Cautious Optimism: “From Crisis after Crisis to Better Outcomes & Brighter Futures”
February 15, 2023, marked the fifth budget address which Governor Pritzker has given to the General Assembly. Those who regularly pay attention to these things will note that this particular budget address differed dramatically from any prior one Governor Pritzker, or for that matter any of his recent predecessors, in one key way: optimism about the state’s fiscal condition.
That’s a far cry from the last two decades when any discussion of the state’s finances inevitably focused on finding a way to navigate out of crisis after crisis. And the best news is the Governor’s optimism is not just a political ruse — but well earned. The state of Illinois’ General Fund is in the best fiscal condition it has seen for decades, in large part due to the Pritzker Administration’s responsible stewardship of the state’s finances. Over the past four years, the Pritzker Administration has been able to leverage financial assistance provided by the federal government during the pandemic, and unexpected revenue growth, to help pay down the state’s bill backlog, pay-off state loans, pre-pay some pension debt, and invest in creating a much healthier Rainy Day Fund.
For instance, as the Governor himself pointed out during his speech, the state has paid the full $250 million it owed to the College Illinois! Program, which was established to help contain the rising cost of college faced by Illinois families by locking in tomorrow’s tuition costs at today’s rates. In addition, over the last two fiscal years his administration, among other things, has:
i. pre-paid $700 million in debt owed to the state’s five public pension systems;
ii. eliminated $3 billion in back-due bills, including health insurance claims of state workers;
iii. repaid $3.0 billion — of which $1.985 billion was repaid early — in COVID-related borrowings;
iv. deposited $4.063 billion into the state’s Unemployment Insurance Trust Fund; and
v. built-up the state’s “Rainy Day” Fund (actually called the “Budget Stabilization Fund”) to a historically high level that is projected to exceed $2 billion by the end of FY 2024.
The Rainy Day Fund revenue is available to fill fiscal holes during economic downturns. It should be noted that from FY 2002 through FY 2016, the state’s Rainy Day Fund hovered between $200 and $400 million — and was reduced to zero during the Rauner Administration.
The net result of handling fiscal matters in a responsible fashion is savings for taxpayers. For instance, as recently as FY 2018, the state was so behind on paying vendors for providing services that it had to pay $981 million in late payment interest alone. That’s almost one billion dollars of taxpayer money that could have funded services but instead had to be used to cover penalties for being late in making payments the state owed for services that had been rendered in the past. By FY 2023, the late payment interest penalty Illinois had to pay was down to $8 million.
Make no mistake about it, good fiscal news for the state’s General Fund is good news for every community in Illinois. That is because around 95% of all General Fund spending on services goes to the four core areas of Education (Pre-K, K-12, and Higher Education), Healthcare, Human Services, and Public Safety. For too long, the state’s structural fiscal problems have forced decision-makers to cut Illinois’ real, inflation-adjusted investment in those core services. Just last year, Illinois’ funding for those services was collectively 16% less in real terms than it was in FY 2000, resulting in inadequate funding for schools, and inadequate capacity to meet the health, safety, and human service needs of everyone from senior citizens to individuals with disabilities, mental health concerns, or who have suffered from domestic violence. (For more information, read CTBA’s analysis of the FY 2023 General Fund budget.)
In addition to paying down state debt, Governor Pritzker noted that the General Fund budget has been “balanced” for four consecutive years, with another balanced budget proposed in FY 2024. And while that is technically accurate when considered solely on an “on-budget” basis — it does not tell the whole story about Illinois’ fiscal condition. That is because an “on-budget” balance simply means the revenue projected for the current fiscal year will at least be equal to the dollar amount of spending appropriations made for said year. What an “on-budget” analysis fails to account for, however, is any unpaid bills left over from the prior fiscal year which will have to be paid during the current fiscal year. The dollar amount of the bill backlog is called the “accumulated deficit.”
When Governor Pritzker gave his first budget address covering the then-proposed FY 2020 General Fund, the projected revenue did cover all the proposed appropriations, so there was a technical “on-budget” balance. Unfortunately, but there was also a backlog of bills left unpaid from FY 2019 of nearly $7.8 billion. Which means the state was effectively deficit spending by that amount. Since that time, the Pritzker Administration has utilized unexpected revenue growth that generated some “on-budget” surpluses, as well as other responsible fiscal practices like prepaying pension debt and other liabilities, to chip away at the accumulated deficit. The net result: the $1.15 billion accumulated deficit that is projected for the General Fund at the end of FY 2024 will be the lowest — in nominal, non-inflation adjusted dollars that it has been in nearly 25 years.
