Illinois’ state budget practices earn poor marks from fiscal watchdog

A Volcker Alliance report on truth and integrity in state budgeting finds Illinois lacking. Debt, budget gimmicks and thin reserve funds gave the state poor marks.

Illinois has spent more than it brings in for 21 consecutive years, giving it the second-largest total debt burden of any state and the nation’s lowest credit rating – even though it recently received its first bond upgrades in decades.

Responsibility largely lies with numerous lawmakers and governors who have made fiscally irresponsible policy decisions for those 21 years.

But there is another important culprit: the budget process itself.

That is the finding in a recent report from fiscal watchdog the Volcker Alliance. While rushing to pass their latest budget, Illinois lawmakers made numerous drafting errors that would have prevented the state from spending billions of dollars until the final month of the fiscal year. The lax standards that enable this kind of malpractice are a major reason for Illinois’ poor performance in the report and the state’s continuing fiscal woes.

The report, “Truth and Integrity in State Budgeting: Preparing for the Storm,” grades states across five dimensions. Illinois performed poorly in three categories, and was not stellar in the remaining two.

Legacy costs

Illinois earned a D-, the lowest possible grade, for legacy costs as the state continues to struggle with the worst pension debt in the nation. Moody’s Investors Service recently reported Illinois’ pension debt had reached a record high of $317 billion as of June 30, 2020.

A major contributor to Illinois’ ever-growing legacy costs comes from guaranteed 3% cost-of-living adjustments, or COLAs, annually for Tier 1 workers who joined the state’s retirement systems prior to 2011. These overly generous payouts versus paltry contributions for public workers foster the tax-and-borrow trap that has Illinois trying to fulfill pension promises it could never keep.

Only a constitutional amendment can enable comprehensive reforms to stabilize Illinois’ pension crisis, provide retirement security for public sector workers, and finally fix one of the state’s primary drivers of crushing taxes, diminishing services and departing residents.

Budget maneuvers

Illinois also performed poorly on budget maneuvers, which is unsurprising given the state’s tradition of borrowing schemes and passing budgets at the 11th hour. The state earned another D- grade for its bad budgeting habits and the effect poor fiscal management has on the state’s overall financial health. These poor policies have caused Illinois’ credit rating to plummet from the highest available rating from S&P Global Ratings and Moody’s Investors Service before 1983, when former House Speaker Michael Madigan began his political reign, to the lowest rating in the nation today.

The state has often relied on a budget maneuver called fund sweeps to make up for shortfalls in its budgeted funds, which are required to be balanced. Fund sweeps allow for money to be transferred out of funds intended for a specific purpose and moved into the state’s budgeted funds, often to pay operating or pension costs.

When the budgeted general funds are short on funding, Illinois simply sweeps money from its special funds to the general fund to make up the difference by counting that funding as revenue. This is one of the gimmicks Illinois politicians frequently rely on to claim to have balanced the budget even as the state has run deficits for more than 20 years.

Reserve funds

Another area Illinois falls short in is reserve funds. Illinois earned a D grade for its paltry reserve funds. That was the lowest grade given to any state, with Kansas earning the same grade.

The report noted Illinois’ “deficits in general fund balances, minimal rainy day fund balances, and a failure to link reserves to revenue volatility.” Even states without official rainy day funds, such as Colorado, scored higher.

While experts suggest states save enough money to operate for at least one month, Illinois had enough in reserve to fund the government for just over 15 minutes in 2020. Illinois has a long history of ignoring calls to adequately fund its reserves.

The rainy day finally arrived in the form of the COVID-19 pandemic. Illinois’ emergency funds were basically empty when it struck and continue to remain nearly empty today. The current $7.6 million in the Illinois budget stabilization fund would be able to fund the government for about 90 minutes in a state set to spend $42 billion in fiscal year 2022.

While other states such as neighboring Indiana and Michigan were able to use their reserves to help close budget gaps, Illinois enjoyed no such luxury.

