY2019 State budget proposal in February for the State fiscal year beginning on July 1, 2018. As discussed in an earlier blog post, the proposal included measures that would have affected local governments including municipalities, counties and transit agencies. The State of Illinois FY2019 enacted budget was passed by the Illinois General Assembly on May 31 and signed by Governor Rauner on June 4. This blog post provides an update on two of the measures included in the FY2019 State budget that make adjustments to revenues collected by the State and distributed to local governments.

Local Government Distributive Fund and Public Transit Funds

The State of Illinois collects a statewide personal income tax and a corporate income tax. A portion of the total income tax revenue collected is placed in a Local Government Distributive Fund (LGDF) and distributed to municipalities and counties based on population size. This portion equals 10% of income tax revenue generated based on tax rates that were in effect prior to 2011 (3% for personal income and 4.8% for corporate income). Recent changes to the income tax rate are not incorporated into local governments’ distribution. In FY2019 total net personal and corporate income tax collections are estimated to be $21.4 billion.[2] Of those total collections, the LGDF will distribute $1.25 billion to counties and municipalities, or 5.8% of total state income tax revenue.

The FY2018 State of Illinois budget reduced the portion of income tax revenue allocated to the LGDF by 10%, effectively holding back 10% of funds that would have otherwise been distributed to local governments. Additionally, the State changed the way income tax revenue would be shared with local governments, directing the money straight into the LGDF rather than passing it through the General Revenue Fund, in order to speed up payments. The 10% reduction in payments made to local governments was intended to be a one-year adjustment. The Governor’s proposed FY2019 budget included the continuation of the 10% reduction to the LGDF for another year.

The enacted FY2019 State budget reduces the holdback of income taxes to the LGDF from 10% to 5%. The 5% reduction is also intended to be a one-year adjustment.[3]  This adjustment is projected to result in an additional $98 million being distributed to local governments across the state compared to FY2018. In FY2019, a total of $1.25 billion is estimated to be distributed from the LGDF. This is compared to an estimated $1.14 billion in FY2018 based on a March 2018 forecast by the Commission on Government Forecasting and Accountability (COGFA) and $1.22 billion distributed in FY2017.[4]

Similar to the Local Government Distributive Fund for counties and municipalities, transit agencies receive payments from the Public Transportation Fund (PTF) and Downstate Public Transportation Fund (DTPF). These funds consist of sales tax revenue collected by the State and distributed to transit agencies. The enacted FY2019 budget will also reduce the FY2018 10% holdback from these funds to 5%. Total sales tax distributions through the PTF and DTPF are projected to be $496 million in FY2019, compared to an estimated $449 million in FY2018 based on the March 2018 COGFA forecast. In FY2017 a total of $723.1 million was distributed to transit agencies from the PTF and DTPF.[5]

Sales Tax Administrative Collection Fee

The FY2018 State budget imposed a 2% administrative fee on sales tax collections distributed to local governments. The fee was intended to cover the State’s cost of collecting and distributing locally imposed sales taxes. The fee was originally projected to generate $5.3 million per month, but after the first eight months of collections, the fee had actually generated $6.2 million on average per month. The Illinois Municipal League advocated for the fee to be reduced from 2% to 1% and two bills reducing the fee to that level were introduced during the spring legislative session. Instead, the FY2019 enacted budget reduced the collection fee from 2% to 1.5%. The change in the fee does not affect the State’s General Funds budget because the fee goes into a special Tax Compliance and Administrative Fund.

 

 

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Capital Spending and Debt Management

Originally published June 22, 2018

Following the enactment of the State of Illinois FY2019 budget on June 4, the Civic Federation blog has analyzed the potential impact on the General Funds and on local governments. This blog post will discuss the provisions for capital spending and the State’s long-term debt.

FY2019 Capital Budget

For the most part, the appropriations bill passed by the General Assembly includes all capital spending requested by Governor Bruce Rauner in his proposed FY2019 capital budget. The proposal included $16.8 billion of total capital spending, including $7.8 billion of new appropriations and $9.0 billion of reappropriations. Of the new appropriations, the Governor proposed that $3.6 billion be financed with bonds and $4.2 billion spent on a pay-as-you-go basis.

However, the enacted budget made several changes to the Governor’s proposal. It allocated $53.1 million to repairs at the Quincy Veterans’ Home, which has been hit by multiple cases of Legionnaire’s disease. This amount is reduced by $11.9 million from the proposed budget amount and falls fall short of the $190-230 million for a new facility recommended by a Department of Veteran’s Affairs task force report issued in May.

