Group Urges Illinois to Make Cuts Before Hiking Taxes

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CHICAGO - With tax increases on the table to deal with a $9 billion budget deficit and to finance a new capital program, a Chicago-based government watchdog group is calling on Illinois to permanently cut spending, jobs, and future pension benefits before hiking taxes.

The Chicago Civic Federation's research arm, the Institute for Illinois' Fiscal Sustainability, yesterday released the report aimed at providing a road map for Gov. Pat Quinn and lawmakers to craft a budget amid what many believe is the state's worst fiscal crisis. The report comes ahead of Quinn's budget address scheduled for next week.

"The Civic Federation sees the financial crisis in Illinois as an unparalleled opportunity for Illinois legislators and the governor to get the state on the right fiscal track," said Laurence Msall, president of the business-funded nonprofit. "State leaders cannot return to the status quo ante of gimmicks and Band-Aids - they must choose a new path of fiscal responsibility."

The report urges state leaders to prioritize programs in an attempt to rein in spending and reject any effort to skip the scheduled pension fund payment or increase the sales tax. The organization is also against any move to levy a gross receipts tax on businesses as former Gov. Rod Blagojevich sought several years ago.

On the Medicaid front, the report includes a series of recommendations aimed at reducing skyrocketing costs, such as moving long-term care patients with mental illness to settings that do not violate federal rules, thereby making costs of $700 million eligible for federal matching funds.

On pensions, the organization urged the state to impose a moratorium on new benefits until a 90% funding ratio is reached, raise the retirement age of new hires, fix automatic increases for new hires to a rate tied to inflation, and increase employee contributions. Illinois' unfunded liability continues to grow, reaching an estimated $73 billion at the close of last year based on initial estimates, for a 40% funded ratio.

Reforms must be adopted before any new pension bond issuance is approved. The state sold $10 billion of taxable general obligation pension bonds in 2003 and sources have said its financial team is considering additional issuance in the next budget.

The institute acknowledges that even if its recommendations on spending are followed, more revenue will be needed to balance the budget, and so Msall said the group might support a modest income tax increase as long as it goes to pay for current liabilities and not new spending.

State lawmakers and Quinn have said tax increases are on the table and hinted at an income tax hikes to help shore up the operating budget, along with an increase in certain tax credits to offset the impact on lower earners. A gasoline tax increase would help finance a new $25 billion capital budget.

Public finance sources said advisers to the governor - who took office after the General Assembly removed Blagojevich by impeachment after his arrest in December on federal corruption charges - are also looking at restructuring the state's debt and resurrecting a lottery lease plan.

Federal authorities have ruled that states must maintain majority control of their lotteries but Illinois officials believe they can seek changes to the rules. The institute's report calls on the state to use any funds from privatizing state assets to reduce existing obligations such as debt or pension liabilities and not as one-time moves to cover recurring expenses.

Illinois has $8.9 billion of non-pension GO debt and $2 billion of sales-tax backed debt outstanding.

Fitch Ratings downgraded Illinois to AA-minus in December. Standard & Poor's put its AA rating on negative watch. Moody's Investors Service has not acted on its Aa3 rating, but did strip the state of top short-term credit marks in December.

The report followed the release last week of an analysis from another Chicago-based business group warning that the state had reached a "financial tipping point" and faces the loss of business, investment, and jobs because of its financial crisis.

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