CHICAGO — Illinois Gov. Pat Quinn called for legislative action this year on pension and Medicaid reforms to stabilize the state’s fiscal house but offered few details on how to accomplish that goal in his state of the state address Wednesday during which he rolled out plans for new tax credits and more education spending.
Quinn offered no means to finance his new proposals, drawing the ire of Republicans and questions from his fellow Democrats over how the fiscally strapped state can afford them.
The speech comes two days after a Chicago government research group released a report warning that financial disaster looms as the state’s bill backlog could rise to $34.8 billion by 2017 from an estimated $9.2 billion this year unless the state reins in pension and Medicaid spending.
Quinn acknowledged the state’s fiscal woes and said details on how to address them would come in his fiscal 2013 budget address in three weeks. “Suffice it to say, we must have Medicaid reform and public pension reform in the coming year,” he said. “Fixing the pension problem will not be easy, but we have no choice. We must do it together in a way that is meaningful, constitutional and fair to the employees who have faithfully contributed to the system.”
Quinn last month named a legislative panel to come up with pension recommendations. The state in 2010 created a two-tier system with new employees receiving reduced benefits. Several ideas for further reforms include trimming the future benefits of current employees and shifting the burden of funding suburban and downstate teachers’ pensions from the state to the districts. Chicago Public Schools currently covers the employer contribution for its teachers.
The state’s five pension funds closed out fiscal 2011 with $82.9 billion of unfunded liabilities for a funded ratio of 43.4%. Pension-related costs — including statutory payments to the systems and debt service on pension bonds — will rise from $5.7 billion in fiscal 2012 to $7.8 billion in fiscal 2017, according to the Chicago Civic Federation’s report on state finances released Monday.
While a temporary income tax increase approved last year eased the state’s fiscal crisis, the failure last year to address the bill backlog and rising pension costs prompted Moody’s Investors Service to downgrade the state in January. It now rates Illinois’ $27 billion of general obligation debt at A2 — the lowest rating held by a state — with a stable outlook. Fitch Ratings rates the credit A with a stable outlook. Standard & Poor’s last month affirmed its A-plus rating and negative outlook along with a warning that lawmakers must act this year to stave off a downgrade.
The federation report also warned that a $508 million operating deficit in the current $33.6 billion budget could grow to $3.2 billion by 2017, but Quinn said cuts alone won’t solve the state’s woes and he called for measures aimed at creating jobs and assisting veterans and others.
“Like all of you, I recognize the severity of our fiscal situation,” he said. “But cuts alone will not resolve this situation. We must build and grow our economy.
Quinn proposed abolishing the natural-gas utility tax, establishing a child tax credit and a tax credit for companies that hire veterans, increasing college tuition grants, and increased spending on early childhood education and classroom technology upgrades. He also proposed reaching out to the business community for ideas on how to improve the state’s business climate.
Some businesses threatened to leave the state after lawmakers enacted the income tax hike last year. He also highlighted the long list of capital investments made possible through funds from the state’s partially bond-financed $31 billion public works program adopted in 2009.
The state issued $800 million of GOs last month for the capital program and will return this spring for another round of borrowing. Illinois captured its lowest ever borrowing rate — benefiting from fortuitous market timing — but it continues to pay a steep penalty compared to similarly rated credits because of its fiscal stress.
Democratic lawmakers, who hold a majority in the General Assembly, questioned how the state would pay for the new proposals while Republicans blasted the idea of new spending before pension and Medicaid costs are tackled.
“We really need to acknowledge and deal with the humongous problem the state is dealing with … it has to be done or this state will become insolvent,” Senate Republican Minority Leader Christine Radogno said.
The strain on the state will grow in the coming years as a portion of the income tax hike is phased out beginning in 2015. Some believe the General Assembly will eventually extend the expiring tax or make it permanent.