CHICAGO – Illinois' elected leaders have plenty of advice about how to solve their budget problems, with no sign that they are going to take any of it.
A local think tank -- and even the President of the United States -- have offered road maps, but Illinois remains locked in a stalemate over its fiscal 2016 spending plan more than seven months after the year began, with the fiscal 2017 budget process about to begin.
The Chicago Civic Federation, a research organization, weighed in Thursday with a revised three-year plan that suggests spending cuts and tax hikes could stabilize the state's budget and eliminate its massive bill backlog in three years.
The report also reaches into pension funding issues, endorsing a constitutional amendment limiting state protection of benefits to those already earned and suggests pension help for Chicago public Schools be in the mix.
"Systemic payment delays and the ongoing budget impasse in Springfield have only exacerbated our state's financial woes, and there are no more politically popular solutions left to explore," warned federation president Laurence Msall. "Despite this dire situation, our roadmap shows that with dedicated action and shared sacrifice, it is possible to enact a comprehensive plan that will get Illinois back on sound financial footing by fiscal year 2019."
The report comes ahead of Gov. Bruce Rauner's fiscal 2017 budget address, slated for Wednesday, and follows President Barack Obama's hour-long speech this week to the Illinois General Assembly.
The president's speech commemorated the launch of his presidential bid nine years ago in Springfield; Obama used it to focus on the bitter political divide at the national level.
He called for leaders to find common ground and work with more civility and a willingness to compromise.
While speaking more broadly about the Washington climate, Illinois represents a clear example of how a political divide hinders government operations.
Obama suggested some potential avenues to an improved tenor including several issues that are on Rauner's governance and policy agenda.
Obama endorsed an overhaul in how legislative districts are drawn, something the Republican governor is pushing for at the state level, but also talked of his support for collective bargaining which he called "critical to the prospects of the middle class."
Rauner wants to curb collective bargaining powers at the local level but Democrats, who control the Illinois legislature, are opposed.
Democrats refuse to include the proposals in the budget mix and Rauner won't talk about tax hikes without concessions, leading to the eight-month-old stalemate. As the fiscal year continues, the state's liquidity worsens and unpaid bills mount.
The Civic Federation says it recommendations offer tough medicine for the state's woes but are needed to rein in the growing red ink.
Spending continues at fiscal 2015 levels under continuing appropriations and court orders but income tax receipts are down due to the partial expiration of a 2011 income tax hike a year ago.
That's led to a $5 billion deficit and could drive the state's bill backlog up to a new peak of more than $10 billion. Meanwhile, higher education institutions and social service organizations struggle to stay afloat without the benefit of their state support.
"If current revenue and expenditure policies continue, the state's backlog of bills could grow to $25.9 billion by the end of fiscal year 2019," the federation warns, citing the state's own three-year budget forecast released last month.
The report from the federation's Institute for Illinois' Fiscal Sustainability recommends a cut in the state's fiscal 2016 baseline spending by $1 billion.
On the revenue side, it suggests a retroactive increase of the income tax rate to 5% for individuals and 7% for corporations to Jan. 1, 2016. It dropped to 3.75% and 5.25%, respectively, Jan. 1, 2015. The group also suggests expanding the income tax to cover some retirement income. The state is one of only three among the 41 that impose an income tax that exempts all pension income.
The state also should broaden the sales tax base temporarily, suspending the exemption for food and nonprescription drugs, and enact a new general consumer services tax, the federation said. To offset the impact on lower earners of the tax hikes, the report suggests raising the state's earned income tax credit of 10% to 15%.
On pensions, the federation recommends folding the Chicago Teachers' Pension Fund and Illinois Teachers' Retirement System into one and "providing more equitable pension funding for all teachers and helping to stabilize Chicago Public Schools' finances."
The Chicago teachers fund carries $9.5 billion of unfunded liabilities but is better funded at 52% than the state teachers' fund, which carries $62.7 billion of unfunded liabilities and is 42% funded.
The report calls on the state to approve placing on the November ballot a constitutional amendment to make clear constitutional protections of pension benefits apply only to accrued benefits. The Illinois Supreme Court last year voided a package aimed at trimming the state's $112 billion of unfunded liabilities because the cuts violate constitutional protections.
Rauner and Senate Democratic President John Cullerton of Chicago have reached agreement on a plan crafted by Cullerton that asks current employees to make a choice in how salary increases are counted toward retirement income. Supporters believe it could pass legal muster but its savings are limited and it's unclear when the state will act given the budget gridlock.
The federation calls on the state to make supplemental payments, tapping revenue beginning in fiscal 2019 as the state pays off existing pension obligation debt and continuing until the five funds that make up the state's system are fully funded.
If the state fails to stabilize its finances, it faces further hits to its status as the lowest-rated state.
Moody's rates Illinois general obligation bond Baa1 with a negative outlook. Fitch Ratings rates the state at the same level at BBB-plus with a stable outlook, and Standard & Poor's assigns the state an A-minus rating and negative outlook.
Illinois' credit slide tacked on an estimated $43 million to its borrowing costs on a $480 million bond sale last month, according to a federation report.
The federation looked at what yields on what single-A rated credits paid in the market at the same time. The federation calculated the added interest cost at $43 million over the life of the bonds.
A separate analysis conducted by the University of Illinois Institute of Government and Public Affairs concluded that the sale generated nearly $53 million less than the state would received a decade ago when it carried healthier double-A ratings.
The report compared prices on the January sale – which brought actual prices that ranged between 98% and 114% of par value and 2006 prices of 104% and 127% of the par amount after making various adjustments to account to market factors.
"Putting a dollar amount on the impact of the state's financial condition hopefully helps policymakers and the public better understand the costs of the state's lack of action in improving its fiscal health," said Martin Luby, an IGPA visiting scholar.