The enacted budget also includes $192 million related to the planned Obama Presidential Center in Jackson Park. The total includes a $180 million grant to the Chicago Department of Transportation for road improvements in and around the park and a $12 million grant to the RTA to rehabilitate the 59th Street Metra station.

Another $115 million in smaller projects are added by the enacted budget to the Governor’s proposal, for a net increase of $295 million. The total appropriation of roughly $17.1 billion is the largest capital bill since FY2015. The roughly $8.1 billion of new appropriations are the highest amount since the passage of FY2010’s Illinois Jobs Now! capital plan.

However, since the FY2019 budget does not raise any additional revenues for capital projects, it is unlikely that a majority of the appropriations will be spent during the fiscal year. Authorized projects that are not completed or started may be rolled forward with reappropriations in future years.

The availability of long-term funding for capital improvements from existing revenue streams remains uncertain. It has been over 28 years since Illinois has raised its motor fuel tax, and revenues have not kept up with the cost of construction. The Illinois Jobs Now! plan relied on a package of revenues, such as video poker taxes, that failed to materialize as projected. Moreover, that plan and capital budgets since then have lacked a comprehensive assessment and prioritization of the State’s capital needs.

Governor Rauner has stated that he will introduce a capital bill with “tens of billions” in the next six months. Likely to be included are the $11 billion of projects identified by the Illinois Department of Transportation in its recently released FY2019-24 highway improvement plan.

Debt Management

The enacted FY2019 budget implementation bill increases the State’s General Obligation bonding capacity by $1.8 billion. Of this amount, $1 billion is restricted to funding the two pension buyout plans authorized by the FY2019 budget. The remaining $800 million falls short of the more than $3.6 billion of new bond-financed capital spending authorized this year.

Finally, the budget implementation bill authorizes the Governor’s Office to issue long-term refunding bonds to finance termination payments for interest rate swap agreements. It also exempts any such transaction from the usual prohibition against extending the maturity of existing debt. The total cost of terminating swap agreements has fallen over the last several years as interest rates have risen, from $153 million in 2016 to $83 million in April 2018. The State has twice renegotiated the agreements with swap counterparties in order to lower the credit ratings thresholds at which Illinois would be automatically forced to make termination payments. However, the Governor’s Office has said that it is still weighing options with regard to the newly granted refunding authority.

 

 

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Examining Pension Savings in Illinois’ FY2019 Budget

Originally published July 5, 2018

Since Illinois passed its budget for the current fiscal year, many questions have been raised about the $445 million in savings expected from enacted pension changes. What is the basis for the savings estimate and how accurate is it likely to be?

The assumed reductions in State pension contributions are the result of three provisions in the FY2019 budget legislation. The most important is a voluntary buyout plan that offers certain employees who are about to retire upfront cash payments—in exchange for delayed and lower automatic annual increases in their benefits. The plan accounts for $382 million, or 86%, of the total budgeted State pension savings for the fiscal year that began on July 1, 2018.[6]

Public records show that the $382 million figure comes from actuarial reviews of a different pension buyout plan. As a result, it is not clear whether the savings estimate applies to the enacted measure. Even if the savings estimate is relevant, it remains to be seen whether the assumed participation rate of 25% is realistic.

The $382 million savings estimate is based on actuarial reviews of House Bill 5472. The measure has not come up for a vote in the General Assembly, but the actuarial studies were prepared by the pension funds at the legislature’s request in advance of a public hearing last February. There was no public hearing on the enacted pension measure.

Like the enacted buyout plan, House Bill 5472 affects the State’s three largest pension funds: the Teachers’ Retirement System (TRS), State Universities Retirement System (SURS) and State Employees’ Retirement System (SERS). The actuarial reviews were obtained through public records requests to the pension funds and can be accessed from the following links for TRS, SERS and SURS. 

The enacted buyout and House Bill 5472 have several similarities. Both apply to Tier 1 pension fund members: employees hired before January 2011 who receive the most generous pension benefits. Upon retirement with full benefits at age 60, Tier 1 members receive automatic compounded annual increases of 3%. More recently hired Tier 2 members, who retire with full benefits at age 67, receive annual increases of 3% or one half the rate of inflation, whichever is less, calculated on a simple-interest basis.

