Msall: FY 2014 is year of missed opportunity

Oct 11, 2013

Editor’s note: The Civic Federation’s Institute for Illinois’ Fiscal Sustainability last week released an extensive analysis of the 2014 fiscal year budget for the state of Illinois. The report highlighted the damage done to the budget by the state’s ongoing pension crisis. About 1/4 of state revenue in the current budget year go toward pensions. In the interview below, Civic Federation President Laurence Msall discusses the report’s findings and the chances for Illinois to substantially improve its financial outlook by passing a pension reform bill in the fall veto session, which begins Oct. 22.

Your report refers to fiscal year 2014 as a “lost opportunity” for the State of Illinois. Does this refer to the legislature’s continued failure to enact comprehensive pension reform or are there other missed opportunities in this year’s budget?

Unsustainable pension costs are certainly the most urgent crisis facing the State of Illinois and local governments, but there are other fiscal threats that remain unaddressed in this budget. Fiscal year 2014 is the last full year before the State faces dramatic reductions in revenues due to the scheduled partial rollback of income tax rate increases in January 2015. The FY2014 budget does nothing to prepare the State for this looming revenue shortfall, which it will face on top of a $5.8 billion backlog of unpaid bills, an unfunded pension liability of $96.8 billion and the lowest credit rating of any state.

The near-term fiscal outlook under current law warns that the State’s financial condition will deteriorate even further after fiscal year 2014. This budget was an opportunity to begin preparing for the extreme financial challenges everyone sees on the immediate horizon. Unfortunately for all who rely on the State of Illinois, legislators failed to take advantage of that opportunity.

Do you have an estimate on how much revenue the State will lose should the income tax rates sunset as scheduled in 2015?

Governor Quinn released three-year budget projections earlier this year that assumed the income tax rate would sunset in 2015 as scheduled. According to the Governor’s projections, State-source General Funds revenue will decline by $4.2 billion between FY2014 and FY2016 due to the partial sunset of income tax rate increases. (Under current law, the State’s individual income tax rate will partially roll back to 3.75% from 5.0% and the corporate rate will decline from 7.0% to 5.0% on January 1, 2015, halfway through FY2015.)

Do you foresee a reasonable path for the State to weather such a loss while continuing to pay down its bill balance?

Even under average fiscal conditions, navigating such a dramatic revenue shortfall would require careful planning and difficult decisions. With its backlog of unpaid bills and unresolved pension crisis, the State is far below average fiscal conditions. The fact that we’ve seen no long-term plan for addressing these challenges from the Governor or the General Assembly only magnifies the threat. As you indicated, this failure threatens to erase recent progress made on the State’s backlog of unpaid bills.

It is certainly financially possible for the State to manage the revenue loss, reform its pension systems and pay down its bill backlog. However, doing so will require leadership that acts in the State’s best interests even if that means choices that aren’t always politically attractive.

The State carried over $6 billion in unpaid bills into fiscal year 2014. Does this budget make any progress toward reducing this backlog?

The State’s backlog of unpaid bills is projected to total approximately $5.8 billion at the end of FY2014. That is down from $8.8 billion at year-end FY2012 and $6.3 billion at year-end FY2013, but still represents more than 16% of the State’s total General Funds revenues. One bright spot in the FY2014 budget is the decision to set aside revenues in FY2013 and FY2014 to pay down outstanding bills. These efforts were aided by unexpectedly high income tax collections in April 2013, a one-time event related to taxpayers’ avoidance of higher federal tax rates.

What does all of this mean for the Illinois taxpayer?

All of this means that the State continues to have fewer and fewer resources available to fund basic government services including education, public safety and economic development. Pension costs consume 24.3% of State-source General Funds revenues in FY2014, an already unsustainable level that is projected to rise sharply in future years without reform. The lingering backlog of unpaid bills continues to threaten the financial viability of our most vulnerable social service providers, local governments and anyone who does business with the State of Illinois. And none of this is escaping the notice of ratings agencies. Illinois is currently the lowest rated state by all three major credit ratings firms – only one downgrade away from falling out of the “A” category. Digging out of this deep fiscal hole is going to require many years of shared sacrifice from the State’s lawmakers, taxpayers, employees and retirees.

The General Assembly is scheduled to return for a veto session on October 22. Are we likely to see pension reform legislation introduced before the end of the year?

With six days of veto session scheduled in late October and early November, it is certainly possible that legislation agreed to by the conference committee will be introduced before the end of the year. The bipartisan conference committee is continuing to negotiate, but no actuarial reports or specific proposals have been publicly released. The Civic Federation is hopeful that conference committee members will agree on a proposal that ensures the State will be able to afford its required pension contributions over the long term. We then urge the General Assembly to publicly release actuarial reports before voting on any pension reform proposal submitted. Actuarial reports are the only way to determine how reforms will impact the State’s required contributions and how those contributions will fit in with the State’s other spending priorities. We are looking for savings near the magnitude proposed by Speaker Madigan, Leader Cross, Representative Nekritz and Senator Biss last session.

Lawmakers will also need to consider how any proposal could be applied to the local governments including the City of Chicago, Cook County and Chicago Public Schools, that are left with fewer and fewer options for balancing their budgets absent pension reform. It is increasingly difficult to envision what the future holds for these governments under the current unsustainable system. 

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