This is a relatively short memo about the Illinois state budget. It contains substantive findings, but is worded to be quoted.
To: Governor-elect Bruce Rauner
From: Tim Nuding, Budget Director for the Transition
Date: December 30, 2014
Re: Sins of the Past and Dishonest State Budgets
As you know, the State of Illinois’ Fiscal Year 2016 budget as well as the current Fiscal Year’s budget contain massive holes that can ultimately only be solved by implementing major, structural changes to the way state government operates.
Before detailing solutions, it is important to continue outlining to the public how Illinois arrived at the worst financial crisis in the nation – a crisis caused not by the income tax rolling back, but by the sins of the past.
Illinois’ massive budget hole is the direct result of previous Governors and General Assemblies giving away benefits they knew the state couldn’t afford, deploying fundamentally dishonest budget practices and kicking the can down the road.
Our challenges are not simply a revenue problem. We have a structural problem decades in the making. Illinois government must undergo major structural reforms and implement honest budget practices that together address the long-term challenges of the state.
The following practices and obstacles deserve special mention:
Borrowing to “Replace” Revenue
This year’s budget, as well as many in the past, borrows money and calls it revenue.
That behavior is clearly irresponsible and, frankly, usurps the balanced budget language in the Illinois Constitution, which says, “[t]he General Assembly by law shall make appropriations for all expenditures of public funds by the State. Appropriations for a fiscal year shall not exceed funds estimated by the General Assembly to be available during that year.”
In other words, the “balanced budget” provision in the Constitution technically applies only to appropriated funds and “estimated” revenues, and past Governors and General Assemblies have driven a freight train right through that loophole. They have been all too willing to skirt any notion of a structurally balanced budget with clever accounting gimmicks that get around any balanced budget requirements.
Potential Repayment of Interfund Borrowing – $650 million
- As referenced in previous memos, the current FY15 budget was built on dishonest budgeting because it included $650 million from interfund borrowing. If this interfund borrowing needs to be repaid, it would show up as an expense in the FY16 state budget, reducing resources that could be available for other purposes.
- Eliminating interfund borrowing in the current FY15 budget would require closing an additional $650 million hole in a broken budget that according to state agencies is already $760 million in the red.
Pension Obligation Bond Debt Service Payments – $1.4 billion
- Past Governors and General Assemblies have chosen to borrow funds through the sale of bonds in order to make the annual pension payments.
- This happened because the General Revenue Funds that should have been used to make the pension payments were allocated to other areas of the budget. Instead, the decision was made to sell bonds and deposit the proceeds into the pension systems in order to make the required state contribution. [See these McHenry County Blog articles: pushing pension money into State Aid to Education and union involvement in 2005 pension bill.]
- Taxpayers are on the hook for pension bond debt service payments for 18 more years.
Ignoring Additional Balanced Budget Requirements
Adding to the state’s budget problems, past General Assemblies appear to have ignored the Balanced Budget Note Act, which was enacted on January 1, 1992.
The Act says each supplemental appropriation bill “shall include a discussion of the proposed reduction in other appropriations or increases in State revenue that would allow the measure to be adopted without adversely affecting the State budget for that fiscal year.”
A review of past supplemental appropriation bills finds that previous General Assemblies skirted this law, which was put in place to prevent precisely the type of shell games that have occurred in the past and led to mountains of unpaid bills.
The current fiscal year’s budget, which according to state agencies is $760 million in the red even if you count the interfund borrowing as revenue, seeks to use the same dishonest policies of the past.
Giving Away Unaffordable Benefits and Kicking the Can Down the Road
For years the state made a bad habit of increasing pension benefits while refusing to pay for them. Now, with the worst credit rating and the worst unfunded pension liabilities of any state in the nation, taxpayers are being asked to foot the bill for sweetheart deals given away in past years.
Payments on Unfunded Pension Liabilities – $4.6 billion
- The scheduled state General Revenue Fund contribution to the pension systems in FY16 totals $6.6 billion.
- Of that amount, about $2.0 billion accounts for “normal costs,” which represents the cost of benefits newly earned each year by active members of the pension
systems. Said another way, if the pension systems were 100% funded, the payment that would have to be made to the systems to maintain 100% funding would be $2.0 billion.
- Unfortunately, the state pension contribution also includes an amount to pay on the outstanding unfunded liabilities of the systems. These unfunded liabilities have been incurred over a period of time in part because of poor decisions to expand pension benefits and underfund the pension systems.
- A total of $4.6 billion of the pension payment is to pay for the sins of the past, or to pay the unfunded liabilities incurred in past years.
When tough decisions are put off for another day, when the can is kicked down the road to be dealt with by a future generation, this is what happens. Illinois taxpayers, schoolchildren and those citizens who need critical state services are being strangled by these additional costs that were incurred because of their government’s failure to make responsible financial decisions