Wednesday, October 24, 2012

New study drills down on state budget problems

By Jamey Dunn

A study released today takes a comprehensive look at Illinois’ fiscal situation and the events that led to the state’s current budget mess.

The study, which comes from the State Budget Crisis Task Force, is a follow-up to a report put out by the task force in July. The summer report focused on the budgets of California, Illinois, New Jersey, New York, Texas and Virginia. Richard Ravitch, the former lieutenant governor of New York, and Paul Volcker, the former chairman of the Federal Reserve, co-chair the task force, which seeks to parse state’s budget concerns in the wake of the national recession.

The report points to the usual suspects as cost drivers for the Illinois budget: growing pension and Medicaid costs. It also cites stagnant revenues, borrowing and shoddy accounting tactics as culprits in the state’s recent budget crisis. The report says that that tactic of selling bonds to cover pension costs — 2003, 2010 and 2011 — has been the primary contributor to Illinois having one of the highest debt rates per capita of any state.

The study says that the 2008 economic collapse was part of a perfect storm that sunk the state budget. Revenues tanked as demand for services spiked. “But unlike other states, Illinois was effectively insolvent. Illinois had no reserves and had used fiscal gimmicks and borrowing to balance the budget for the previous six or seven years.”

The authors attribute the problems leading up to 2008 to expansions of state programs and services without corresponding revenue increases under former Gov. Rod Blagojevich. The study said that the governor’s refusal to increase the state income tax and House Speaker Michael Madigan’s unwillingness to work with Blagojevich on alternative revenue sources left the state spending more than it could afford. “During Blagojevich’s two terms as governor, new programs were created and expanded, including health insurance coverage and preschool for Illinois children and free public transportation and prescription drugs for Illinois seniors. But with an existing structural deficit, and without new sources of revenue, the state did not have sufficient resources to meet all of its obligations,” the report said. “And while the recession took a toll on the state’s resources, Illinois’ government became essentially dysfunctional with the federal investigation of Governor Blagojevich and his removal from office.” The authors described the state’s budgeting tactics leading into the recession as such: “Illinois did all this without any sort of long-term financial plan to restore balance and without reserves. Illinois has been doing back flips on a high wire, without a net.”

Illinois economic growth has also stalled when compared with the rest of the country. “By FY 2010, Illinois’ total personal income fell 2 percent more and employment fell 1 percent more than in the U.S. as a whole. The impact of the recession on Illinois’ tax collections was much, much larger. In FY 2010, total state taxes in the U.S. were 93 percent of the amount in FY 2007, but Illinois’ tax revenues had fallen to 85 percent of the FY 2007 amount,” said the study. Illinois is recovering from the recession, but it is doing it more slowly than it recovered from the last three recessions.

The report notes that progress has been made to get the state back on secure footing. An income tax increase brought in new revenues, and lawmakers agreed on spending caps, cuts and sweeping Medicaid reforms. The authors note that such cuts are not painless and could have long-term effects on the state’s priorities, such as education and infrastructure. “There is, of course, nothing ‘encouraging’ about cuts in education, medical care and human services from the point of view of recipients or advocates. One of the most controversial budget appropriations was $6.5 billion for K-12 education, which was a cut of 3 percent from FY 2012,” said the study. Despite cuts and new revenues, the authors say the state cannot continue on its current budget trajectory. “Illinois’ budget is not fiscally sustainable. Despite recent progress and difficult choices, it is still in a deep hole. It cannot simultaneously continue current services, keep taxes at current levels, provide all promised [public employee] benefits, and make needed investments in education and infrastructure.”

Gov. Pat Quinn’s new budget spokesperson, Abdon Pallasch, echoed the idea that the current budget is unsustainable when he spoke to the Daily Herald’s editorial board yesterday. Quinn is pushing for concessions from the state’s largest public employee union and pension reform as at least a partial solution. “The alternative is we, you know, close a few prisons or universities, I guess,” Pallasch told the Daily Herald. “I’m not threatening to close prisons or universities,” he said. “I’m just saying, let your imagination run wild with what we’d have to do.” Officials with the American Federation for State County and Municipal Employees say Quinn and lawmakers should repeal tax breaks given to corporate interests, such as a recent tax deal given the Sears and the CME group, which owns the Chicago Mercantile Exchange and the Chicago Board of Trade.

The study also looked to potential future concerns for Illinois, including cuts to federal funding as deficit reduction efforts continue, the need to invest in infrastructure upgrades and the state’s aging residents. “Illinois’ demographics show an aging population with a trend toward fewer workers and more retirees, which will pose daunting fiscal challenges in the years ahead.”

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