A Fiscal Rehabilitation Plan for the State of Illinois
An Analysis of the State’s Fiscal Crisis and Actionable Recommendations for Governor Pat Quinn and the Illinois General Assembly
The Fiscal Rehabilitation Plan for the State of Illinois describes the basis of Illinois’ current fiscal crisis and presents the Civic Federation’s plan to salvage the State’s finances. This plan calls for a comprehensive package of budget cuts, pension reforms, and revenue increases to put Illinois on solid financial footing and address its nationally-recognized fiscal crisis.
Illinois’ Fiscal Crisis
Illinois is facing a fiscal crisis that is expected to result in a deficit of at least $12.8 billion going into fiscal year 2011. As in other states, the economic recession that started in December of 2007 has contributed significantly to Illinois’ poor fiscal health.
However, Illinois also entered the recession in worse fiscal condition than most other states because of a failure to deal with its structural deficit, a situation in which a government’s growth in expenditures consistently outpaces its growth in revenues. One of the biggest problems has been Illinois’ historically underfunded retirement systems, which have put increasing pressure on the State’s operating budget.
The report provides a description of how the crisis is affecting residents, public employees, social service agencies, and local governments.
The Fiscal Rehabilitation Plan for the State of Illinois
After considering actions taken by other states and proposals from other civic organizations and lawmakers, the Civic Federation has concluded that the scope of the State’s fiscal crisis requires a combination of remedies. The problem is too large to be solved solely by budget cuts or tax increases.
Without pension reforms and spending cuts included in this plan, the Civic Federation opposes any new revenue increases.
The Civic Federation offers the following proposal:
- The State must first enact reforms of its retirement systems. These reforms must include additional employee contributions and reduced benefits for new State employees.
- Expenditures must be cut by at least $2.1 billion. General Funds spending should be rolled back to FY2007 levels, with the exception of Medicaid and General State Aid to elementary and secondary education. These areas will be kept at FY2010 levels to prevent loss of federal stimulus funds and protect critical funding to local school districts.
- Employee contributions to the retirement systems and the State’s group health insurance plan must be increased. Along with other changes detailed in the report, these measures are expected to save the State more than $400 million.
- The Civic Federation opposes any revenue increases until pension reforms are undertaken and at least $2.5 billion in budget cuts and savings have been made.
- The state income tax rate should be increased from 3% to 5% for individuals and 4.8% to 6.4% for corporations. This increase is expected to raise about $6.0 billion in new revenues.
- The State should repeal the income tax exemption for federally taxed portions of retirement and Social Security income. This step is expected to raise $1.6 billion at the personal income tax rate of 5%.
- The State should enact a $1 a pack increase in cigarette taxes and end specific business tax deductions or credits that are outdated and economically inefficient, such as the income tax credit for research and development.
If this budget plan were enacted, the State would pay down more than $10 billion or nearly 84% of its $12.8 billion deficit in FY2011.
Because the remaining $2.1 billion budget gap would not be closed until FY2012, the State should continue to spend at FY2007 levels until the backlog of bills associated with the deficit are paid off.
All other new revenue in FY2012 and beyond will be needed to make the required statutory pension contribution, which will increase in future years.
"Illinois' fiscal crisis has been many years in the making," said Civic Federation President Laurence Msall. "It was caused by more than 30 years of pension underfunding and many years of spending unfettered by the State's shrinking revenue resources. The Civic Federation does not enjoy advocating a significant tax increase in the middle of a recession. However, continuing to do nothing would be by far a worse option."
The Civic Federation recommends that the State consider the following additional measures to improve its fiscal outlook:
- Longer term proposals, including reducing non-vested pension benefits for current state employees.
- Shifting state Medicaid spending from institutional care for the elderly and disabled to home- and community-based care.
- Consolidating the State’s hundreds of special purpose funds to allow for maximum flexibility in allocating resources to meet policy priorities.
The Federation also recommends that the State study the feasibility of extending the sales tax to consumer services to broaden Illinois’ tax base.
The Civic Federation has also prepared several tutorials to help explain Illinois' fiscal crisis:
The Civic Federation would like to express its gratitude to:
for its support for the Institute for Illinois' Fiscal Sustainability and
for funding the research and analysis for the report.
For more information on the origins of the State of Illinois' fiscal crisis, please read the following posts from the IIFS blog:
2/13/10 "State Still Waiting On Budget Reform"
"Although the Governor and General Assembly enacted laws to provide for ethics reform and campaign finance reform last year, much needed fiscal reform of the State’s budget has yet to make it to the top of the legislative agenda in Illinois."
"The [IIFS] analysis shows that the State already faces a two-year budget deficit going into FY2011 totaling at least $12.8 billion but it also revealed that the Governor plans to spend an addition $885 million before the fiscal year ends on June 30."
"The State’s unpaid bills could reach $5 billion by the end of December, according to the Comptroller’s office."
11/24/09 "Report Suggests More State Revenue Declines"
"Including the $900 million revenue adjustment and the increase in state spending approved during the General Assembly’s October Veto session, the State is already facing a deficit of at least $4.8 billion at the end of the fiscal year."
"The State of Illinois’ personal income tax revenue for FY2010 is now expected to be $850 million lower than projected when the budget was approved in July 2009 [...]"
9/15/09 "The Check is (Not) in the Mail"
"Although State revenues and expenditures seem to be in balance in the data provided for FY2010, other details regarding total unpaid bills and the amount of short-term debt issued by the State cast doubt on this positive outlook."
8/18/09 "The Elephant in the Room"
"In other words, what the State was planning to do is equivalent to a consumer taking out cash during a mortgage refinancing to pay for her ongoing bills."
8/12/09 "Is Illinois' New Budget Balanced?"
"More details are finally available on the FY2010 operating budget, and it would be difficult to describe it as balanced—even on paper."
8/3/09 "Governor Puts Off Budget Cuts"
"The State plans to borrow about $3.5 billion to help meet its required pension fund payments, and it will continue to leave about $3.9 billion in bills unpaid through the end of the year."