CHICAGO — Illinois could balance its books and begin tackling a $7 billion unpaid bill backlog and $133.7 billion pension burden through a combination of belt tightening, new taxes, and supplemental pension contributions.
That’s the recommendation from the Civic Federation of Chicago’s Institute for Illinois’ Fiscal Sustainability, which annually offers advice to state leaders for curing fiscal ills that have dragged its bond ratings down to the lowest end of investment grade.
“The enormity of Illinois’ financial challenges demands a solution of the same magnitude,” said the federation’s president, Laurence Msall.
The federation also has a list of what the state should avoid. “While the federation remains cautiously optimistic for the upcoming budget year, Springfield unfortunately has a long record of attraction to accounting gimmicks and shortsighted maneuvers. Accordingly, the roadmap also outlines a number of steps the governor and General Assembly should not take on the state’s quest for sounder financial footing,” Msall said.
Recently inaugurated Gov. J.B. Pritzker, a Democrat who warned last week that the state’s deficit stands at $3.2 billion, will unveil his first budget Feb. 20. Market participants believe the change in leadership spells an end to partisan bickering that drove the two-year budget impasse under Republican Gov. Bruce Rauner, but they are watching closely for how Pritzker will offer a balanced budget without adding to the backlog or shorting pensions, which could trigger downgrades.
On the spending side, the federation’s suggested five-year roadmap relies on the state limiting future spending growth to 2.4% annually through at least 2024 and urges it to pursue “reasonable” savings in employee salary increases and health insurance.
On the revenue side, the federation recommends extending the state’s income tax to cover federally taxable retirement income, which would generate $2.5 billion in new annual revenue. The state should also begin taxing 14 services currently taxed by Wisconsin, its neighbor to the north, which could generate $200 million in fiscal 2020 and $500 million to $600 million in future years, the federation said.
The new revenue would allow the state to eliminate the deficit and begin paying down its unpaid backlog in earnest by 2023, reducing it from an estimated fiscal 2019 end tally of $7.8 billion to $5 billion in 2024. After the backlog is paid off, the state should commit to establishing a reserve equal to at least 10% of its general fund.
“The biggest challenge continues to be staggering public employee pension costs,” the report says. To mitigate the underfunding due to inadequate statutory payments, the federation recommends identifying revenues to make annual supplemental payments sufficient to reach 100% funding by fiscal year 2045.
The federation repeated its support for a constitutional amendment asking voters to limit the constitution’s existing pension clause and allow for moderate changes to current employee and retiree benefits.
The taxation ideas were part of a roadmap offered last week by the Civic Committee of the Commercial Club of Chicago. The administration, based on recent comments, has rejected the retirement tax idea and does not appear inclined to tax services.
Pritzker is expected to rely on expanded gambling and taxes on legalized marijuana and possibly other items like e-cigarettes to raise new revenue for the operating budget or a capital plan with his long term plan focused on asking voters in 2020 to approve a shift to a graduated income tax from the current flat one. The federation advises that the top individual rate should be no more than three percentage points higher than the bottom rate under any shift.
The federation also cautioned Pritzker against relying in the next budget on revenue from either gambling or cannabis because of the legal and regulatory hurdles that make the timing on implementation uncertain. “Instead they should be designated for one-time expenses, such as paying down the multi-billion-dollar backlog of bills” said Msall.
The federation also warns the new administration from slipping backward by relying on “certain unwise budgetary practices that have been used in the past and imprudent steps that might be under consideration for the future.”