Estimating the COVID-19 Pandemic’s Impact on the State of Illinois Budget

May 04, 2020

UPDATE: On May 5, Illinois delayed the planned sale of $1.2 billion of short-term debt as it faces steep interest penalties from investors due to the coronavirus crisis. The sale was tentatively scheduled for May 6, but now the timing will depend on market conditions. Proceeds of the sale are intended to be used to help close the revenue gap described below in the State’s FY2020 budget. Illinois has the lowest credit rating of any state and is poorly positioned to face dramatic revenue declines because of its overwhelming pension obligations and large backlog of unpaid bills. Investors have recently demanded record high interest-rate premiums on Illinois debt.

When Illinois Governor J.B. Pritzker announced his budget proposal for the upcoming fiscal year in February 2020, the overall economic outlook was cautiously optimistic, with few signs of a recession on the horizon. The Governor’s budget assumed underlying annual growth of slightly more than 3% in income and sales taxes, the State’s largest revenue sources.

But in the past two months, economic disruptions aimed at controlling the coronavirus pandemic have upended financial plans in Illinois and other states and led to projections of dramatic revenue declines and gaping budget shortfalls across the country.

The Illinois Governor’s Office of Management and Budget (GOMB) released revised revenue forecasts for the current and upcoming fiscal years on April 15, 2020. For FY2020, which ends on June 30, the administration plans to use short-term borrowing to partially offset declining revenue, resulting in an estimated year-end general operating deficit of $255 million. The Illinois General Assembly hasn’t met since March 5 and has yet to pass a budget for FY2021, which starts on July 1. However, based on the Governor’s original spending plan, the General Funds operating deficit in FY2021 could reach $7.4 billion, after accounting for repayment of the FY2020 borrowing.

The revised revenue projections assume “large declines in economic activity in the second and third quarters of calendar year 2020, followed by a very gradual recovery that does not conclude until after fiscal year 2021,” according to the GOMB report. The agency said the numbers are subject to further revision, given uncertainty about the duration and impact of efforts to contain the virus.

FY2020 Revisions

State-source revenues for FY2020 are now projected at $34.2 billion, a decrease of $2.7 billion, or 7.2%, from the February estimate of $36.9 billion and $1.4 billion, or 4.1%, below FY2019’s $33.6 billion. The largest decrease is in individual income taxes, which are expected to decline by $1.3 billion, or 6.9%, to $18.1 billion from the February estimate. Approximately $1 billion of the decrease is related to the three-month extension of the deadline for paying 2019 income taxes until July 15, which falls in the State’s 2021 fiscal year. Payments that are deferred until the new filing date will be booked in FY2021 for budget purposes. In addition, job losses due to the economic shutdown are expected to reduce withholding taxes in the last quarter of FY2020. Corporate income taxes are projected to fall by $299 million, or 12.0%, from the February estimate to $2.2 billion, partly due to deferred collection of $100 million due to the filing extension. Estimated corporate income tax payments for 2020 are also expected to decline, reflecting the drop in the stock market and reduced business activity. Estimated taxes are quarterly payments made by all corporations and by individuals with income not subject to tax withholding by employers.

Sales taxes are forecast at $8.0 billion, a decrease of $743 million, or 8.4%, from the February estimate. The projection is based on business closures, social distancing and event cancellations, as well as reduced consumer spending due to lost income and lower valued investment portfolios. Revenues from lottery sales and casino gaming are expected to decline due to reduced economic activity. Illinois gambling operations, including casinos and video gaming, have been shut down since mid-March. The shortfall in gaming receipts, which are used to help pay debt service on capital projects, will also require an additional $120 million transfer from General Funds to cover those costs.

