Illinois Faces Daunting Fiscal Challenge

SPRINGFIELD, Illinois — The Illinois General Assembly has given itself five years to fix the state’s dismal fiscal situation. It will be a painful five years.

The countdown is timed to new personal and corporate income taxes approved by lawmakers this January. Most of them will expire in January 2016. Before the extra revenue sources go away, the state somehow needs to get itself back on a permanently stable financial footing. The 2011 tax increases won’t do that by themselves.

In fact, they won’t come close. Even though they bring in more money than the entire state budget of Iowa, legislative forecasters say the only way the tax hikes would lift Illinois out of the fiscal hole it has spent years digging for itself would be if lawmakers kept spending flat through 2014. That’s unlikely, given growing bills for pensions and health care. And right now, at least, it is hard to imagine any more tax increases during the five-year period. So massive program cuts are certain to come, on top of cuts that already have been made.

That is why nearly 200 anti-poverty activists came to the front lawn of the state Capitol last month, rallied beneath the statue of Abraham Lincoln, and pleaded with legislators not to make any more reductions in services to the homeless.

It is a familiar plea. Groups that help the poor — including those that provide food and shelter to the homeless — have been especially hard-hit by recent spending cuts. A fund to help families keep their homes, for example, once had a yearly budget of $11 million; now Governor Pat Quinn wants to reduce that to $1 million. State money for shelters and other emergency housing would be cut in half in the budget Quinn has proposed. Funding for homeless youth has already been cut by a third.

For the crowd of activists who came to the statehouse in a caravan of school buses that day, it is too much. “No more cuts!” they chanted. “No more cuts!” But even if services for the homeless are spared, very little else will be. Legislators have few options.

“There are days when I still wonder whether a majority of lawmakers grasp the long-term severity of the state’s budget problems,” says state Senator Jeffrey Schoenberg, a co-chair of the legislature’s financial forecasting panel. “Tremendous strides have been made to provide certainty and stability for taxpayers, but ultimately we are still going to have to confront difficult choices.”

In Illinois, that may be a considerable understatement. The hard choices could include further hits to human service providers, who, besides seeing their budgets dwindle, routinely have had to wait six months or more for the state to pay what it owes them. Pension and retirement benefits for state workers are on the table for slicing. So, too, is the long-sacrosanct funding for local schools.

Turning the corner

Illinois’ budget woes have been complicated by the legislature’s persistent habit of delaying the day of reckoning. The state hasn’t had a balanced budget since 2001. It papered over its budget problems by stringing out payments to doctors, pharmacists, schools and local governments. It diverted money designated for special purposes to pay for general operations. It borrowed money to cover its annual pension payments. For the last three years, lawmakers approved budgets that decreased overall state spending but failed to specify the details — they left the politically unsavory specifics of what to cut to the governor.

So it is significant that, for the first time in recent memory, legislators are beginning to confront the serious structural problems of the state fiscal system. But the relative improvements belie the staggering problem. By the end of July, the comptroller’s office says, the state’s budget hole will still be $8 billion.

Before the January tax increase, legislators made changes to the state’s pension system, the nation’s worst-funded. Last year, they raised the retirement age for state employees from 60 to 67—now the highest in the country—and prohibited “double dipping” by retired workers who draw pension checks while working for another agency of government.

The January increase temporarily raised Illinois’ personal income tax rate from 3 percent to 5 percent. Corporate tax rates went up too. The package capped spending increases at a 2 percent rate for the next five years, while the bulk of the tax increases are in effect.

The measure, passed in the waning days of a lame-duck legislative session, was even more audacious than the proposal originally proposed by the governor. Quinn had long called for an income tax increase of a single percentage point, but discussions with Wall Street analysts convinced him to seek the higher rate.

“The state was careening toward bankruptcy, to fiscal insolvency,” Quinn explained shortly after Illinois legislators voted for the higher rates. “Even in the last couple of months, we got seriously much more dire. The idea here is a temporary income tax to deal with the immediate fiscal emergency the state faces.”

Still, Quinn did not get everything he wanted. The package did not, for example, include a cigarette tax hike to supplement the new revenues. And legislators refused to go along with his push for even more borrowing to pay down the state’s enormous backlog of bills. At the end of March, Illinois had more than 200,000 unpaid bills that totaled $4.5 billion.

What Illinois legislators did was find a way to stop digging themselves into a deeper hole. Now they must find a way to climb out of the one that has taken years to create.

Spending pressures

Some of the changes made so far will have little or no immediate effect on the fiscal crisis. With pensions, for example, the changes apply only to new hires, so they won’t improve the budget situation for years to come. In the meantime, the state made its last two years’ worth of contributions to its pension system by borrowing the money on Wall Street. Now it has to pay back that money—with interest—even as the size of the checks it must write to the pension funds gets larger every year.

