It's Time for Illinois to Make Some Big Financial Decisions
A new report says the state faces key questions in 2014 that could have a lasting impact on its financial future.
Illinois lawmakers have avoided making tough financial decisions for years – but the state could start making amends for its wrongs if legislators today can steer the state toward a path that takes account of its financial realities, a new report says.
Since 2008, Illinois’s poor budget performance, rising unfunded pension liability and inaction by state government has led to four downgrades by the ratings agency Standard & Poor’s. The poor performance has come despite some efforts by some lawmakers to enact better financial management practice. But this year could be a turning point as the state is contemplating two different budget options and legal challenges to its pension reform hang in the balance.
The analysts who wrote the report predict that the next two months will be “pivotal” to whether the state can be financially sustainable in its budget.
“We believe Illinois’ ability to affect change to revenues and spending programs is well-established, so its credit direction will largely hinge on the willingness of policy makers to decisively address chronic budget issues,” said the report by analysts Robin Prunty and John Sugden.
Gov. Pat Quinn has actually included a recommended and not-recommended budget in his 2015 proposal. The not-recommended budget follows current state law and ends the temporary income tax hikes of the previous year. Reducing the tax rates means the state would forfeit about $1.8 billion in potential revenue. The budget, based on very modest revenue growth, also calls for cuts across a broad swath of programs, including $1 billion less for education funding.
The budget Quinn is pushing would make the current income tax rates permanent. It would also eliminate a property tax deduction to bring in another estimated $560 million. Major spending initiatives include education, health and family services and public safety. The budget also forecasts a $480 million surplus, although the state’s rainy day fund would still decrease slightly.
Although the recommended budget would put Illinois on a more sustainable path, S&P warns, it still relies on one-time fixes like borrowing money from a state fund. The governor’s five-year forecast also expects that the legal challenges to the pension reform passed last year will not jeopardize the projected $1 billion in savings starting in 2016. Prunty and Sugden also note that as long as Illinois continues without a sizeable rainy-day fund, it will continue to suffer from financial inflexibility.
The other driver behind Illinois’ credit future is whether the pension reform is upheld. Slated to go in effect in June, the changes include minimum contribution requirements from the state that will make the plan fully funded in 30 years, increases in some retirement ages, a cap on pensionable salary and a pension-stabilization fund that will supplement – but not replace – the state’s annual required contribution. The reform applies to the state’s three largest plans and is projected to save $145 billion total.
If lawmakers make the tough choices this year and their fixes to pensions prevail, Illinois’ story could drastically change over the next two years, the analysts write. The state’s broad economy and above-average income levels are two big positives, yet the state’s revenues have continued to limp along.
“Only time will tell,” said S&P, “which path [Illinois’] credit quality [takes].”