National Report Presents Tools for Sustainable State Budgeting

December 01, 2023

Federal pandemic assistance provided to states through the Coronavirus Aid, Relief and Economic Security (CARES) Act and American Rescue Plan Act (ARPA) contributed to budget surpluses for many states, which were used for a mix of one-time investments, ongoing commitments and reserves. These surpluses, however, were for the most part a reflection of temporary factors that are dissipating. Since the federal financial assistance will run out soon, states will have to decide how to balance their budgets in the coming fiscal years. A recent report published by Pew Charitable Trusts is focused on how states can create sustainable state budgets and manage future financial volatility. The study includes fact sheets for several states, including Illinois, that provide overviews of current practices and suggestions for improvement. The report recommends that states conduct long-term budget assessments and budget stress tests as a means to measure budget sustainability, address financial challenges, measure risk and project potential shortfalls. The research concluded that several states—including Illinois—already incorporate one or both of these methods and that these tools were informing policy. However, there is room for improvement in states already using these methods, and those that do not could build on existing work to expand their analyses. 

Long-term budget assessments help to identify structural deficits by making key revenue and spending projections, at least three years into the future, and use those projections to identify structural deficits and analyze ongoing fiscal sustainability. Illinois has a well-documented history of budget deficits, with spending outpacing revenue every year from FY2006 to FY2020. The State delayed several vendor payments to balance the budget, but such practices force governments to allocate significant portions of the budget to account for past financial commitments. The State’s bill backlog reached a peak of $16.7 billion in 2017 and has since been improved to a normal payment cycle.

The State of Illinois is one of fifteen states that currently conduct annual long-term budget assessments. The Commission on Government Forecasting and Accountability (COGFA) releases a Three-Year Budget Forecast each March that includes descriptions of challenges with corresponding causes and consequences, as well as growth scenarios to examine budget balance under various levels of spending. However, the Pew report notes that these reports hold less weight in budgeting than COGFA’s short-term revenue estimates. Pew recommends that the State of Illinois work to increase the impact of the Three-Year Budget Forecast through legislative outreach and collaboration. They further recommend that the report include more detailed findings and recommendations and that its release time be changed  to the beginning of the budget season.

The Illinois Governor’s Office of Management and Budget (GOMB) also produces an Economic and Fiscal Policy Report each November, which includes five-year revenue and spending forecasts and describes budget management strategies put forward by the Governor. These reports also detail budget management strategies, but do not discuss risks.

Budget stress tests gauge whether states are prepared for temporary shortfalls. In doing so, they identify possible scenarios that could cause budget stress, analyze the potential effects of the stress on budget conditions, and compare the scenarios’ negative effects with needed and available contingencies for addressing them. To date, according to Pew, thirteen states conduct regular budget stress tests. Illinois, however, does not produce a public stress test. (In the report Pew noted that COGFA analyzes stress scenarios, but does not publish the results). The State of Illinois’ prior lack of budgetary reserves put it at a serious disadvantage when the COVID-19 pandemic hit in 2020 and significantly reduced State revenue. Illinois was the only State to borrow from the Federal Reserve Bank’s backstop Municipal Liquidity Facility, in part because it did not have reserves to draw upon in an emergency. While the State paid off its $3.2 billion in short-term borrowing early, it still came at a cost to taxpayers that might not have been necessary if the State had emergency reserves. In recent years, the State has taken steps to rebuild its rainy day fund, which recently reached a balance of over $2 billion. Pew suggests COGFA incorporate recession analyses into the Three-Year Budget Forecast or release them as a stand-alone report, which could help policymakers set goals for future savings.

Currently, only eight states incorporate both tools in their policymaking process. The Civic Federation continues to recognize the improvement in the State’s financial footing and has long recommended that the State conduct analyses that would help public officials incorporate a longer-term perspective into the budgetary process.

Related Links:

Civic Federation FY2024 State Budget Analysis