CTBA Responds to Governor Pritzker’s FY 2022 Budget Address
By CTBA Staff
If nothing else, Governor Pritzker’s FY 2022 General Fund budget proposal was sobering. After acknowledging he had bolder plans for the state’s upcoming fiscal year, the Governor none-the-less proposed spending $28.7 billion on public services in FY 2022, essentially holding total service appropriations to the same nominal-dollar level they were in FY 2021. Of course, after adjusting for inflation, this means total spending on services in FY 2022 will be $868 million less in real terms than this year.
Being compelled to reduce the real investment Illinois state government makes in General Fund services is a legitimate cause for concern, given over 95 percent of all such spending goes to the four, core areas of Education (including Early Childhood, K-12, and Higher Education), Healthcare, Human Services, and Public Safety.
Consider that, in the first three years after the state enacted its new school funding formula (FY 2018 — FY 2020), Illinois made a real increase in its investment in public education of $979 million. Almost 90 percent of that investment went to those school districts that educate 70 percent of Illinois’ low income students, as well as 75 percent of its Black, and 71 percent of its Latinx students. This enhanced, real investment was effectively addressing decades of underfunding experienced by those school districts under Illinois prior, inequitable funding formula. However, that progress is being reversed because state funding for K-12, while flat in nominal dollars, is declining in real terms.
What is particularly sobering about the FY 2022 General Fund budget proposal is that it continues a long-term trend of Illinois disinvesting in those core service areas. In fact, after adjusting for inflation, total real spending on services in FY 2022 would be 23 percent less under the governor’s proposal than it was over two decades earlier, in FY 2000 under Republican Governor George Ryan.
This long period of disinvestment has had consequences. As Governor Pritzker highlighted, “Illinois state government already spends less money per person than the majority of states in the nation.” So much so, that according to the National Association of State Budget Officers, Illinois ranks 35th in spending on services per capita, despite having the sixth largest population and fifth largest economy of any state.
So what caused Illinois to embark on this long term course of disinvesting in core, General Fund services? The data make the answer clear: (i) flawed tax policy that generates inadequate revenue growth over-time; and (ii) an unaffordably back-loaded schedule for repaying the debt the state owes to its five public pension systems known as the “Pension Ramp.”
The revenue generation problems caused by the state’s tax policy shortcomings are so significant, that just to have enough current revenue available to keep total spending on services in the FY 2022 proposed General Fund budget level in nominal dollars with FY 2021, Governor Pritzker had to rely on both:
(i) proposing to increase year-to-year General Fund revenue through the elimination of $932 million in existing tax expenditures that benefit businesses, while generating an additional $304 million in one-time revenue by proposing to prorate the Local Government Distributive Fund at 90 percent of its statutory value, and diverting some cigarette tax and gas-sales tax proceeds from capital projects to the General Fund; and
(ii) creating another $1.8 billion in year-to-year savings through a combination of administrative cuts, reduced expenditures on health insurance costs for state workers, and reduced borrowing costs. Without those proposed initiatives, state spending on General Fund services in FY 2022 would have had to have been cut significantly from FY 2021 levels.
The reality is the state’s mix of taxes and their respective structures are so flawed, they simply do not work in a modern economy, and combine to create a fiscal system that fails to generate annual revenue growth that is sufficient in amount to cover the cost of providing the same level of public services from one fiscal year into the next — even during a normal, non-pandemic economy. This is known as a “structural deficit.” The structural deficit in Illinois is so significant that it continues to grow despite the cuts in real spending on services implemented in both the FY 2022 budget proposal — and otherwise over the last two decades.
Then there is the worsening of the state’s structural deficit caused by the unaffordably backloaded debt payment schedule created in the Pension Ramp, which was enacted in 1995. This payment structure is so backloaded that it annually increases at rates that outstrip both inflation and General Fund revenue growth. For instance, the repayment of debt the state owes to its five pension systems under the Pension Ramp increases from $8.6 billion in FY 2021, to $9.3 billion in FY 2022, a year-to-year jump of $740 million. In the governor’s FY 2022 budget proposal, however, total year-to-year General Fund revenue growth is only projected to be $220 million — or fully $520 million less than the growth in the debt service payment scheduled under the Pension Ramp.
To be clear, pension benefits did not drive this problem. Illinois incurred the debt it owes to its public pension systems — which now stands at over $143.7 billion — because for generations elected officials in both parties avoided raising the tax revenue needed to address the structural deficit. Instead, they chose to engage in the irresponsible practice of underfunding the state’s pension systems, and then diverting the revenue that should have funded pensions to maintain some spending on services that otherwise would have had to have been cut due to the revenue shortfalls caused by the structural deficit.
To his credit, Governor Pritzker’s FY 2022 General Fund budget proposal minimizes the harm that significant cuts to spending on core services would cause. Responding to some of the challenges created by COVID-19, the governor actually proposes a $322 million increase in year-to-year appropriations for Human Services, which are needed by some of our state’s most vulnerable populations. The governor was able to accomplish this, however, only by proposing the revenue enhancements and savings outlined above, and creatively using federal relief funding to reduce the total amount of Healthcare costs covered through the General Fund.
But the federal government won’t always be around to bail out the state. It has to get its fiscal house in order.
Which is why, big picture, Governor Pritzker was spot on when he emphasized that “Government cannot be bloated, but it must have the resources to provide for the needs of our state’s residents.” As the data make abundantly clear, Illinois does not have adequate resources to meet the needs of its citizenry, because the state’s flawed tax policy has created a long-term structural deficit. The only way to resolve that structural deficit and contemporaneously make an adequate level of investment in core services is for Illinois to reform its tax policy in a manner that generates meaningful new, recurring revenue for its fiscal system that will grow with the economy.
Governor Pritzker was also right to voice concern over raising taxes on the middle class — whose incomes in Illinois have been declining on an inflation-adjusted basis for over 40 years. He made it abundantly clear he wants the middle class to pay lower income taxes in Illinois. The good news is, Illinois can increase its flat rate income tax and raise the revenue needed to start eliminating the structural deficit, while also reducing the income tax burden on the 78 percent of Illinois taxpayers who have $75,000 or less in taxable income annually, through the use of refundable income tax credits. For more information on how this approach could work, please see CTBA’s report “Increasing the Income Tax Rate: One Method for Addressing Illinois’ Long-term Fiscal Problems.”
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This post was updated on Monday, February 22nd, 2021 to correct the inflation adjusted decline in spending on total services in FY 2022.
