Use current surpluses to eliminate persistent budget issues permanently

The most recent budget forecasts from the Governor’s Office of Management and Budget show state revenues coming in much higher than anticipated. This combined with enhanced federal aid that the state is still receiving has created an estimated $3.55 billion surplus for this year. Projections for the upcoming 2024 fiscal year also show the state is anticipating a budget surplus of $357 million, despite the drop in federal funding.

State lawmakers should use the surplus to: restore Illinois’ Unemployment Trust Fund – lawmakers have already paid off the $1.36 billion deficit but still need to contribute an additional $450 million to replenish the fund; pay off 2010 Railsplitter Tobacco Settlement Authority Bonds, which the state still owes more than $561 million on; eliminate the anticipated $1.2 billion bill backlog; and deposit the remaining $347 million into the state’s Budget Stabilization Fund.

This is similar to what Gov. J.B. Pritzker originally proposed to do with the higher-than-expected revenue. His plan called for a larger transfer to the budget stabilization fund – which has yet to actually occur – without eliminating the bill backlog. Lawmakers should prioritize eliminating the state’s unpaid bills, while still actively seeking to grow the rainy-day fund balance.

This would make for a responsible start to Illinois FY 2024 budgeting process. GOMB estimates show without significant structural changes, annual budget deficits will return beginning in 2025.

The most recent projections show although the state is expecting a $357 million surplus in 2024, the state budget will be out of balance by $384 by 2025. The annual deficit is expected to grow to $708 million by 2028. In total, current projections show Illinois will rack up a cumulative budget deficit of $2.3 billion during those four years, absent reform.

Illinois Forward 2024: A sustainable budget plan

Without serious structural reform, Illinois financial condition will again begin to deteriorate. Illinois already levies the highest state and local tax rates in the nation, making increasing the state’s tax burden an untenable solution, particularly as hundreds of thousands of residents and major corporations flee the state each year. Through a series of targeted reforms, Illinois can maintain balanced budgets without resorting to tax hikes. Those reforms make up the Illinois Policy Institute’s Illinois Forward 2024 plan.

If Illinois’ can right-size government employee health care costs, reduce administrative costs at Illinois’ more than 850 school districts and enact a spending cap linking growth in expenditures to the growth rate of the economy, the state will eliminate the persistent structural deficit and end future fiscal years with a budget surplus in excess of $600 million and eventually approaching $1 billion annually by 2028.

These reforms would save the state nearly $5.6 billion compared to current projections over the next five years: $2.3 billion from eliminating currently projected deficits and $3.3 billion in creating additional budget surpluses. The resulting budget surplus should be transferred to the state’s Budget Stabilization Fund or returned to taxpayers. Should the state transfer the full amount to the rainy-day fund, the fund balance would be nearly $4.95 billion – 9.2% of projected expenditures – by 2028 based on current projections, the repayment of the Unemployment Trust Fund loan to the fund and the savings outlined above.

Right-size employee health care costs

In 2019, Pritzker signed a new contract with the American Federation of State, County and Municipal Employees Council 31, the state’s largest public employee union. It raised compensation and increased the cost of government. The Illinois Policy Institute determined a taxpayer-friendly contract, one that sought to bring government worker compensation in line with what private sector taxpayers can afford, would have cost $3.6 billion less over four years.

One of the most expensive perks offered in that contract was the continuation of a platinum health insurance subsidy that leaves state workers paying only half as much as private sector workers as a share of their own health care costs. Today, state workers pay for 20% of their combined premium and out-of-pocket health costs, while the state pays for 80% of the costs. By contrast, private sector workers paid 42% of their health care costs in 2022, according to the Milliman Medical Index. Private-sector workers are essentially paying higher costs for their own health insurance, while also paying a disproportionate share of state employee health care costs.

The current AFSCME Council 31 contract will expire at the end of the fiscal year, presenting an opportunity to renegotiate these costs. The state’s final offer to AFSCME before Pritzker’s election would have right-sized group employee health insurance costs by bringing them more in line with the private sector. The plan would have created three tiers of insurance: one with higher premiums, one with higher out-of-pocket costs and a mixed plan. Each of the plans would have increased the total employee share to 40% on average, with a mix of higher out-of-pocket or higher premium costs, depending on the plan selected.

A bill proposed in the 100th General Assembly, Senate Bill 2680, would have removed health care coverage from collective bargaining as long as average employee costs remained below 40% annually. Lawmakers should again pursue similar reforms that better align state workers’ health care costs with affordability for the private sector taxpayers who fund them. Doing so would save taxpayers – who already pay a larger portion of their own health care costs – $446 million in fiscal year 2024 alone.

Prioritize classrooms over administration

Illinois has 852 school districts and roughly half of these districts serve only one or two schools. As a result of all that administrative duplication, Illinois ranks fourth in general administration spending per student, and spends significantly more than all other large states, spending $558 per pupil, according to the most recent Census Bureau data.

If Illinois reduced its general administrative spending to the national average per student, it would save nearly $515 million in unnecessary costs that could be reinvested in the classroom to improve student outcomes or returned to overburdened property taxpayers. A bill to achieve this goal previously passed the Illinois House of Representatives unanimously, but never received a full vote in the Senate.

The Classrooms First Act, first introduced by state Rep. Rita Mayfield, D-Waukegan, would create the Efficient School District Commission, tasked with making recommendations for consolidating districts. Each consolidation recommendation would go to local voters for approval. The commission would include representation from all key stakeholders, including teachers unions, organizations representing school boards and superintendents, regional representation from each of the state’s education support districts and parents. It is tasked with developing specific recommendations for a minimum 25% reduction in bureaucracy, roughly the amount needed to bring Illinois in line with the national average. A larger reduction in districts would likely result in larger benefits.

