Civic Federation opposes Rauner’s recommended FY 2017 Illinois budget plan

May 03--The Civic Federation gave Gov. Bruce Rauner's proposed Illinois budget plan for fiscal year 2017 a thumbs down in a report released today.

The federation's Institute for Illinois' Fiscal Sustainability says it opposes Rauner's recommended budget for the upcoming fiscal year because it contains an operating deficit of $3.5 billion and lacks a detailed plan on how to close the budget gap.

"This budget as proposed would not move Illinois forward and would lead to further deterioration of the State's finances. It would generate billions in additional unpaid bills and continue to count on future years' revenues to pay for current, unmanaged obligations," Civic Federation President Laurence Msall said in a press release. "The Civic Federation cannot support a plan that does not provide the State of Illinois with a detailed and sustainable path to reduce and alleviate its ongoing financial crisis."

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Illinois now has been without a budget for 11 months, and as the Civic Federation notes, the state "entered uncharted waters" in February when Rauner laid out his financial plan for the 2017 fiscal year that begins July 1 despite there being no budget for the current fiscal year.

The state's backlog of unpaid bills is projected to reach $9.3 billion by the end of June. If the $3.5 billion shortfall in Rauner's budget proposal is not closed, it could drive the backlog up to $12.8 billion by June 30, 2017, according to the analysis. The report says the $3.5 billion figure appears to be underestimated because "it does not fully account for the actual cost of essential state services" and derives from anticipated savings that are "unlikely to be realized."

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From the analysis:

The administration arrives at the $3.5 billion operating deficit for FY2017 by beginning with a maintenance budget that has a $6.6 billion shortfall.7 The Governor's recommended FY2017 budget reduces the operating deficit to $3.5 billion through projected spending cuts of $2.6 billion and the use of $476 million in one-time revenues[...]

The administration has not released details about its proposed cuts to the Community Care Program, which seeks to keep elderly residents out of nursing homes, or any actuarial reviews of its proposal to save money on pension contributions. The recommended savings on overtime pay and group health insurance depend on changes that have so far been rejected by the state's largest labor union.

The Rauner administration says the $3.5 billion operating deficit could be eliminated if the General Assembly agrees to one of two choices: implementing key items, including pro-business reforms, from Rauner's Turnaround Agenda in return for up to $36.3 billion in new revenues; or giving the governor broad discretion to rework the budget through spending cuts and the transferring of resources between government agencies, which could reduce state spending to as low as $32.8 billion.

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While the Civic Federation acknowledges its support for the Rauner's administration's long-term, cost-saving measures, such as the modernization of the state government's information technology system and criminal justice reform, the outstanding deficit and a number of spending cuts cannot be supported, the analysis concludes.

Here are some key findings from the analysis, along with its concerns regarding the proposed FY 2017 budget and recommendations on how to address the current fiscal crisis and bring long-term financial stability to Illinois.

Key findings

* The unpaid bill backlog decreased from $8.1 billion in FY 2012 to $5.2 billion at the end of FY 2015, and is expected to reach $9.3 billion by June 30 if additional appropriations are enacted without new revenue.

* If the $3.5 billion operating deficit is not closed, the bill backlog could grow to $12.8 billion by June 30, 2017, consuming 37.5 percent of projected FY 2018 revenues.

* Between FY 2006 and FY 2015, the state racked up $1 billion in interest penalties for failing to pays its bills on time. More than 90 percent of the penalties have come in the last six years. Based on the proposed budget, late-payment penalties in FY 2017 are estimated to cost the state $233 million.

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* The loss of revenue in FY 2016 from the partial sunset of the 2011 temporary income tax increase resulted in $5.1 billion less tax revenue compared to the peak in FY 2014; General Funds revenue for FY 2017 are $4.4 billion below the FY 2014 level.

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* The FY 2017 maintenance budget has an operating deficit of $6.6 billion, which is reduced to $3.5 billion in Rauner's proposed budget through the collection of $475 million in one-time revenues and $2.6 billion in spending cuts.

* Of the $475 million in one-time revenues, $276 million would come from the state's only rainy day fund and another $200 million from the sale of the James R. Thompson Center in Chicago.