In both buyout plans, retiring members who opt to participate get a lump sum payment equal to 70% of the difference between the present value of their benefits with the current Tier 1 annual increase and with a lower simple interest annual increase starting at age 67. The annual increase in House Bill 5472 is the Tier 2 formula, while the enacted plan provides for a flat, simple 1.5% yearly increase. In both cases, the upfront payments must be deposited into another retirement account to avoid being taxed.

There are other differences. The enacted buyout plan lasts for three years, until June 30, 2021. House Bill 5472 has no set ending date.

Another difference relates to how the upfront payments are funded. The enacted buyout will be financed by selling up to $1 billion in bonds through FY2021.[7] House Bill 5472 does not specify how the payments would be funded; the actuarial analyses for TRS and SERS assumed that the cash for the buyout would come from pension assets, while the SURS study assumed that an unspecified funding source other than pension assets would be used. Bond financing is expected to reduce net State costs because the pension funds’ assumed rates of return on investment of 6.75% to 7% are higher than the expected interest rate paid on the bonds. 

In evaluating House Bill 5472, the funds’ actuaries were asked to consider participation rates of 25%, 50% and 75%. The budgeted savings of $382 million were based on a 25% participation rate.[8] The actuaries did not provide their own assessment of how many fund members would choose the buyout or consider the potential cost of adverse selection, in which individuals in poor health choose the buyout while healthy members keep their lifetime pension payments. 

The following table compares FY2019 General Funds pension contributions before and after the changes in the FY2019 budget. The table has contributions to all five State pension funds, including the smaller Judges’ and General Assembly Retirement Systems, which are not affected by the new measures. It should be noted that the savings shown in the table total $445 million rather than $382 million because they reflect all three measures in the FY2019 budget (see footnote 1 for more details).

For reasons that have not been explained by State budget officials, most of the pension savings are expected to come from SERS. Even through the assumed participation rate is the same for all the affected funds, budgeted contributions for SERS were reduced by 20.1%, compared to reductions of 2.1% for TRS and 4.9% for SURS. This mirrors the results of the actuarial reviews of House Bill 5472, which show savings of $279 million, $56.1 million and $46.8 million for SERS, TRS and SURS, respectively.

In all, General Funds pension contributions are estimated to decline by 6.0% from $7.48 billion to $7.03 billion in FY2019 after the budgeted changes. With the assumed savings, pension contributions will account for 18.3% of budgeted General Funds expenditures of $38.51 billion. Total pension costs, including $1.25 billion of debt service payments on previously issued pension bonds, is estimated at $8.28 billion, or 21.5% of General Funds spending.[9]

The budget legislation directs the pension funds to implement the buyout plan “as soon as practical,” so it is not clear when it will take effect. However, the retirement systems will not receive their last monthly payments from the State until their trustees officially recalculate required contribution amounts in light of the newly enacted pension measures.

If the savings fall short of the estimated amount, the State would have to make up the difference due to continuing appropriation requirements, which statutorily authorize spending without any specific action by the General Assembly. Although the assumed savings are small compared with the overall General Funds budget, the budget is already precariously balanced with an operating surplus of $11 million.

The Civic Federation believes that significant changes to pension benefits should not be enacted without detailed actuarial impact studies that are made available to the public. Such actuarial analyses could indicate whether the changes will have the intended budgetary effects and show the long-term effects on the pension funds. Given the uncertainties inherent in actuarial projections, budget officials who are relying on the savings to balance the budget should also outline contingency plans in the event that the assumed savings do not materialize.

 

 

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Illinois FY2019 Budget Still Faces Major Hurdles

Originally published September 27, 2018

When the State of Illinois enacted this year’s budget, it had a razor-thin surplus that depended on several aggressive assumptions. A quarter of the way through fiscal year 2019, questions remain about whether the revenue and spending estimates will be met.

As explained here, the $38.5 billion general operating budget for the year that began on July 1, 2018 assumed $445 million in pension savings and $300 million in revenues from the sale of the James R. Thompson Center in Chicago. In addition, the budget did not account for as much as $400 million in wage increases withheld by the State since the contract with its biggest labor union expired at the end of FY2015.

Together, these items improved the FY2019 budget balance by $1.1 billion. After they were included, the projected surplus was only about $11 million, and even this figure relied on borrowing $800 million from accounts outside of General Funds.

