"Run government like a business." We've all heard the familiar refrain, typically as a pledge from a political candidate or as a demand from a government critic.
Forget for a moment that government is not like a business, in which bottom-line concerns like profits and market share dictate decisions. Rather, government exists to provide public services that its constituents deem are needed. Imagine instead that the state of Illinois really is Illinois Inc., with Gov. Rod Blagojevich as its chief executive officer. Were that so, chances are good Illinois would be in federal bankruptcy court looking for Chapter 11 protection from its creditors and a green light to dump its mega-billion-dollar unfunded pension liability, all the while shedding jobs and cutting services.
Alarmist? Not according to reports from a variety of state budget-watchers, including government officials, nonpartisan think tanks and business leaders. Consider these facts:
• Not since 2001 has the state posted a budgetary surplus at the end of its fiscal year, according to data from the office of state Comptroller Dan Hynes. When the books were closed last year on FY 2006, the budgetary deficit was $291 million, the difference between cash in the bank on June 30 and FY 2006 bills remaining to be paid through August.
• The current FY 2007 budget masks deficit spending of some $3 billion, largely by delaying payments to Medicaid providers and underfunding pension systems, according to the Center for Tax and Budget Accountability, a Chicago-based research and advocacy think tank.
• Last September, Hynes warned that all likely revenue growth in the next few years will be needed to meet commitments in just three areas — pensions, debt service and Medicaid — which are expected to increase at a $1-billion-a-year clip.
• "Illinois is headed toward fiscal implosion," warned the Civic Committee of the Commercial Club of Chicago in a report issued last December. The group of top business leaders pegged the state's debts and unfunded long-term obligations at about $106 billion.
The Prairie State's sorry fiscal condition stems not from political chicanery nor wasteful spending. Rather, it's the inevitable consequence of the growing mismatch between the cost of providing such essential services as education and health care and the resources generated by a revenue structure not well-aligned to the state's economy.
There are a number of big-ticket commitments that have state finances foundering.
For starters, the state supports five retirement systems covering state workers, public school teachers outside Chicago, higher education personnel, judges and legislators. Each is a defined benefits plan, in which retirees are guaranteed a fixed amount, based largely on length of service and final salary.
The systems are funded by a combination of employee contributions, appropriations from the state as the employer and income earned on the invested cash. Ideally, the three sources should provide sufficient dollars each year to cover benefits paid to current retirees, as well as the projected cost of future benefits to current workers.
For decades, however, governors and lawmakers haven't set aside as much money as they should have, based on actuarial estimates. Instead, scarce dollars went to more immediate, pressing needs, such as education, health care and human services. The past two budgets, for example, allocated some $2.3 billion for pension funding, roughly half the amount required under a 1995 law designed to bring the systems to a 90 percent funding level by 2045.
What is the result of this chronic shortfall? As of last June 30, Illinois' pension systems faced an unfunded actuarial liability of $40.7 billion, the largest in the nation, eclipsing by far second-place Ohio's $30 billion gap, and more than five times the national average.
To get back on track for 90 percent funding by 2045, state contributions from the general funds will have to more than double in the next three years, to $3.5 billion in FY 2010 from $1.4 billion in FY 2007. For the coming budget year, which begins July 1, the required contribution is $2 billion, some $600 million more than in the current budget.
Illinois cannot dump its pension responsibilities on the federal government, as some financially beleaguered corporations have done through bankruptcy, nor can the state slash future benefits — they're protected by the Illinois Constitution. So even were the pension systems to be abolished this moment, the state would be on the hook for more than $40 billion in unfunded benefits already earned by workers.
In addition to the huge sums owed the retirement systems, Illinois has borrowed tens of billions of dollars by selling bonds over the past 35 years to build roads, bridges, schools, prisons and a host of other capital projects. Much like a homeowner with a mortgage, the state repays the money over time, making annual principal and interest payments until the debt is retired.