Lack of sufficient rainy-day savings is a major reason Illinois was the only state to borrow from the Federal Reserve during the pandemic. It did so twice.

Transparency

The lone bright spot for Illinois came from a B grade on transparency for the first-time disclosure in 2019 of at least $25 billion in deferred infrastructure maintenance costs for buildings, universities, roads, bridges and schools. Just four other states make such disclosures public, but the grade isn’t representative of the whole picture for transparency in Illinois’ budget process.

While public disclosure of debts and dealings surrounding the budget are welcome and necessary, Illinois fails the transparency test in a much more basic way by passing last-minute budgets negotiated in secret. This lack of transparency in creating the budget excludes most lawmakers from the process and thereby disenfranchises their constituents.

A better budgeting process would use reliable forecasting methods, fund the rainy-day reserves, prevent short-term borrowing and fund sweeps and end poor accounting practices that enable lawmakers to hide the real financial condition of Illinois from taxpayers.

Legislative leaders begin by using shell bills to get around constitutional requirements to read the bill by title on three different days before voting on it. Once they move the shell bill through the reading process, they amend it to include thousands of pages of new language. Once the actual budget language is added to the shell bill, the bill is often made public for just a few hours before a final vote is taken.

This process is fully controlled by legislative leaders and often bars ordinary members from participating in crafting the budget. By creating the budget this way, leaders essentially freeze out the rank and file and disenfranchise Illinoisans who have no say in creating the single-most important piece of legislation issued annually by the General Assembly.

Creating the budget quickly and in the dark leads to a shoddy product. During the latest budget process, which saw lawmakers given mere hours to read more than 4,000 pages of spending language, the finished product was found to be riddled with errors. Gov J.B. Pritzker was forced to issue an amendatory veto on the budget package, as bill drafting errors in the budget initially passed by lawmakers meant significant portions  of the state’s operating and capital budgets could not be spent until a month before the fiscal year was to end – June 1, 2022. The intent was to start spending this July 1, the start of fiscal year 2022 in Illinois.

Such potentially costly and embarrassing mistakes are the direct result of a budget process done hastily and without effective oversight from the public or average members of the General Assembly.

Budget forecasting

Illinois earned a C grade for budget forecasting from the report. State law currently requires two separate entities to estimate revenue for the coming year. The executive estimate comes from the Governor’s Office of Management and Budget and is used by the governor in his annual budget proposal, while a second estimate comes from the legislative Commission on Government Forecasting and Accountability.

The General Assembly is then supposed to use these numbers to adopt its own official estimate for the budget process, which it has failed to do since 2014. There is no formal consensus forecasting process or requirement that projections from the two agencies be averaged together. Both estimates rarely match or equal the revenue that actually ends up coming in, resulting in inaccurate figures that can miss reality by billions of dollars.

From 2008 to 2020, the legislative revenue estimate was on target just five times while the executive estimate was on target only twice.

Conclusion: For better budget outcomes, fix the budget process

The Volcker Alliance’s report highlights just how poorly positioned Illinois is when it comes to truth and integrity in its budgeting. Massive legacy costs are coupled with poor practices in creating the budget and bad borrowing and forecasting strategies. This has led to chronically troubled finances, two decades of unbalanced budgets, a poor credit rating and empty reserve funds. Unfortunately, legislative leaders continued their bad habit of a secretive last-minute budget process again this year.

Despite all of the problems facing Illinois’ finances, there are many potential solutions. A true balanced budget amendment would prevent the budgeting and borrowing schemes that enable lawmakers to claim the budget is balanced when it is not.

A spending cap would help keep Springfield’s spending under control. Consensus revenue forecasting would provide a better, more accurate read on what revenues might look like instead of wildly varying estimates that usually miss the mark.

Ultimately, a constitutional amendment to reform public pensions would bring the biggest relief. Without a change, legacy costs will continue dragging down the state.