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The Long Haul: Illinois' Chronic Fiscal Problems will Make it Harder to Recover from the Recession

Rep. Frank Mautino reviews a COGFA report.
WUIS/Illinois Issues

This year might be a good time to take up yoga. 

Consumers will continue to need more ways to relieve stress as the recession threatens their jobs and their personal wealth. Budget experts expect little, if any, economic good news for the next 18 months. 

It’s a vicious cycle. Consumers stop spending money on homes, vehicles and services. When the demand for goods and services declines, employers lay off workers. Without a paycheck, even more consumers tighten their wallets, continuing to hurt the economy.

“It’s hard to break that cycle,” says Jim Muschinske, revenue manager for the state’s economic forecasting arm, called the Commission on Government Forecasting and Accountability.

State government garners less tax revenue during each downward spin of the cycle. And the downturn comes at a particularly bad time for Illinois because the state already started 2008 by spending more than it would make in tax revenue. Although the Illinois Constitution requires lawmakers to enact balanced budgets each year, they repeatedly have pushed unpaid bills into the future. 

“We’re balancing the budget by not paying people,” says Dan Long, the economic commission’s executive director.

Even in good years, when state government collected more revenue than needed to operate, lawmakers neither caught up on unpaid bills nor built a significant rainy day fund for emergencies.

Unlike world leaders battling the international economic crisis, the Illinois General Assembly and the governor do have some control over the state’s structural deficit. Their problems are just made worse by the economic slowdown.

“We’re going into recession with no reserves, a huge backlog of unpaid bills and a budget that was unbalanced even before the recession came,” says economics professor J. Fred Giertz with the University of Illinois’ Institute of Government and Public Affairs.

Economic forecasters wouldn’t be surprised if the state takes in less money than it did last year, meaning something’s got to give.

A recession is defined by consecutive months of decreasing revenues and increasing unemployment, and the state’s fiscal commission anticipates a deeper and longer downturn than Illinoisans experienced in the 1980s. In addition, unlike the recession in 2001 and 2002, when consumers fared pretty well, the current economic slump is more broad-based and hits consumers harder, Muschinske says.

The demand for social services is expected to increase at the same time that the state must dedicate more money to programs outside of its core services.

The problem will get worse in fiscal year 2010, which starts July 1.

One of the largest spending pressures the General Assembly will face is for public employee pensions. Lawmakers have to find a way to make the highest payment in state history — about $4 billion — to fund pensions for teachers, judges, lawmakers, state workers and university employees.

That’s an increase of more than $1 billion over last year, but it’s also more than the state is expected to collect in new revenue.

The higher pension payment is rooted in a 1995 law that established a gradually increasing payment plan designed to force state government to have enough assets on hand to meet 90 percent of its pension liabilities by 2045. The plan was born out of a chronic failure to fully fund the pensions. Fiscal year 2010 is scheduled to be the last year of the so-called ramp up. The annual payments would start to back off in fiscal year 2011.

The upcoming ramp up is “catching us at the worst time,” says Muschinske.

With the recent stock market decline, the state’s pension investments have lost value. Assets for all five pension systems dropped from $70.5 billion in June 2007 to $50.5 billion in October 2008. 

The poor return on investments means the state has to make up $510 million more than originally planned, according to the economic commission. What was expected to be a $710 million increase in the payment became a $1.22 billion increase.

State Treasurer Alexi Giannoulias has proposed a plan to save up to $82 million a year by consolidating the state’s three pension investment boards, but his idea faced early opposition among pension officials and some state lawmakers.

Meanwhile, the state struggles to pay for daily operations, let alone public employee pensions. The challenge increases with projections that Illinois will collect less tax revenue than it did last year.

That’s partially because economists say the worst job losses are yet to come. Multiple rounds of layoffs in late 2008 marked only the beginning, Muschinske says. The state’s unemployment rate is expected to increase from an average of 6.8 percent to 8.2 percent. 

Less income for Illinois residents means less tax revenue for state government. Muschinske says he doesn’t look for a recovery in personal income tax receipts for state government until 2011.

The dominoes keep falling because consumer spending has hit a record low, meaning the state also collects less in sales taxes and corporate income taxes, a significant indication that this recession could outlast those of the past 36 years.

For instance, when consumers stop buying houses, they don’t purchase as many couches, appliances and construction materials. Sales of single-family homes have dropped below the recession levels of the early 1990s.

Illinoisans also are buying fewer cars, decreasing automobile registrations to the lowest point since 1998.

Even taxes on riverboat gambling facilities, which help fund public education in Illinois, have brought in less money and are expected to continue to decline. Lawmakers could anticipate a one-time influx of about $435 million when the state finally activates a long-dormant 10th gaming license, which would allow a new riverboat to be built. But the lease had yet to be settled by mid-December and was headed for another round of challenges.

The national economy is partially to blame for the state’s revenue picture. Illinois joined 21 states that started the fiscal year with a revenue shortfall. And it’s one of 31 states that expects further shortfalls through June, according to the Center on Budget & Policy Priorities in Washington, D.C. 

This state is better off than others. Illinois has a budget gap of more than $2 billion, which accounts for 6 percent of its general funds. Nevada’s $1.5 billion shortfall seems smaller but consumes 21 percent of its biennial budget.

