The all-cuts balanced budget for Illinois: 1/6 of K-12 funding gone, and billions in delayed pension costs

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CTBA does not generally respond to publications from other policy organizations. However, the state budget blueprint issued this week by the Illinois Policy Institute (IPI) deserves comment because it helps to demonstrate a core conclusion of CTBA’s research: Illinois’ structural deficit can only be fixed with either new revenues, or public service cuts so severe that they would profoundly damage the state economy and create fundamental quality of life issues.

IPI’s report attempts to balance the budget without additional tax revenue, which means $7 billion in cuts for fiscal year 2018. These include:

  • $1.22 billion in cuts to K-12 education (or 16 percent of the baseline as estimated by the Governor’s Office of Management and Budget), including $250 million in cuts to PTELL and TIF adjustments and $970 million in pension costs added to local district budgets, without compensation;
  • An additional $375 million cut to teacher take-home pay statewide by eliminating pension pickups;
  • $950 million (or 51 percent) in cuts to public colleges and universities, including $500 million in direct cuts and $450 million in pension costs added to college and university budgets without compensation;
  • Ending health insurance coverage for 600,000 Illinois residents by repealing the Affordable Care Act’s Medicaid expansion;
  • Ending $1.75 billion in aid to local governments through the Local Government Distributive Fund, worth roughly five percent of a typical city’s budget, according to IPI.

Halving funding for a state higher education system already in crisis, increasing the number of uninsured Illinois residents, and taking one out of every six dollars that go to elementary and high school education would, absent enormous local tax and tuition increases, represent a profound departure from the level of services that Illinois residents have come to expect.

Economic disaster

But research suggests that these cuts would also have a devastating effect on the state’s economy. Partly, that’s because they would directly lead to thousands of lost jobs, as schools and colleges laid off teachers, janitors, counselors, and other employees. (To get a sense of the magnitude, $200 million in cuts led to 1,400 layoffs in the Chicago Public Schools in 2015; Chicago State University laid off 300 employees to save $24 million in 2016. Scaled up to the full statewide cuts, that would total nearly 20,000 lost jobs as a direct results of cuts in the education sector alone).

But education, in particular, drives Illinois’ economy in ways beyond the people that schools directly employ. In fact, economists have estimated that for each dollar invested in an institute of higher education, $2.286 is generated in the state economy, as students, professors, and other employees patronize local businesses, support families, and contribute to a vital local economy. That means that IPI’s proposed $950 million cut to higher education could result in over $2.17 billion in losses to the state economy.

More broadly, CTBA’s recent report on higher education funding highlighted research showing that over the last generation, investing in residents’ educational attainment has been crucial to robust state economies.

Additionally, copious independent studies have found that the Medicaid expansion under Obamacare has been a net positive for state economies. A study in Kentucky found that Medicaid expansion in that state generated 40,000 jobs; another study found that Medicaid expansion created 31,000 jobs in Colorado. Blending these estimates and adjusting for Illinois’ population, that suggests that IPI’s proposal on Medicaid alone could eliminate more than 95,000 jobs.

Research also suggested that Medicaid expansion will have added more than $8.5 billion, or about 1.38 percent, to Colorado’s economy by 2035. A similar effect in Illinois, adjusted for the size of our economy, would mean our state could lose $20 billion or more under IPI’s proposal.

The pension problem

This is far from a complete review of the economic damage that could be caused by all of IPI’s proposals. But it is also worth addressing the proposed pension changes — which essentially repeat the state’s failed policy of holding down costs on the front end by increasing them on the back end.

IPI’s blueprint suggests shifting state workers into defined-contribution retirement plans whose value would fluctuate with the market, as well as a smaller, optional guaranteed annuity program. In addition to taking on the risk of retiring during a market crash, workers would be required to contribute fully 15 percent of their wages to their retirement, close to double current levels.

Without weighing in on the merits of this shift from defined-benefits to defined-contributions, IPI’s proposal — according to its own numbers — would actually cost the state more than what’s required under current law in less than a decade.

The report doesn’t include figures comparing the amount of money the state would have to contribute over the long term under IPI’s proposal with estimates under the status quo. So CTBA used IPI’s own graph depicting the costs to the state budget under its plan, and superimposed the latest projections of the state’s required contributions under current law from the Commission on Government Forecasting and Accountability (COGFA) to compare.

While IPI’s plan costs less in the first few years — in part thanks to artificially lowered state payments from delaying the full implementation of changes to actuarial assumptions — within a decade or so, it actually becomes a net drag on the state budget, and continues to add billions of dollars in additional payments through the 2040s.

In conclusion, in order to balance the budget without new tax revenue, Illinois would have to take the following steps, among others:

  • Cut a sixth of state funding to elementary and high schools, and halve funding for higher education, leading to tens of thousands of job losses directly and tens of thousands more indirectly;
  • Remove 600,000 people from Medicaid, causing more job losses and billions of dollars of damage to the state economy;
  • “Reform” pensions in a way that actually begins adding to the state’s costs within just a few years.

This is not a recipe for a high quality of life for Illinoisans, or for economic growth — or even, over the long term, for state fiscal health. Now that IPI has documented exactly how serious the cuts to public services and the blows to Illinois’ economy must be in order to close our deficit without new revenue, the case for new revenue is stronger than ever.

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