Pension Savings

Like everything else related to pensions, the projected pension savings in the FY2019 budget are complicated and subject to misinterpretation. There has been confusion about how much of the savings would come from curtailing State costs from pension spiking—end-of-career salary increases designed to boost pension benefits.

Only $22 million of the budgeted $445 million in savings involves pension spiking. That provision of the budget legislationrequires local school districts, universities and community colleges, instead of the State, to pay for additional pension costs due to salary increases above 3%. The previous cap was 6%.

Most of the projected pension savings stem from two new buyback plans, which allow members of the State’s largest retirement systems to give up future benefits in exchange for an immediate payment from the State:

• Automatic Annual Increase (AAI) Reduction Buyout: Tier 1 members, who receive the most generous pensions, will have an opportunity to get an upfront cash payment into a private retirement account in exchange for agreeing to a lower automatic annual increase in their benefits. Upon retirement, these employees will give up the 3% annual compounded benefit increases now paid to Tier 1 retirees and instead receive yearly increases of 1.5% of their base pension amount. In exchange, they will get a lump sum payment equal to 70% of the difference between the value of their benefits with the higher and lower annual increases. Assuming 25% of those eligible choose to take the buyout, savings to the State are estimated at $382 million in FY2019.
• Pension Buyout: Inactive Tier 1 and Tier 2 members, who are no longer employed at their State pension-eligible jobs but are qualified for State pensions, will be able to receive 60% of the current value of their benefits as a lump sum payment into a private retirement account. State savings in FY2019 are assumed to be $41 million if 22% of those eligible participate.

Despite the precise savings projections, the State acknowledged in recent bond documents, page 32 that the numbers are speculative: “(T)he State can provide no assurance as to the amount of savings realized from such programs.” As discussed here, the $382 million savings estimate for the AAI buyout was based on an actuarial review of a different proposal. The major uncertainties, according to page E-33 of the bond documents, are “whether the Programs will be implemented” and “the degree to which members choose to participate in the Programs.” 

Since the budget was enacted, the Teachers’ Retirement System (TRS), State Employees’ Retirement System (SERS) and State Universities Retirement System (SURS) have been gearing up to offer the buyout plans to members. TRS said it will be ready in January 2019 to offer the AAI plan and as early as March 2019 to offer the pension buyout plan; the comparable dates for SERS are December 2018 and March or April 2019. SURS did not immediately respond to a question from the Civic Federation.

Launching the buyouts has involved a myriad of technical issues. TRS said preparations have required the development of actuarial formulas to estimate the payout for each member based on their particular circumstances, including expected life span; programming computer systems to accommodate the buyouts; establishing administrative procedures; and checking with the Internal Revenue Service to make sure the payouts are in line with federal laws and rules.

The pension buyouts will be financed by selling up to $1 billion in bonds through FY2021, when the buyout offers end. The date for the bond sale has not yet been determined, but the bonds will be issued after the buyouts are offered, according to State budget officials.

Sale of the James R. Thompson Center

The FY2019 Budget also relies on $270 million of net revenues from the sale of the State’s main office building in Chicago. The proposed sale was similarly included in the FY2018 budget and the Governor’s FY2017 budget proposal (which was not enacted), but the transaction was not completed during either year. There is some concern that even if the sale does occur, it may not produce the budgeted $300 million in revenues.

However, even to begin the sale process, the State must have legal authorization. The bill authorizing the sale was passed by the General Assembly in May 2017, but has been held by a motion to reconsider—a legislative maneuver that prevents the bill from being presented to the Governor for signature. The Governor’s Office has stated that it is working with the Senate President on moving the bill forward.

Payments for Step Increases

The FY2019 budget does not account for any payment of step increases to members of the American Federation of State, County and Municipal Employees (AFSCME) under their last contract, which expired at the end of FY2015. AFSCME has said that about 15,000 workers are eligible for the automatic annual increases given to workers in the first seven to ten years of their careers.

An appeals court ruled in November 2017 that the State violated the law when it stopped awarding step increases after the contract expired. The State appealed the ruling to the Illinois Supreme Court, but the high court on March 21, 2018 declined to hear the case.

The ruling means that the State could have to pay about $400 million in retroactive and currently owed step increases in FY2019, according to page 33 of the bond documents. However, State officials have reportedly estimated the cost at $194 million in filings with the Illinois Labor Relations Board. A compliance officer for the labor board ordered Governor Bruce Rauner's administration to report by October 1, 2018 the amount owed to each employee based on salary steps that would have been in effect under the expired contract. 