Even when the national recession starts to lift and consumers begin to feel more confident, however, Illinois will still face structural problems that make it even harder to recover from the recession.

In early December, Comptroller Dan Hynes reported that state government didn’t have enough cash on hand to pay about $4 billion worth of bills, including payments owed to medical providers who care for low-income and disabled patients on Medicaid. 

Hynes’ spokeswoman, Carol Knowles, says unpaid bills threatened everything from police officers filling their gas tanks to prisons paying vendors for food deliveries. Downstate mass transit districts and home health care providers for seniors also sent out SOS signals, saying without more timely payments, they might have to shut down services. 

The state pays the bills as cash flows in, but the comptroller’s office also has to have enough money on hand for such long-term obligations as employee payrolls and general state aid for schools. 

“It’s a very delicate balancing act,” Knowles says, “and the larger the bill backlog is, the more difficult it is to answer the emergencies when they arise because it gets to the point where everything is an emergency.”

In mid-December, the comptroller, the treasurer and the governor agreed to borrow about $1.4 billion to pay down some of the backlogged bills. Such short-term borrowing is common, although the amount must be repaid by the end of the fiscal year, June 30.

The comptroller also has throughout the past few years tapped into the state’s so-called rainy day fund to pay bills, but the fund had a zero balance in December. 

Not that it was flush to begin with. The rainy day fund typically contains only $276 million, which is about 1 percent of the state’s general funds. Numerous other states of various sizes have reserves of $1 billion or more, according to the National Conference of State Legislatures.

If there is one positive outcome from the nation’s economic woes, it’s that in the future, states might be more inclined to build more significant cushions into their rainy day funds, says Scott Pattison, executive director of the National Association of State Budget Officers in Washington, D.C.

“In [the budget officers’] defense, we knew there’d be a downturn, but I don’t think anybody expected it to this degree. So what was probably fairly reasonable at the time, now it’s — gosh,” he said, without finishing the sentence.

The combination of the highest pension payment in history and the longest and deepest recession in more than three decades calls for creative budget solutions.

Traditional survival mechanisms normally include cutting programs or raising taxes, but these are anything but traditional times. 

Gov. Rod Blagojevich repeatedly refused to do the latter, and agencies and statewide officeholders already have scaled back their operations, laying off hundreds of employees and requiring workers to take unpaid days off. Eight parks and about a dozen historic sites also closed until June, or until the state restores funding.

The future of those cuts and any future cuts are in question after federal authorities arrested Blagojevich on corruption charges in December. Whether the governor would step aside or whether the state legislature or Supreme Court would act to remove him from office was unknown at press time.

One thing is clear, however. The governor’s arrest made an already challenging economic situation even more complicated with so many unknowns about the future of the state’s leadership.

Alternative coping methods for the state include partnering with businesses to deliver government services. The city of Chicago last month went as far as leasing its parking meters to a private company for an up-front $1.2 billion.

However, previous attempts to privatize state assets have failed in the legislature and have been rejected by the courts.

Giertz, the University of Illinois economist, says Illinois may fare no better or worse than other states in the national recession, but its consumers may not see relief until the federal government enacts another stimulus package or until the state undertakes a major capital program to start road and school construction projects.

Blagojevich seeks as much as $3 billion in federal aid during the next three years. He flew to Philadelphia last month to join other governors to make a case to President-elect Barack Obama for federal assistance.

“President-elect Barack Obama has indicated that he’s interested in a federal stimulus plan that would help the states, as well,” says Katie Ridgeway, spokeswoman for Blagojevich’s office. “And we believe that our proposals not only help our budget but also help stimulate our economy by stimulating consumer spending and investing in infrastructure.”

Before his arrest, Blagojevich wanted to borrow money, withhold more state funds and continue to trim expenses. 

Calling his plan the “Emergency Budget Act,” Blagojevich sought authority to withhold as much as 8 percent of general revenue funds in reserve. That would expand a governor’s power to withhold money from state agencies, primary education, higher education, state pension funds and local governments. The reserves would be on top of the 3 percent Blagojevich already withheld from many service providers last year. 

The legislature shot down the plan last fall, and the impeachment process has distracted lawmakers from preparing for the next fiscal year.

There is, however, renewed hope within the Statehouse that the General Assembly, with the help of two new Senate leaders and potentially a new governor, might agree on ways to fund a long-awaited capital program. Finding a way to finance the construction projects will prove just as difficult, if not more, than last year’s politically heated efforts, given the difficult economic conditions.

The Commission on Government Forecasting and Accountability also warns that a state public works program might not start to stimulate the economy until 2011, too late to help get through fiscal year 2010. A capital bill also wouldn’t help ease many of the state’s operating costs.

With such ominous projections of decreasing revenue, backlogged bills and increasing spending pressures, the state has a real mess, Long says. 

To state officials and consumers: Find a way to relax because “it’s going to be a very difficult year.”

 

Illinois joined 21 states that started the fiscal year with a revenue shortfall. And it’s one of 31 states that expects further shortfalls through June, according to the Center on Budget & Policy Priorities in Washington, D.C.

Bethany Jaeger can be reached at capitolbureau@aol.com.

Illinois Issues, January 2009

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