The decrease in anticipated revenues from the State’s own sources is partly offset by increased federal revenues, according to GOMB’s forecast. Federal revenues deposited in General Funds, which are mainly related to reimbursements for State Medicaid spending, are expected to increase by $459 million, or 14.6%, to $3.6 billion due to increased federal reimbursements. As part of the federal Families First Coronavirus Response Act passed in March 2020, the federal Medicaid matching rate was increased by 6.2 percentage points retroactive to January. For Illinois, the enhancement means that the federal government currently pays 56.34% of most Medicaid costs instead of 50.14%. The federal reimbursement increase does not apply to Medicaid beneficiaries who are covered due to the Affordable Care Act, for whom the matching rate is 90%.

Overall, General Funds revenues are expected to decline by $2.2 billion, or 5.5%, to $37.8 billion from $40.0 billion in the February estimate. The following table compares the revised FY2020 budget with the FY2020 budget estimate included in the proposed FY2021 budget. The table also shows actions being taken to close the revenue shortfall, which are discussed below.

Preliminary Revisions to State of Illinois FY2020 General Funds Budget:
   (in $ millions)*
  February 2020 Estimate  April 2020 Revised Estimate  $      Change  %       Change 
Net Individual Income Taxes  $         19,435  $     18,099  $  (1,336) -6.9%
Net Corporate Income Taxes  $           2,490  $      2,191  $     (299) -12.0%
Net Sales Taxes  $           8,740  $      8,003  $     (737) -8.4%
Public Utility Taxes  $              846  $         846  $         -   0.0%
Other Taxes and Fees  $           2,725  $      2,622  $     (103) -3.8%
Lottery  $              700  $         550  $     (150) -21.4%
Riverboat Gaming Taxes  $              261  $         204  $       (57) -21.8%
Adult-Use Cannabis  $                15  $           15  $         -   0.0%
Other Transfers  $           1,675  $      1,702  $        27 1.6%
Total State Source Revenues  $          36,886  $     34,229  $  (2,657) -7.2%
Federal Revenues  $           3,154  $       3,613  $       459 14.6%
Total Revenues  $          40,040  $     37,842  $  (2,198) -5.5%
Interfund Borrowing  $              150  $          473  $       323 215.3%
Treasurer's Investment Borrowing  $              400  $          400  $         -   0.0%
Short-Term Borrowing  $                   -  $       1,200  $    1,200 na
Total Resources Including Borrowing  $          40,590  $     39,915  $     (675) -1.7%
Agency Expenditures  $          27,445  $     27,445  $           - 0.0%
(Spending Controls)  $                   -  $          (25)  $        (25) na
Group Insurance Payments  $           2,028  $       2,028  $           - 0.0%
Pension Contributions  $           8,113  $       8,113  $           - 0.0%
Statutory Transfers  $              393  $          393  $           - 0.0%
Debt Service Transfers   $           1,827  $       1,947  $       120 6.6%
Interfund/Short-Term Borrowing Repayment**  $              578  $          178  $      (400) -69.2%
Total Expenditures  $          40,385  $     40,079  $      (306) -0.8%
Operating Surplus (Deficit) Before Supplemental Appropriation  $              205  $        (164)  $     (369) -180.0%
Supplemental Appropriation Needed  $               (91)  $          (91)  $         -   0.0%
Operating Surplus (Deficit)   $              114  $        (255)  $      (369) -323.7%
*Totals may not sum due to rounding.
**Includes interest on the Treasurer's investment borrowing of $8 million.
Source: Illinois State FY2021 Budget, p. 51; State of Illinois, Governor's Office of Management and Budget, April 2020 Revenue Forecast Revision; Civic Federation calculations.

FY2020 Gap-Closing Measures

To help offset the revenue loss, the administration is relying mainly on additional borrowing. On May 6, the State plans to sell $1.2 billion of General Obligation debt certificates that must be repaid next year. This kind of short-term borrowing in response to unanticipated revenue shortfalls is authorized by the Illinois Constitution and was last used in FY2011 in the wake of the Great Recession.