In 2003, though, Blagojevich sold $10 billion in pension bonds with a new wrinkle, a repayment schedule that included interest-only payments — but no principal — until FY 2008. The governor used $7.3 billion of the bond sales to shore up the pension funds and the remainder to pay for ongoing programs.
The 2003 sale more than doubled the state's total debt load, to $18.8 billion from $7.6 billion, placing Illinois sixth in the nation for tax-supported debt per capita, according to an analysis by Moody's Investors Service, a national bond-rating agency.
As a result, the state's debt service — principal and interest payments — jumped to $1.4 billion from $973 million the year prior to the pension bond sale. For the coming fiscal year, debt service is projected to be $1.7 billion, up $83 million from the current figure, including the first $50 million principal payment on the pension bonds, according to a report from the Commission on Government Forecasting and Accountability.
The problems don't end there.
More than 2 million Illinois residents are covered by Medicaid, the joint state-federal program that provides health care for low-income families, people with disabilities and seniors, with a current budget of some $12 billion. As health care costs have risen in recent years, Medicaid spending has outpaced both the rate of inflation and state revenue growth. As a result, the state has lacked the cash to make timely payments to providers, and hospitals, doctors, nursing homes and others complain about having to wait months before they're paid for the care they have provided.
Meanwhile, Blagojevich last summer kicked off All Kids, his program to insure health care coverage for every child in the state, regardless of family income. The governor is counting on underwriting the new initiative with savings achieved by moving most Medicaid recipients into managed care, but it's too soon to know whether the math will work.
What is clear, however, is a growing tendency by the state to roll over Medicaid bills from one fiscal year into the next. Under a provision of the statutes gov-erning state finances, Medicaid costs incurred in one fiscal year can be paid from the following year's appropriations, unlike most other expenses. Such deferred Medicaid liabilities totaled $2.7 billion in FY 2005, almost triple the $972 million rolled over five years earlier, according to the comptroller.
Continued inflation in health care costs nationally, coupled with an increasing aging population, "suggests that the program will continue to grow at a rapid pace going forward — perhaps in the range of 9 percent per year," the Civic Committee estimated, well above likely revenue growth.
What about education? The Illinois Constitution declares the state has the "primary responsibility" for funding public schools, but local property taxes have covered most of the costs of K-12 education for as long as anyone can remember. As a result, the dollars available for each child's education vary widely from school district to school district, with some schools in well-to-do suburbs able to spend $12,000-plus per pupil while others in economically distressed communities and rural Illinois struggle to reach half that level.
To address the inherent inequity, the state over the years has tried to funnel more dollars to property-poor districts.
A special panel — the Education Funding Advisory Board — was created in 1997 to recommend the minimum amount needed to provide an adequate education to youngsters, based on actual outlays in high-achieving, low-spending districts.
In recent years, however, state aid allocations have fallen short of the amount required to meet the Funding Advisory Board's recommended "foundation level," last set at $6,405 in April 2005. For the current school year, the actual level is $5,334, about 17 percent less.
Although the state's responsibility for funding schools at a certain level is not as legally binding as some of its other obligations — such as pensions and debt service — the Civic Committee argues the state has a commitment to guarantee at least the foundation level for each child.
Adjusting the 2005 figure for inflation, some $2 billion more would be needed to cover fully the advisory board's recommendation, according to the Center for Tax and Budget Accountability.
The state's current commitments clearly exceed its resources, yet the imbalance has not dissuaded Blagojevich and others from advocating costly new initiatives. In his inaugural address, the governor pledged to bring affordable, accessible health care to all Illinoisans. While he offered few details on his plan for universal health care, a task force studying the issue in January proposed a plan to cover almost 90 percent of the state's uninsured at a cost of more than $3 billion to the state and some $1.5 billion to employers. Meanwhile, a coalition of business and labor leaders in February called for a $25 billion, five-year program to repair and expand the state's road and transit network.
Adding up everything the state owes — not even counting the bright new ideas — should leave no doubt that Illinois is hardly run like a business.
Charles N. Wheeler III is director of the Public Affairs Reporting program at the University of Illinois at Springfield.
Illinois Issues, April 2007
