Illinois deficit increases as governor ponders pension and budget fixes
CHICAGO — Illinois Gov. J.B. Pritzker’s administration warned of growing red ink in the next budget as he offered a deeper glimpse into some of the ideas under consideration to tackle the now $3.2 billion deficit and $133.7 billion unfunded pension tab.
The new budget gap estimate came Friday ahead of the release of a report from Pritzker’s transition working budget committee about measures that could help cure the state’s fiscal ills, which also include a more than $7 billion unpaid bill backlog.
Pension ideas include restructuring the current 50-year payment structure, transferring an asset to the system to reduce unfunded liabilities and improve the 40% funded ratio, and dedicating a new revenue source solely toward pension funding.
The report does not suggest issuing pension obligation bonds as some believe the governor’s past remarks suggest is under consideration to generate more upfront funding. Administration officials cautioned that the report only offers up ideas that may be considered.
“We look forward to taking these ideas into consideration and presenting our agenda,” Pritzker said in a statement releasing of all 11 transition committee reports.
Former Gov. Bruce Rauner’s administration had pegged the deficit in in the next fiscal 2020 budget at $2.765 billion in the five-year forecast released last November. That report warned that the bill backlog could ratchet up to $23.7 billion during that period if the red ink is not erased.
The deficit report released Friday — authored by Pritzker’s deputy governor, Dan Hynes — raised the projection to $3.2 billion. It argues the November estimate didn’t take into account spending needs that are in some cases due to neglect during the two-year budget impasse during Rauner’s tenure. The state is operating on a $38.5 billion general fund.
“Widespread cost pressures have become evident — and it has become clear that in order to deliver basic services throughout the state, those pressures must be addressed,” the report warns.
Additional spending beyond what was estimated in November in the areas of human services, state employee health insurance, higher education, public safety, and government services drove the higher deficit, according to the report.
The 11-page report is entitled “Digging Out: The Rauner Wreckage Report.” It provides an initial review and “in-depth look at where things stand in terms of the deficit and lays the groundwork for moving forward,” said Pritzker’s press secretary Jordan Abudayyeh.
The report seeks to lower any expectation of a quick fix.
“Illinois will need years to dig out of the fiscal mess this administration inherited,” writes Hynes, who is a former state comptroller. The budget will be released Feb. 20.
The new report adds $500 million to the $7.8 billion bill backlog the November forecast had projected for the close of fiscal 2019. The comptroller warned last week that number could rise by as much as $2 billion.
The report blames the problem squarely on Rauner.
Late payment interest penalties tied to the two-year budget impasse driven by political differences by the former governor, a Republican, and the Democrat-led General Assembly will reach $1.25 billion once all bills are repaid, the report said. About $700 million was paid out on interest last year.
The report also puts a price tag on bond interest due to the state’s credit deterioration: at least $75 million since 2017. The report highlights the eight downgrades handed down to Illinois by Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings and its current status just one to two notches away from junk. The state’s rating erosion, however, begun under Rauner’s predecessor, Pat Quinn, a Democrat.
The report also takes Rauner to task for “overly aggressive assumptions” built into the fiscal 2019 budget such as the expectation that $400 million in savings would be achieved from a pension buyout. Some of the state’s pension funds have begun implementing it but it’s unclear how much can be generated this year. The state currently owes $9.2 billion to the pension system next year.
While the report takes aim at Rauner for the impasse, the fiscal 2019 budget he signed was crafted by Democrats and Republicans alike and approved in a bipartisan vote. All parties labeled it at the time as “balanced.”
The budget and innovation transition committee report published Friday offers ideas for revenue, many endorsed by Pritzker during the campaign or since the election, but offers just broad strokes on how to solve the pension dilemma.
Suggestions include strengthening tax collection and compliance, finding increased revenue from existing and new sources, improving expense management and efficiency, and increasing coordination between state and local governments.
New revenue ideas include taxing new and existing products and services that have traditionally been exempted in Illinois but not in other states. Pritzker has endorsed legalizing marijuana. The legalization of untaxed industries — including sports betting, internet gaming, and cannabis usage — would generate additional annual revenues. The report promotes a shift to a graduated income tax from the current flat income tax, a cornerstone of Pritzker’s plans that requires a constitutional amendment.
On pensions, the report said, the goal should be to increase the inflow of funds to the system, reshape the pension payment curve, and improve the performance of the investment engine.
Ideas offered include directing a specific revenue stream to pay own pension debt with provisions mandating that the revenue goes solely to pensions.
“Asset transfers could also be used as a means to add value to pension systems. For example, if the state were to move an asset to a pension fund, it could be used to reduce the unfunded liabilities for the pension system and increase the funding ratio, leading to potentially reduced interest costs on pension debt,” reads the report.
The report suggests higher returns could be generated through various consolidation of local pension funds, negotiating a standard “one-price” investment management fee for all Illinois pension funds while investment management and asset allocation could be re-assessed.
The committee looked at a restructuring of the current pension payment curve as one means to put the funds on a more sustainable path. It suggested the state could create a sustainable amortization schedule combined with other changes to meet short-term budget needs while improving the funded ratio in the long term.
“The goal here is to find a rational payment plan that increases the funded ratio each year while still meeting the cost of paying benefits to current and future retirees,” the report said. “Such action would need to be taken in conjunction with changes that increase funding, improve investments, and/or increase stability such that debt markets see that Illinois is serious about comprehensively solving the pension funding deficiency.”
The report also suggests the state revisit its current bonding rules on maturity caps, refunding restrictions, and available security to provide more flexibility.
“This could help the state create innovative financial vehicles to manage all of its debt including the pension debt while also strengthening Illinois’ creditworthiness,” reads the report.