The State Treasurer has also agreed to extend until FY2021 $400 million of investments with the Illinois Comptroller that were scheduled to be repaid during the current fiscal year. The Treasurer may borrow from other State funds to invest up to $2 billion with the Comptroller to pay down the State’s multi-billion dollar backlog of unpaid bills. The Treasurer’s investments carry lower interest rates than the State’s steep statutory interest penalties for past-due bills.

The Comptroller borrowed $323 million directly from other State funds in March and April to support the General Funds, increasing FY2020 interfund borrowing to $473 million from an initially projected $150 million. That borrowing must be repaid in 48 months.

In addition, the State expects to reduce General Funds expenditures by $25 million by curbing non-essential purchases, travel and hiring. The projected result is a $255 million budget deficit at the end of FY2020, instead of the initially projected $114 million surplus.

FY2021 Revisions

Despite original projections of moderate underlying growth in the State’s main revenue sources, the Governor’s proposed FY2021 budget relied on $1.4 billion in revenue that would have been available only upon approval of a constitutional amendment in November 2020. Expected revenue losses due to the pandemic suggest a far larger budget gap—or deeper spending reductions—if voters reject a shift from a flat-rate tax to a graduated rate structure.

The April revisions forecast individual income taxes of $18.4 billion in FY2021, a decrease of $1.8 billion, or 8.8%, from the February estimate of $20.1 billion. The April number includes about $1 billion of deferred collections due to tax filing deadline extension; without the timing shift, individual income taxes in FY2021 would be about $2.8 billion, or 13.7%, below the February estimate. The revised estimate is based on a poor employment outlook through FY2021 and significantly lower estimated tax payments as a result of the stock market drop off.

Corporate income taxes are expected to total $2.0 billion, which is $442 million, or 17.8%, below the February estimate. The revised number includes about $100 million of deferred receipts from FY2020; without the timing shift, receipts would have been about $542 million, or 21.8%, below the original estimate. Economic growth is assumed to resume in FY2021, but corporate losses in FY2020 are expected to be used to offset taxable income in the following year.  

Sales taxes are projected to be $1.6 billion, or 17.5%, below the February estimate at $7.5 billion. Federal relief efforts are projected to have a modest impact, and year-over-year growth in receipts is expected to resume only in the last fiscal quarter of FY2021. Additional declines are forecast in lottery, gaming and other receipts, including the elimination of a previously expected transfer of $170 million in surplus funds from the account that pays income tax refunds.

Federal revenues are essentially flat from the February estimate. Additional revenues from the enhanced federal reimbursement and increased State Medicaid spending are assumed to be offset by longer delays in bill payments. At this point, it is not clear how long the higher Medicaid matching rate will last; the federal legislation states that it will end on the last day of the quarter in which the national public health emergency ends. 

If approved by voters in November, the graduated income tax proposal would take effect in January 2021, midway through the fiscal year. The new structure was originally expected to bring in $1.4 billion in FY2021, but the estimate was decreased in April by $261 million, or 18.2%, to about $1.2 billion. Full-year revenues from the new tax are now estimated at $3.1 billion, down from $3.6 billion, according to bond documents related to the May 6 borrowing. The GOMB report does not explain the decline, but the new rate structure relies heavily on volatile highest incomes, which depend more on investment and business income.

As shown in the next table, FY2021 revenues decline by $4.6 billion, or 11.0%, to $37.5 billion from $42.1 billion in the February proposal.

Because the General Assembly has not yet passed an FY2021 budget, the expenditure figures in the table are from Governor Pritzker’s proposed budget, with one exception. There is an increase of $1.6 billion to account for repayment of the $1.2 billion in debt certificates sold in FY2020 and the $400 million in Treasurer’s investments carried over to FY2021. (The Civic Federation estimated interest payments of $59 million because GOMB declined to provide the figure it used to calculate the operating deficit.)

The result is an operating deficit of $6.2 billion if the graduated tax is approved and $7.4 billion if it is not approved. It should be noted that the Governor’s proposed budget included agency spending increases of $1.7 billion, or 6.3%, from FY2020. Agency spending does not include pension contributions, group insurance payments and required transfers for debt service, which are subject to various legal and contractual restrictions. If the graduated tax is not approved, the Governor recommended spending reductions and revenue transfers totaling nearly $1.4 billion, resulting in an operating surplus of $69 million.

