John Cullerton

CHICAGO – Budget season in Illinois kicked into gear this week with Democrats and Republicans trading barbs over the shape of the next budget and how the state should deal with an projected $3 billion deficit due to the looming rollback of an income tax hike.

Gov. Pat Quinn won’t lay out his proposed fiscal 2015 budget until late next month, after the state’s primary election, but budget talk took center stage during an appropriations committee hearing late Wednesday on state finances.

The General Assembly’s Commission on Government Forecasting and Accountability also released an economic outlook prepared by Moody’s Analytics. The report underscores the state’s daunting budgetary challenges even after passing a pension overhaul in December aimed at stabilizing the state’s troubled funds.

“Longer term, Illinois has a lot of what of businesses need to thrive — talent, access to customers and capital, transportation — but painful fiscal reforms are needed before it can fully capitalize on these strengths,” the report said. “The state’s financial condition remains precarious as chronic deficits have led to a budget that is not fiscally sustainable.”

The report also underscored that “pension reform still faces a significant legal challenge” mounted by unions and others angry over benefit cuts and said the state must resolve how to deal with a partial rollback of the 2011 tax increase which “will dramatically reduce revenues starting in fiscal 2015.”

Quinn and many of his fellow Democrats who control the General Assembly have yet to outline their position on whether the tax rate hike should be extended, made permanent, or replaced with a new revenue stream.

The first salvo in the debate came from Democratic Senate President John Cullerton during a news conference Monday in the form of a warning that difficult decisions lay ahead without the benefit of the higher income tax collections. The $3 billion shortfall threatens fiscal progress, he said, calling on the minority Republican caucus and Republican candidates for governor to work on a bipartisan plan.

“I’m here to jump-start a discussion on how we bridge a $3 billion gap. I’m here to urge my Republican counterparts to join the discussion so we can produce a bipartisan solution,” he said. He attributed the projected $3 billion deficit to a $1.6 billion drop in income taxes as the tax hike rolls back on Jan. 1, midway through the next fiscal year, and to required increases to fund various services and programs.

Cullerton said that without new revenue a 27% across the board cut to discretionary spending would harm schools and result in teacher layoffs and crowded classrooms with Chicago Public Schools —which faces a $900 million deficit already — losing $300 million. Higher education spending would fall by $500 million driving up tuition at public universities and resulting in tens of thousands students losing aid.

Republican caucus leaders responded to the call on Wednesday by releasing a set of demands to win their cooperation on a budget agreement. “If they want us to work with them, there are things they’re going to have to recognize and commit to,” Senate Republican Leader Christine Radogno, R-Lemont said. The caucus accused the Democrats of ignoring past Republican recommendations by burying proposals in committee.

The group called on Democrats to let the tax increase expire as scheduled. The Republican caucus leaders want to take off the table any talk of a shift from a flat income tax to a graduated one based on income. They want additional workers’ compensation reforms and a ban on expanding current programs or creating new ones in the next budget, and believe there is room to cut.

At risk in the debate is the state’s fiscal underpinnings and credit. The state is rated in the low single-A category, the weakest among states, and it carries a negative outlook from two rating agencies and a “developing” one from a third. The rating agencies have praised the pension overhaul, while suggesting that they are waiting for the outcome of the legal challenge and want to see how the state deals with the looming income tax drop before acting on the rating.

The Moody’s economic forecast highlights the state’s weak recovery among Midwestern states over the last year and low ranking in jobs, income and output last year. It also suggested there are positive signs afoot in declining foreclosures, manufacturing advances and improved consumer wealth with the recovery gaining speed in the third and fourth quarters.

The signs are offset by the state’s budgetary challenges. “Illinois’ economy is poised to strengthen, but severe state budgetary problems and poor population trends will act as a speed limit on growth,” the report read. The state’s poor fiscal practices include pushing off bill payment which results in a structural imbalance. The state expects to carry over more than $5 billion in bills over into the new fiscal year. It closed out the last fiscal year with $7.6 billion.

The report also underscores the potential negative impact on the city’s economy if lawmakers don’t act on local government reforms that cover Chicago which is struggling under $19.5 billion of unfunded liabilities and faces a $600 million payment spike in 2015, and Cook County. The city’s funds are “grossly underfunded and will undermine the city’s capacity to provide essential services if left untouched,” the report said.

While the budget and tax rollback are at the forefront of lawmakers’ agenda this spring, Quinn has said he wants lawmakers to tackle passage of a new capital program as the state winds down spending on a $31 billion partially bond-financed package approved in 2009.

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