* Rauner's proposed spending cuts include:

* $748 million reduction in pension contributions to the state's five retirement systems by recalculating pension liabilities to lower current expenses and shifting pension costs to local school districts and universities;

* $445 million reduction in group health insurance payments by giving employees a choice between paying higher health insurance premiums or less generous coverage, which depends on a successful resolution to deadlocked labor negotiations or the removal of health insurance benefits from collective bargaining;

* $197.6 million spending cut for the Community Care Program by moving seniors who are not eligible for Medicaid to a less costly program;

* $200 million in funding cuts for higher education;

* $15 million of the $454 million borrowed from other state funds at the end of FY 2015 would be repaid in FY 2017.

* The revenue sources enacted to fund the capital budget continue to fall short of expectations, leading to an accumulated deficit in FY 2016 of about $800 million.

Concerns

* The minimum $3.5 billion operating deficit in the governor's proposed FY 2017 budget and the lack of a detailed plan to address the shortfall.

* An increase in the state's backlog of unpaid bills following three years of decline because of a loss in revenue from the partial sunset of the 2011 temporary income tax increase.

* Reducing the state's pension contributions by $748 million by partly deferring costs to future budget years.

* The proposed budget anticipates a nearly 25 percent reduction in group health insurance costs, which depends entirely on either the successful resolution of labor negotiations with the state's largest public union, the American Federation of State, County and Municipal Employees Council 31, or the removal of health insurance from collective bargaining.

* Illinois' only rainy day fund, the Budget Stabilization Fund, would be depleted to help close the gap.

* The proposal to save $198 million by reducing funding for Community Care Program could lead to increased institutionalization of elderly Illinoisans.

* Using one-time revenues to pay for the state's operating costs guarantees future deficits and unbalanced budgets.

Recommendations

The Civic Federation says Rauner and the General Assembly must enact a comprehensive budget plan for the upcoming fiscal year that includes appropriations that cover the full cost of state government, along with the necessary revenues and resources to balance out expenditures. Following are the recommendations listed in the Federation's State of Illinois FY2017 Budget Roadmap report:

* Limit spending and pay down bills

* Eliminate fiscal year-end backlog of unpaid bills by FY2019 by controlling spending and generating annual operating surpluses to pay down the bill backlog.

* Increase income tax rates

* Retroactively increase the income tax rate to 5.0 percent for individuals and 7.0 percent for corporations as of Jan. 1, 2016, up from 3.75 percent and 5.25 percent, respectively, in order to address the fall in revenues resulting from the income tax rate rollback on Jan. 1, 2015.

* Expand the sales tax base

* Temporarily suspend sales tax exemption for food and nonprescription drugs and enact a new general consumer services tax, excluding all business-to-business services as well as medical, financial and legal services.

* Tax retirement income

* Eliminate the income tax exemption for non-Social Security retirement income from individuals with a taxable income of more than $50,000.

* Cap retailers' sales tax collection discount

* Cap the retailer's discount at $200 per month for each retailer to recoup revenue that it cannot afford to give up in light of its financial condition.

* Approve a constitutional amendment limiting pension protection clause

* Draft and approve a proposed amendment to the Illinois Constitution for the November 2016 statewide ballot specifying that the clause in the Illinois Constitution protecting public pension benefits applies only to accrued benefits.

* Make supplemental pension payments

* The state should make supplemental pension payments until all five state retirement systems are 100 percent funded.

* Establish comprehensive teachers' pension funding reform

* Consolidate the Chicago Teachers' Pension Fund and Teachers' Retirement System and have the state assume responsibility for CTPF's unfunded liability.

You can find the full report here.

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Kevin Hoffman is a Reboot Illinois staff writer who graduated from the University of Iowa with a degree in journalism, political science and minor in international studies. He believes keeping citizens informed and politicians in check is the best way to improve Illinois and bring about common sense reform. Follow Kevin on Twitter -- @OnlyinIllinois.

Reboot Illinois is a nonpartisan website and social media effort dedicated to involving Illinoisans in the key issues facing our state, including state debt, corruption and waste and improving business and schools.

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