Illinois Budget Gets Watchdog Group's Endorsement

CHICAGO — Illinois Gov. Pat Quinn's proposed $62.4 billion fiscal 2014 operating budget won the endorsement of a local government watchdog group, but the positive assessment was tempered by the organization's alarm over the state's mountain of unpaid bills and pension crisis.

The analysis by the Civic Federation of Chicago's Institute for Illinois' Fiscal Sustainability endorses the governor's budget for making progress on paying down bills, reducing the expected $7.6 billion backlog this year to $6.8 billion. It also praises the budget for not relying on borrowing and being balanced based on projected revenues.

But the report describes the budget as a stopgap that underscores the need for pension reform as combined pension payments and debt service on past pension note issues will consume 25% of state-source general fund revenues. That figure will rise to 35% by fiscal 2033 if nothing is done. State pension payments rise by nearly $1 billion to $6 billion in fiscal 2014 and total $7.7 billion when pension debt payments are counted.

The all-funds $62.4 billion budget includes a $35.6 billion general fund. The state's fiscal strains — which have driven several rounds of downgrades — remain even as Illinois has seen a jump in income tax revenue from a temporary tax hike in 2011 and several years of cost cutting.

"This budget is overwhelmingly constrained by the state's pension costs," federation president Laurence Msall said in a statement accompanying the group's analysis. "A long-range plan to substantially reduce these unaffordable costs is the only way to protect essential services for Illinois residents while keeping our public employee pension funds solvent."

The state can't make much more progress in paying down its bills without easing the pension payment burden as the uptick in income taxes will fall back beginning in fiscal 2015 when the income tax hike partially expires, the federation cautioned.

Lawmakers have yet to take up much of the budget as they have in recent weeks focused on policy and social legislation, gambling expansion, and pension reform. The House and Senate over the last two weeks passed competing versions of pension reform.

The federation also raised some concern over state projections on savings tied to retiree healthcare reforms. Quinn's budget team has estimated the savings next year at $354 million and $900 million over the next three years. While employees will pay more next year under a new union contract, the federation believes the state still can't afford the benefit and should require higher cost sharing from retirees.

The budget anticipates a 2% increase of $706 million in revenues in the next fiscal year. The figure is disputed by the General Assembly, however, and lawmakers are expected to trim overall general fund revenues by $549 million. General fund-supported debt service peaks in fiscal 2014 at $2.1 billion.

The federation endorsed a Quinn proposal that is deeply disliked by local governments to reduce state transfers for local governments and mass transit and to annually review the transfer that in the past has been automatic. The budget caps local income tax sharing payments at the fiscal 2012 level of $1.1 billion, down $27 million from fiscal 2013 and $68 million under what would have been the automatic 2014 payment.

The federation supports a House-passed pension plan that calls for direct benefit cuts aimed at trimming $30 billion off of the state's $95 billion of unfunded pension obligations and overall savings about $140 billion in future payments. A Senate-approved package asks employees and retirees to accept cuts in exchange for preserving their retiree healthcare. It would trim $10 billion off of the unfunded liabilities and about $50 billion off future pension payments.

In addition to passing state reforms, the federation called on lawmakers to pass along those measures to local governments. Chicago Public Schools and Chicago are facing major spikes in the size of their pension payments in the coming years without action.

"Without changes to pension benefits for local governments, the taxpayers of Chicago face catastrophic tax increases or service cuts and the employees of all the Chicago and Cook County funds face an uncertain retirement benefit," the federation wrote.

Fitch Ratings has the state's A rating on $26.2 billion of GO debt on negative watch. Standard & Poor's earlier this year downgraded the state to A-minus and assigned a negative outlook. Moody's Investors Service assigns a negative outlook to Illinois' A2 GO rating.

The budget calls for reauthorizing $18.1 billion in capital spending and $3.3 billion in new funding. The federation opposes the authorization of debt-funded projects until the state establishes a "more transparent and needs-based capital improvement program for all capital spending," the report reads.

In  a statement Monday, Quinn’s office said: “Gov. Quinn welcomes the Civic Federation’s analysis of our proposed fiscal year 2014 budget; the group’s endorsements of our major budget policy initiatives; and their exhortation to Illinois’ General Assembly to pass comprehensive pension reform.”

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