Budget Balance

Actual budget results will depend on many factors that could outweigh the impact of the issues discussed above. In FY2018, for example, the State collected $961 million more than expected in General Funds revenues.

It should be noted that even if the budget achieves its stated balance at the end of FY2019, Illinois will have done little to reduce the remaining backlog of bills during the fiscal year. The backlog peaked at $16.7 billion in November 2017 and now stands at $7.3 billion.
 

October 5, 2018 Update: The State Universities Retirement System (SURS) does not expect to be ready to fully implement pension buyout plans for its members during FY2019, according to documents provided to the Civic Federation. SURS attributed the delay to complex benefit provisions, limited staffing and poor quality payroll information. As discussed below, the other two large State pension funds, the Teachers’ and State Employees’ Retirement Systems, expect to be ready to start offering the plans as early as December 2018 or January 2019, but SURS does not expect to begin processing applications until June 2019, the last month of the current fiscal year, and will need four to six weeks more to finalize payment claims. The Governor’s Office of Management and Budget, which is counting on savings from the buyout plans to help balance the budget, is working with SURS to expedite the process, officials said.

 

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Illinois Budget Deficit Projected to Exceed $1 Billion in FY2019

Originally published November 20, 2018

When the State of Illinois enacted its budget for the current fiscal year in June 2018, it had a narrow surplus on paper of about $14 million. But a new report from the Governor’s Office estimates that the State’s actual financial result for FY2019 will be a budget deficit of more than $1 billion—a gap that could widen to $2.8 billion the following year without policy changes.

The projected outcome in FY2019 is not a surprise, given concerns expressed last spring that the budget was based on aggressive assumptions. In fact, the latest numbers no longer include revenues from the long-anticipated sale of the James R. Thompson Center in Chicago. Additionally, the new projections include payments not accounted for in the budget for union wage increases withheld by the State since the end of FY2015. The projected deficit also reflects less interfund borrowing in FY2019 than originally projected.

The Governor’s Office of Management and Budget (GOMB) continues to count on most of the savings that were budgeted from new pension buyout plans in FY2019.  However, the buyout plans have not yet been implemented, and the report cautions that the State “can provide no assurance as to the amount of savings actually realized from the implementation” of the buyouts.

The latest projection means that Illinois’ backlog of unpaid bills is expected to reach $7.8 billion in June 2019. That compares with a current backlog of $7.4 billion and $6.8 billion in unpaid bills at the end of FY2018.

The following table compares GOMB’s estimated general operating funds results for FY2019 with the enacted FY2019 budget.

As required by State law, the new report was accompanied by a five-year budget forecast. The forecast shows the deficit rising to $2.8 billion in FY2020 and remaining at more than $3 billion each year through FY2024. The backlog of unpaid bills increases from $10.6 billion at the end of FY2020 to $23.7 billion in FY2024.

However, the numbers for FY2020 and beyond do not incorporate any policy changes. GOMB noted that future fiscal policies will be proposed by Governor-elect J.B. Pritzker, who will succeed Governor Bruce Rauner in January 2019.

Revenues

GOMB projects General Funds revenues—before interfund borrowing—of $37.6 billion in FY2019, a decrease of $135 million from budgeted revenues. A projected increase in receipts from incomes taxes and other sources is partly offset by lower federal revenues.

The new estimate no longer includes the sale of the Thompson Center. When the FY2019 budget was enacted, the State forecast a sale price of $300 million, offset in the first fiscal year by $30 million in expenses. However, the legislationauthorizing the sale, passed by both chambers of the General Assembly in 2017, has been held on a motion to reconsider and has yet to be presented to the Governor for signature. The legislation will expire when the 101st General Assembly begins in January. Accordingly, the Governor’s Office has removed $300 million of revenues from the FY2019 projection and has not placed them in any subsequent year of the forecast.

GOMB’s estimate for FY2019 assumes a reduction in interfund borrowing from the $800 million authorized by the General Assembly. Officials said balances in other State funds can support a maximum of only $400 million in interfund borrowing. After accounting for the reduction in interfund borrowing, total FY2019 revenues decline by $535 million, or 1.4%, to $38.0 billion in the latest estimate from $38.5 billion in the enacted budget.