Lawmakers are considering changes to Medicaid, such as greater use of managed care for patients. But most of the proposals in this area are about improving patients’ health in the long term. The state won’t reap the financial rewards for those types of programs for years. Democratic state Senator Donne Trotter, a budget negotiator who approves of much of what has been done, admits that the short-term effect will be slight. “These are things that basically are not going to kick in for a couple years, so we still have to make some serious reductions in our state spending.”

Where will they come from? Schoenberg, Trotter’s fellow Senate Democrat, wants to eliminate or cut back the expensive practice of providing health insurance to retired state workers before they qualify for Medicare at age 65. In the early 2000s, the state tried to save money by offering early retirement to some of these workers, and 11,000 of them left the state workforce. But those retirees—even the ones who quickly moved to jobs in the private sector—by and large do not pay premiums for their health insurance. Schoenberg hopes to change that by the time the General Assembly wraps up its work this spring. The result would be a significant short-term reduction in spending.

Republicans want even bigger reductions. Matt Murphy, a Republican state senator, has moved out front with a long list of recommendations. Murphy, who ran unsuccessfully for lieutenant governor last year, thinks major changes to the pension system are still needed. He wants to tighten up the state’s generous Medicaid eligibility standards. And he says public schools, long the favorite cause of Illinois legislators, don’t need nearly as much money as they are getting from Springfield. Illinois schools, Murphy argues, have a permanent revenue source in local property taxes, and could absorb substantial cuts in the state’s education budget.

“These are the three big things that we fund,” he says, referring to pensions, health care and schools. “It’s not popular, but if you’re willing to reduce some of these things, the reward is great.” Murphy’s goal is to cut enough from the budget to be able to repeal the income tax increases before the five-year clock stops ticking; the cuts he is recommending would amount to one out of every seven dollars spent by the state.

Of course, raising taxes one more time would be another way to fill the fiscal hole, but there seems little chance that legislators will pass more tax increases anytime soon. Still, Ralph Martire, the executive director of the Center for Tax and Budget Accountability in Chicago, says lawmakers missed a golden opportunity this winter when they did not apply the state’s sales taxes to services.

Nearly half of Illinois’ economy is based on services, but the state taxes only a handful of services that deal mostly with utilities or tourism, such as hotel rooms and car rentals. Legislative forecasters say increasing the number of routine services that come under the sales tax, depending on whether business-to-business transactions are included, could bring in between $4 billion and $8 billion a year.

Martire, who has worked with Senate Democrats on the budget, says not expanding the sales tax could hurt lawmakers politically. In the current situation, Martire says, legislators will have to tell the voters that “the bad news is, I just raised your taxes. The worse news is, I’m now going to underfund your schools and cut other services you care about.” With an expanded tax base applied to services, he says, legislators could have told their constituents that taxes were going up but social programs would be spared more cuts.

Hitting human services

For all the debate and protest, Illinois has generally avoided making the kinds of high-visibility cuts to government that have been making headlines in other states. Some employees have had to take unpaid time off, but there has been nothing like the “Furlough Fridays” that closed DMV offices in California and prevented residents from getting driver’s licenses one day a week. Unlike in Arizona and Virginia, highway rest stops have stayed open. Illinois briefly closed a dozen historic sites and state parks, but Quinn reversed that decision soon after becoming governor.

Instead, human services, including help for the homeless, have been particularly hard-hit. “There are higher caseloads. There is no administrative staff left,” says Daria Mueller, senior policy analyst for the Chicago Coalition for the Homeless. Shelters and other providers have had to turn away homeless kids. A survey by the coalition says it happened last year 4,775 times.

In Springfield, the calculations leading to human services cutbacks have been relatively straightforward. As the state’s revenue declined in the recession, large swaths of the budget were essentially off-limits. Education has long been protected, because it is politically popular. Pensions had to be paid—even if it was with borrowed money. The federal stimulus law severely curtailed the state’s ability to reduce Medicaid spending. Even in normal times, Medicaid is difficult to cut because the federal government pays for half of it. That means cutting $1 only saves the state of Illinois 50 cents.

The budget for the state’s Department of Human Services is relatively small, just shy of 9 cents out of every dollar in the budget proposal Quinn put forward for next year. But with so many areas of the budget difficult or impossible to cut, budget writers may still have to take big chunks out of Human Services to have any appreciable impact on the state’s total budget.

This year, rank-and-file legislators are getting more involved than usual in determining the details of the budget. Rather than relying on leadership, more of them are getting a closer look at where state money is going. Presumably, the hands-on approach will help them weigh the cases presented by Mueller and other advocates for the needy against the burden of shoring up the finances of the state.

Whether more involvement will lead to a better result remains to be seen. “Out of the 177 members (of the General Assembly), there’s not one who doesn’t believe that something needs to be done and needs to be done now,” says Trotter. “Having said that, out of 177 people, there might be 177 different ways they want to change. But at least everybody is still thinking change has to come.”