In fact, the on-budget surplus for FY 2023 was significant enough in amount ($4.93 billion) to create true balance at the end of FY 2023, with no accumulated deficit carrying forward into FY 2024, except that the state instead opted to use $1.8 billion of its “on-budget” revenue surplus from FY 2023 to deposit into its UI Trust Fund — a rational decision that ultimately saves interest costs.
As Illinois moves from fretting over its fiscal crisis to a far better — and healthier — financial position, it is time for decision-makers to reconsider the state’s fiscal priorities, as well as fiscal system, with an eye toward building a sustainable path to investing in those four core service areas that are crucial to the quality of life in, and economic vitality of, every community in the state. To his credit, Governor Pritzker is using his FY 2024 General Fund budget proposal to begin that process.
For instance, the FY 2024 General Fund budget proposal that was just put on the table calls for a year-to-year increase in funding for each of the four, core service areas of Education, Healthcare, Human Services, and Public Safety. One key initiative of the Governor is to build the infrastructure for Early Childhood Education in Illinois. Hence, it is no surprise that the FY 2024 proposal targets early childhood for a substantial increase of $75 million over FY 2023 levels.
For K-12 Education, the state’s Evidence-Based Funding Formula (“EBF”) is slated to receive the $350 million year-to-year increase. This comports with past practice and satisfies the minimum increase identified in the legislation. However, the EBF also provides that it should be fully funded within 10 years of its initial implementation, which would be FY 2027. Making the minimum targeted investment won’t allow the state to hit that mark. Indeed, it will delay full funding of the EBF until FY 2038 — and concomitantly lose another generation of Illinois children to underfunded schools. Given the unexpected, yet significant, uptick in the state’s revenue, it would make sense for Illinois to bump its investment in the EBF up from the statutory minimum to $550 million — and keep it at that level for the next few years. This would allow Illinois to fully fund the EBF by FY 2030, and provide an adequate education to all children in the state a generation sooner.
Meanwhile, the FY 2024 General Fund budget proposal would boost funding for the state’s Monetary Award Program — or “MAP” — of $100 million over FY 2023. MAP provides grants to low-income students who otherwise couldn’t afford college. This boost in funding for MAP is sorely needed, as it counters the decades-long underfunding of the program.
It is a real positive for people across the state that Illinois’ fiscal condition has improved to the point where the state can invest more in needed services. However, for the state to continue to have the capacity to make needed investments sustainably over the long haul, it will have to eliminate the two primary drivers of its historic deficits, one revenue-based, the other cost-based.
The state’s revenue generation problems are caused by Illinois’ tax policy shortcomings. Illinois’ flawed state tax policy is simply not designed to work in the modern economy. Hence, it has historically failed to generate adequate annual revenue growth to cover the cost of providing the same level of services from one fiscal year into the next. That’s called a structural deficit — and Illinois still has one. The recent unexpected revenue growth is due in large part to some unique economic factors that mask the design problems in Illinois tax policy.
Then on the cost side of the ledger, there is the unaffordably backloaded design of the debt payment schedule created in the “Pension Ramp,” which was enacted in 1995. Illinois incurred this debt — which now stands at over $139.7 billion — because for generations elected officials in both parties approved the irresponsible practice of underfunding the actuarially required contributions owed to the state’s pension systems as a way to maintain spending on services, despite the annual revenue shortfalls being caused by the structural deficit.
Effectively they ran up debt to the pension systems, using them a credit card to cover the cost of services — rather than raise adequate recurring tax revenue to pay for services. That irresponsible decision still haunts the state to this day. The Pension Ramp will continue to artificially strain state resources going forward — and thus, interferes with decision-makers’ ability to invest adequately in core services.
The bottom line here is clear: the Pritzker Administration should be commended for its responsible stewardship of Illinois’ fiscal system, and putting the state in a position to actually consider how best to invest in its future. But for Illinois to have the capacity to sustain those investments, there is still some work to do.