The bill would require all newly formed districts to be unit districts, meaning they’d serve both high schools and elementary schools. Unit districts spend money more efficiently on average in Illinois, spending $13,992 per student compared to $19,044 for high-school-only districts and $15,961 for elementary-only districts.

Consolidation of districts, particularly among the smallest districts, is a commonsense and proven strategy to reduce the cost of administration while improving student outcomes.

Giving Illinois voters the opportunity to exercise that option would yield major benefits for public education while enabling savings for the state. By using administrative overhead savings to boost local school funding, education spending in the state budget could be set to grow with taxpayers’ ability to pay – an average increase of 3% per year, the average long-run growth rate of the Illinois economy. This change would result in savings of $159 million in fiscal year 2024.

Enact a spending cap to limit growth in expenditures to what taxpayers can afford

The most fundamental problem to Illinois’ budget woes is simple: expenditure growth exceeds taxpayers’ ability to pay. This misalignment means Illinois is bound to face either frequent budget shortfalls, perpetually rising taxes or both.

Illinois needs a spending cap to protect taxpayers from continuous tax hikes and to rein in runaway state spending. Because the state for 20 years has spent beyond its means, Illinois has seen:

• the two largest income tax hikes in state history, in 2011 and 2017
• Pritzker enact 20 new tax and fee hikes totaling $4.6 billion in 2019
• voters forced to stop a $3.6 billion income tax hike in 2020
• Pritzker and some lawmakers push a $500 million to $1 billion tax hike on small businesses
• Pritzker threaten to raise the flat income tax by 20%
• Pritzker propose $934 million in tax hikes in his 2022 budget.

A spending cap would eliminate the constant call for these tax hikes. By joining growth in the state budget to the average growth in the Illinois economy, lawmakers would be able to reasonably predict how much additional state spending their constituents could afford in the coming year without the need to raise taxes. This procedure would create stability within the state budgeting process and allow for modest growth in government funding while also protecting taxpayers from future tax hikes.

During the past 10 years, a spending cap coupling growth in state expenditures to the long-run growth rate of the economy would have allowed for average expenditure growth of 3% per year. If lawmakers were to adopt this principle for future budgets, the state would save an additional $145 million in fiscal year 2025 – current FY 2024 expenditures projections fall within the cap – in addition to the savings previously outlined above.

Pension reform remains a priority

The Illinois Policy Institute’s Illinois Forward 2024 budget plan provides a five-year plan for balancing the state’s budget, eliminating the bill backlog, building up the Budget Stabilization Fund balance and potential tax relief while making the state’s statutorily required annual pension contributions.

However, the statutorily required contributions are not enough to pay down the state’s pension debt, and the outstanding $140 billion in unfunded liabilities presents an existential threat to taxpayers, retirees and future state budgets. For example, the projected pension contribution for FY 2024 is $4.4 billion less than the actuarially determined contribution needed to begin paying down the state’s liabilities.

The fact that Illinois’ annual pension contributions have historically been lower than actuaries said was needed is one of the major reasons why the state’s pension debt has continued to grow. Since the inception of the state’s current funding schedule in fiscal year 1996, the state has shorted the funds by $58.5 billion.

Meanwhile, missed investment returns, which were the primary driver of the increase in pension debt last year, have added more than $12 billion to the state’s unfunded pension liabilities since 1996. These figures are expected to grow in coming years, as Illinois’ statutorily required funding continues to be insufficient to pay off the state’s unfunded pension liabilities and a prolonged market downturn hamstrings investment income.

As unfunded pension liabilities grow, pension funding ratios, which are currently at 44% across Illinois’ five state systems, will likely fall. Experts warn  pensions with funding ratios below 60% are deeply troubled and plans with funding ratios below 40% are likely to be past the point of no return.

Lawmakers in Springfield must pursue pension reform in order to achieve retirement security for Illinois’ public servants. A “hold harmless” pension reform plan similar to one originally developed by the Illinois Policy Institute – based loosely on bipartisan 2013 reforms – could help to eliminate the state’s unfunded pension liability and secure retirements for pensioners.

Previous analysis showed changes such as capping pensionable salary, replacing cost-of-living adjustments with true cost-of-living increases and adjustments to realigning benefits with historical inflation rates would have saved the state $2.4 billion in the first year alone, and more than $50 billion by 2045. It would also fully fund the plans, as opposed to the state’s goal of 90% funding, to truly safeguard retirees’ benefits.

Without reform, Illinois’ unfunded liabilities will continue to grow and the state’s pension systems will become even leaner, the retirement of Illinois’ public servants will be put at risk and taxpayers will be asked to pay higher taxes in exchange for fewer services.

Attempts to keep up with this unsustainable debt burden without reform have already caused disinvestment in higher ­­education, public safety, public health programs, and vital services for the poor and vulnerable. From fiscal year 2000 through 2022, a 584% increase in inflation-adjusted pension spending was accompanied by a 20% decline in spending on a range of core services.

Simply put, tax hikes alone are not a viable solution to paying down Illinois’ pension debt. Doing nothing endangers the long-term retirement security of Illinois’ public servants, along with investments in core services. The only pension protection that ultimately guarantees a secure retirement for public workers is a sustainable, fully funded pension system.

Conclusion

Illinois is in a unique and fortunate position to get its fiscal house in order for the first time in decades. Lawmakers can chose to use surpluses from bolstered federal funds and a strong rebound in revenues to eliminate longstanding issues within the state budget. Or, they can continue the practices that led to more than a 20-year deficit, billions in unpaid bills and the worst pension crisis in the nation.

Illinois Forward 2024 offers commonsense strategies to balance the budget, eliminate the bill backlog, build the rainy-day fund and offer tax relief.