Will Legalizing Marijuana and Sports Betting Solve Illinois' Budget Problems?

The state, which has worse credit than any other and has had chronic budget deficits, passed a fiscal plan this week that relies on new revenue sources to help pay down its massive debt.
by | June 6, 2019 AT 4:34 PM
Illinois Gov. J.B. Pritzker signing a bill.
Illinois Gov. J.B. Pritzker signed the state budget on Wednesday. (AP/Amr Alfiky)

After years of passing late budgets -- or no budget at all -- in the era of bitter partisanship under former Republican Gov. Bruce Rauner, Illinois this week finalized one of its most comprehensive spending plans in recent memory.

It’s a nearly $40 billion, blockbuster budget that intends to raise revenue by legalizing recreational marijuana and sports betting, and places a constitutional amendment on the 2020 ballot to change the state’s income tax structure. It represents a 2 percent spending increase, some of which will boost public education and child welfare funding. Lawmakers also passed an additional $45 billion infrastructure plan.

While signing the budget Wednesday, Democratic Gov. J.B. Pritzker, who took office in Janurary, said leaders had “achieved something that has eluded state government for decades -- we passed a real balanced budget.”

But fiscal observers warn that it remains to be seen whether the budget, which they say does little to curb Illinois’ chronic overspending, will be a sustainable one.

“This is a status-quo budget for the state,” says Adam Schuster, director of budget and tax research for the free-market think tank Illinois Policy Institute. “Every year we pass a budget that we claim is balanced, and every year since 2001 we spend more than we take in.” 

Regardless of whether it's sustainable, this year’s budget seeks to raise revenue in new ways. The expansion of gaming, which includes the legalization of sports betting, will help fund a massive infrastructure package. One-third of the tax revenue from upcoming marijuana sales will bolster the general fund. And a graduated income tax rate, if approved by voters next fall, could raise as much as $3.5 billion a year.

The latter two revenue streams are being billed by the budget's backers as ways to pay down the state's pension debt and unpaid bills backlog. But some are skeptical that will ultimately be the case.

“People are already starting to spend that money in their minds,” says Kenneth Kriz, director of the University of Illinois at Springfield’s Institute for Illinois Public Finance. “I’m hearing talk about property tax relief for communities, or more money for the infrastructure plan.”

Meanwhile, Pritzker’s claim about a balanced budget is subjective.

While the budget does “fully” pay the state's nearly $9 billion pension contribution that's due next fiscal year, the way Illinois funds its pension system differs from most governments. It follows a planned “ramp up” that keeps payments artificially lower now, only to increase by billions in the near future.

If Illinois were to fund its pensions like most other governments, says Kriz, its amount due next year would be roughly $13 billion.

“So whether they are or aren’t addressing this depends on your perspective,” he says. “As long as they follow the ramp [which they haven’t always done], the plans will be 90 percent funded by 2045. But the problem is, those payments will increase dramatically.”

Another issue that depends on one’s perspective: whether the state is really addressing the $6.7 billion it owes in overdue bills.

Next year’s budget authorizes borrowing $1.2 billion in municipal bonds to pay down part of the backlog. While the maneuver will likely save the state money on interest rate costs, it's still moving debt from one balance sheet to another, says Schuster.

The initial reaction to the budget from credit analysts, who mark Illinois as their lowest-rated state in the country, is muted with a hint of positivity. One good sign, says Carol Spain, an S&P Global Ratings analyst, is that -- unlike in recent years -- Illinois lawmakers seem to have passed a budget with few one-time revenue measures.

“In S&P Global’s view,” she told Reuters this week, “the fiscal 2020 budget signals near-term credit stability and buys the state more time to address out-year gaps.”

 

In Other Public Finance News:

 

More Privacy, Please

While some states contemplate taxing tech companies for the data they compile from us, New York might increase privacy protections for its citizens.

The It's Your Data Act, introduced this week by Assemblyman Ron Kim, would add to the transparency and security requirements that tech companies have to follow in keeping and sharing New Yorkers' personal information. It would also establish new, stricter legal standards for obtaining consent and exercising reasonable care when it comes to the use, distribution and collection of personal data.

The legislation would open the door for New York residents to sue tech companies over the use of their data. Kim told Governing he hopes his bill will be model legislation for other states.

 

Are Governments Prepared for Hurricane Season?

Congress finally passed a comprehensive disaster aid package this week, but it’s important to remember that states and localities bear the upfront costs when natural disasters strike. As such, a report issued this week by Moody’s Investors Service notes that many state economies are more concentrated in flood-zone areas than 20 years ago.

Maine, New York and South Carolina have seen the biggest economic growth in flood zones, meaning they are now much more financially vulnerable than they were two decades ago.

Still, Florida, Massachusetts, New Jersey and New York account for the greatest amount of potential economic disruption in dollar terms, according to Moody’s. These four states combine for two-thirds ($66 billion) of all wages earned in the flood zones of at-risk counties.

Meanwhile, inland economic expansion in Florida and Texas means those states have “relatively less exposure” than before, even though both states have suffered from severe hurricane damage in recent years.

 

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