The projection of future revenues also reflects a change. In past years’ forecasts, GOMB factored the possibility of a recession into a blended revenue forecast. The current forecast instead contemplates a specific recession from the fourth quarter of 2019 to the second quarter of 2020. As a result, forecast income tax revenues grow by only 2% to 3% in FY2020 and FY2021, then more quickly in later years. Total revenues (excluding interfund borrowing) grow by only 2.1% annually over the five-year period, from $37.6 billion in FY2019 to $41.5 billion in FY2024.

Expenditures

Projected General Funds spending of $39.0 billion in FY2019 is $526 million above the budgeted level of $38.5 billion. The main reason is that the FY2019 budget did not account for any payment of step increases to thousands of members of the American Federation of State, County and Municipal Employees (AFSCME) under their last contract, which expired at the end of FY2015.

An appeals court ruled in November 2017 that the State violated the law when it ended the automatic annual increases for early-career workers, and the Illinois Supreme Court in March 2018 declined to hear the case. However, the Rauner administration has maintained that it does not owe anything after January 2016, when it declared an impasse in contract negotiations. The issue is now before the Illinois Labor Relations Board, which is weighing both whether an impasse occurred and how much step pay is owed.

The latest estimate of FY2019 spending includes step payments of $200 million for the current year and $300 million for prior years. GOMB said that $500 million is a maximum figure and that the actual payment could be as low as $170 million, depending on the labor board’s final rulings. The five-year forecast also includes step increase payments of more than $200 million annually through FY2024.

As discussed here and here, the FY2019 budget assumed $445 million in savings on State pension contributions, mainly due to new pension buyout plans. The Teachers’ Retirement System (TRS) and State Employees’ Retirement System (SERS) have said they plan to start offering the buyouts in December 2018 or January 2019, but the State Universities Retirement System (SURS) has indicated that the plans will not be fully implemented until after the end of FY2019. As a result, GOMB’s forecast shifts the $70 million savings on SURS contributions originally budgeted for FY2019 to FY2020. In addition, actual State contributions for TRS and SERS will not be known until they recalculate the required amounts before the end of FY2019.

In FY2020 General Funds pension contributions are projected to increase by $1.1 billion, or 15.3%, to $8.2 billion from $7.1 billion in FY2019. Except for the SURS shift explained above, the FY2020 amounts projected by GOMB reflect the State contributions recently proposed by the retirement systems. Although TRS included savings due to the pension buyouts, SERS and SURS did not. SERS, the pension fund that had been assumed to generate the largest savings, said it had no basis to estimate the impact of the plans without any actual experience about members’ participation.

To finance payments to members who select buyout options, the forecast assumes the State will issue $1 billion of bonds at 6% interest in March 2019. The bond sale is expected to result in additional debt service of $90 million to $99 million annually during the five-year period.

GOMB projects that General Funds spending will rise by $1.6 billion, or 4.1%, in FY2020 to $40.6 billion. Besides increases in step payments and pension expenses, the FY2020 forecast is based on additional elementary and secondary education spending of $350 million to meet the annual target increase of $350 million specified in education funding reform legislation enacted in August 2017. Medicaid spending is expected to increase by $397 million in FY2020, partly due to decreased federal reimbursements under the Affordable Care Act’s eligibility expansion and reduced cigarette tax receipts. By FY2024 General Funds expenditures are projected to climb to $44.7 billion.

Budget Balance and Backlog

After accounting for both interfund borrowing and step payments, GOMB projects a budget deficit of $1.0 billion in FY2019. Without policy changes, the projected deficit rises to $2.8 billion in FY2020 and stands at $3.2 billion in FY2024.

As a result, the backlog of unpaid bills is expected to increase to $7.8 billion at the end of FY2019 and jump to $10.6 billion by the end of FY2020. By FY2024 the projected backlog is $23.7 billion. GOMB’s conclusion: “Options must be considered for implementing structural reforms, imposing spending reductions and enhancing revenues to balance the State’s budget and resolve the budget shortfalls projected in this report.”

This task will fall to the new Governor-Elect, whose budget proposal for FY2020 is due on the third Wednesday of February, according to the State Budget Law. The scheduled date would be February 20, 2019, unless the General Assembly approves a delay. Although Governor Rauner presented his four budget proposals on time, his predecessors were granted numerous delays, including a reprieve of nearly two months for then-Governor Rod Blagojevich’s first budget, which was issued on April 9, 2003.