Illinois’ Strenuous Fiscal Climb
Aug 20, 2019
By Michael A. Pagano
Director, Government Finance Research Center
Dean of the College of Urban Planning and Public Affairs, University of Illinois, Chicago
Like many states, Illinois faced monumental financial challenges during the Great Recession. The circumstances in Illinois, however, were more extreme and were dealt with through different means than others.
While California and New York raised taxes, they also agreed to contain expenditures such that the future wasn’t held liable for the present. Illinois raised revenue and grew spending, while continuing to offload costs onto unborn Illinoisans and immigrants by borrowing (Illinois’ credit rating ranks last of the fifty states) and ignoring our infrastructure assets (is there another state that approves only one capital bill per decade?).
The dilemma for Illinois seems always to have been how to promise more without confronting the hard choices. Or to make hard choices when nobody is looking. Take, for example, the so-called “veto session” of the legislature, which is an extra session following the November elections. It is an aggressive politicking time in which newly reelected legislators and the retiring legislators can actually vote on the hard choices without facing voter wrath. Witness, for example, the 2012 hike in the personal state income tax (a flat tax) from 3% to 5% and the corporate tax rate from 4.8% to 7%. Both rates were adjusted to carry through until 2015, when they would drop to 3.25% and 5.25%, respectively. The revenue side was addressed but spending, however, continued merrily along. Except that the state continued to provide inadequate funding for its pensions.
The can has been kicked so long that even the united efforts of both a newly elected governor in 2018 and a super-majority legislature, both of the same party and understanding of the overwhelming importance of getting the budget right, have been tightly constrained.
Although an NCSL report on Rainy Day funds states that Illinois does not have an ‘official rainy day fund, that’s not entirely accurate, as Illinois does have a Budget Stabilization Fund. Unfortunately, it’s been empty since 2017. The reason is not due to indifference, but due to the fact that the state still has unpaid bills (as of June 2019, the backlog was $6.6 billion which is an improvement over the $9 billion backlog in 2017). A backlog of that magnitude limits, if not eliminates, the possibility of building a savings account (rainy day fund) and preparing for the future downturns.
The state legislature approved a capital bill in 2019 for the first time since 2009. IT amounted to a staggering $45 billion, which includes $33 billion for transportation projects. At the macro level, an infusion of infrastructure funding to augment the economic development potential of the state is essential to the long-run wellbeing of the state. Replacement and expansion needs over the past decade soared reaching, for example, $7.8 billion for state facilities and $6.7 billion for higher education, and adoption of the capital bill was touted as an important step in rebuilding the state. How the capital projects were chosen and how the projects fit into a long-term capital plan are among the questions that analysts and the general public should find answers to. In the absence of any prioritization scheme or a performance measurement system that can compare projects’ impact, one is left wondering whether the best projects have been selected for funding. To those who might claim that something is better than nothing, we should remember that resources invested in Alaska’s infamous Bridge to Nowhere could have generated a much higher return on the investment somewhere else. Planning, prioritizing, and strategic thinking about the future economy of the state appear to have taken a back seat to expediency.
And let’s not forget the state’s pension liability. Not only is it huge, (>$130 billion) but the Illinois Supreme Court ruled that the state’s constitution forbids it from reducing benefits The emerging wisdom about this panic-inducing lability is that this is not the time to panic because it’s not yet a crisis that threatens payments to retirees. That may occur in the future, but not today. So, cool heads must prevail, reminiscent of Desmond Tutu’s advice on how to eat a hippopotamus (‘a bite at a time’).
The challenge for the state is not to ignore the pension liability but to address it purposefully. The days of arguing that the state can grow out of any financial liability are behind us. The state’s fiscal policies, including both the revenue/resource side along with the expenditure side, must certainly be confronted by the state’s policymakers. The question for Illinois is: Will our elected officials bet on the growth strategy (and do nothing) or make the hard choices? Stay tuned.