Corona Virus-Related Revisions to State of Illinois Proposed FY2021 General Funds Budget:
 (in $ millions)1
  Proposed (February 2020)  Revised   (April 2020)         $      Change  %     Change 
Net Individual Income Taxes  $            20,126  $        18,361  $           (1,765) -8.8%
Net Corporate Income Taxes  $              2,489  $          2,047  $             (442) -17.8%
Net Sales Taxes  $              9,038  $          7,453  $           (1,585) -17.5%
Public Utility Taxes  $                 828  $             828  $                 -   0.0%
Other Taxes and Fees  $              2,532  $          2,424  $             (108) -4.3%
Lottery  $                 728  $             636  $               (92) -12.6%
Riverboat Gaming Taxes  $                 258  $             251  $                 (7) -2.7%
Adult-Use Cannabis  $                   46  $               46  $                 -   0.0%
Other Transfers  $              1,000  $             653  $             (347) -34.7%
Total State Source Revenues  $             37,045  $         32,699  $           (4,346) -11.7%
Federal Revenues  $               3,651  $           3,634  $               (17) -0.5%
Total Revenues  $             40,696  $         36,333  $           (4,363) -10.7%
Additional Revenue from Graduated Income Tax2  $               1,435  $           1,174  $             (261) -18.2%
Total Resources Including Graduated Income Tax  $             42,131  $         37,506  $           (4,625) -11.0%
Agency Expenditures  $             29,180  $         29,180  $                   - 0.0%
Group Insurance Payments  $               2,022  $           2,022  $                   - 0.0%
Pension Contributions  $               8,624  $           8,624  $                   - 0.0%
Statutory Transfers  $                  401  $             401  $                   - 0.0%
Debt Service Transfers   $               1,706  $           1,706  $                   - 0.0%
Repayment of Interfund,Treasurer's Investment and Short-Term Borrowing3  $                   90  $           1,749  $            1,659 1843.3%
Total Expenditures  $             42,023  $         43,682  $            1,659 3.9%
Operating Surplus (Deficit)   $                  108  $         (6,176)  $           (6,284) -5818.5%
Adjustment to Resources in Lieu of Graduated Income Tax   $             (1,435)  $         (1,174)  $               261 -18.2%
Appropriation Reserve and Revenue Transfers in Lieu of Graduated Income Tax   $               1,396  na   na  na
Revised Operating Surplus (Deficit) in Lieu of Graduated Income Tax  $                   69  $         (7,350)  $           (7,419) -10752.2%
1Totals may not sum due to rounding.
2Graduated income tax rates in Public Act 101-0008 take effect on January 1, 2021 only if Senate Joint Resolution Constitutional Amendment 1 is approved by voters in November 2020. 
3The revised figure includes a Civic Federation estimate of interest on borrowing. 
Source: Illinois State FY2021 Budget, pp. 51, 62 and 63 ; State of Illinois, Governor's Office of Management and Budget, April 2020 Revenue Forecast Revision; Civic Federation calculations.

In announcing the revised revenue estimates on April 15, Governor Pritzker repeated his request for federal assistance for Illinois and other states to cope with revenue shortfalls. The National Governor’s Association has pressed for $500 billion to stabilize state finances, but the request has met resistance in Congress. Although Illinois received $3.5 billion under the federal Coronavirus Aid, Relief and Economic Security (CARES) Act, the money is restricted to paying for new expenses to combat COVID-19.

The revised revenue forecast did not address the State’s $45 billion Rebuild Illinois capital plan, which relies on revenues from gambling and motor fuel taxes.  Bond documents related to the May 6 borrowing explain that the State “makes no prediction” about how revenues supporting Rebuild Illinois might be affected by the pandemic or measures to control the outbreak.