CHICAGO—Illinois Gov. Bruce Rauner unveiled a nearly $38 billion election-year budget that pushes some of the state’s fiscal pain off to local school districts and public universities, authorizes $7.8 billion in new capital spending, and ties proposed pension change savings to a rollback of last year’s income tax increase.

The general fund would total $37.9 billion, with 37.6 billion in spending, leaving a surplus of roughly $300 million. Other state funds and federal funds bring the all-funds state budget to $75 billion.

“These are the priorities we’ve set for the next fiscal year and beyond” that “put a stop to the unsustainable growth in our pension and health care costs, halt and reverse the advance in taxes, and restore emphasis on investments in education, human services, public safety and infrastructure,” Illinois Gov Bruce Rauner said Wednesday in his budget address.

Release of the spending plan marks the first salvo in the fiscal 2019 budget season. Rating agencies, investors, watchdog groups, and voters are watching to see whether gridlock returns and drives the state’s bill backlog back. It was trimmed to a current level of $8.9 billion from a record $16 billion due to the two-year budget impasse through $6 billion of borrowing late last year.

Shifting some pension costs to public schools and universities as well as some health care expenses over a four-year period would save $696 million in fiscal 2019. The move would deal a blow to districts by cutting into additional funding they would get under the funding formula overhaul approved last summer. The cash-strapped Chicago Public Schools would lose about $200 million.

The budget earmarks $350 million more under the new school aid formula for a total of $6.8 billion. Universities would get $205 million to offset the pension/healthcare cost shift and further savings could be achieved to offset the loss by more “flexibility” in contracting, bidding, and sharing services, some measures unions are likely to fight.

Rauner also wants to take group health insurance out of the collective bargaining process and put it under legislative authority which he says would save $470 million in general funds.

“Our FY19 budget sets out to make the structural reforms that will get us moving in the right direction,” Rauner said in his address Wednesday.

If his proposals come to fruition, Rauner said the state would save about $1.3 billion and may achieve a surplus to help pay down the state’s bill backlog. The budget also relies on $600 million in interfund borrowing that is serving as a bridge, as the state's debt service will fall in fiscal 2020 when a portion of its previously issued pension notes are repaid.

Without approval of the various measures, the budget would fall $2 billion short of balancing.

“These are the priorities we’ve set for the next fiscal year and beyond” that “put a stop to the unsustainable growth in our pension and health care costs, halt and reverse the advance in taxes, and restore emphasis on investments in education, human services, public safety and infrastructure,” Rauner said.

Rauner renewed his call for pension “reforms” that stalled last year amid partisan feuding. He has backed a proposal from Senate President John Cullerton, D-Chicago, that asks employees to accept some cost-saving cuts in exchange for future raises being counted toward their pensionable salary. While Cullerton has said the plan passes constitutional muster by offering a choice, unions have threatened a legal challenge.

Rauner wants to use the nearly $1 billion the plan would trim from the state’s roughly $8 billion in annual pension contributions to begin rolling back the tax increase approved in the budget package last summer.

State officials said the goal is to reduce the current personal income rate of 4.95% to 4.7 %. The drop would not take effect unless the consideration pension model is adopted, survives a legal challenge, and is implemented. “It’s an off-budget item” that’s not needed to balance the budget, an official said.

Budget season begins with a $600 million hole to plug in the current budget, whittled down from a previous estimate of $1.7 billion primarily through cuts and higher-than-expected revenues, budget director Hans Zigmund said at a legislative hearing last week.

The state is also grappling with more than $1 billion in unappropriated bills and the weight of a $129 billion unfunded pension burden.

The state’s tarnished general obligation ratings – two are at the lowest investment grade level of Baa3/BBB-minus and one is at BBB – hang in the balance as well as it borrowing costs. The state’s spreads on its 10-year to the Municipal Market Data benchmark stood this week at 185 basis points, according to MMD municipal strategist Dan Berger. The spread briefly hit a high of more than 300 basis points before the impasse broke and after an adverse Medicaid bill payment court ruling. It has hovered in recent months between 175 and 195 basis points.

The General Assembly’s Democratic majority broke a two-year budget stalemate last July with the help of a handful of Republicans who broke with Rauner to approve the $36.1 billion fiscal 2018 budget package. It relied on nearly $5 billion in new revenue primarily from an income tax hike.

Tensions have amplified with the start of the 2018 legislative session, with the March primary and November general election looming. While Rauner has kept up his attacks on House Speaker Michael Madigan, D-Chicago, and Democratic contenders, he faces GOP strife with some members backing his primary opponent Rep. Jeanne Ives of Wheaton.

The sniping began soon after the address, as Democrats charged that Rauner dragged out the same proposals from past budget proposals with no assurance of bipartisan support. Rauner has long argued that his budget proposals are balanced, a notion shot down by both Democrats and watchdog groups, who cited a reliance on revenue proposals and savings that are uncertain.

“It appears much of this is the governor recycling previous proposals,” Cullerton said. “He’s going after public sector employees’ health insurance, again. He’s going after retired teachers’ health insurance, again. I don’t think those cuts are good ideas, and I’m pretty sure Republicans don’t support them either.”

CAPITAL

Rauner is proposing $7.8 billion in new capital spending that, combined with a reauthorization of previously approved projects, adds up to $16.8 billion of spending. The total program relies on $6.9 billion of borrowing and $9.9 billion of pay-as-you-go funding, according to documents.

The full plan is likely to be completed over multiple years, given the state’s limited borrowing ability based on current revenue sources.

New borrowing authority being sought is just $2 billion.

The capital budget sends $2.2 billion to the Illinois Department of Transportation for road projects in pay-as-you-go funds and provides an additional $511 million in new funding for other IDOT projects.

The capital program proposes $4.8 billion in new initiatives that rely on $530 million of sales tax-backed Build Illinois bonds and $655 million of GOs.

The plan also authorizes $100 million in new funding for deferred maintenance and repairs at state colleges and universities and $500 million for the Discovery Partners Institute at the University of Illinois. The latter is among the new initiatives that relies on Build Illinois bonds.

The capital plan provides $50 million in emergency funding for upgrades at the state’s veteran’s home in Quincey that has seen multiple outbreaks of Legionnaires disease.

RECOMMENDATIONS

The state could balance its books and clear out its bill backlog by fiscal 2023 through a series of spending and tax measures and belt-tightening, the Chicago Civic Federation’s Institute on Illinois Sustainability said in its annual fiscal roadmap report issued this week.

Proposals include limiting spending growth to 2.1% annually and reducing late payment costs on overdue bills that run as high as 12% to a market-based rate.

To raise revenue, the state should eliminate the exclusion of state taxes on federally taxable retirement income and extend the sales tax to 14 services that neighboring Wisconsin taxes.

“Building political will to implement more painful tax and fiscal policies will be difficult, but it is necessary in order to secure Illinois’ financial future,” Civic Federation President Laurence Msall said in the report.

The report also recommends the state look at its consolidation of its 12 public university campuses. The federation suggests consolidating some higher education boards and degree programs possibly shutting down some campuses to reallocate resources.

The general fund budget includes $2 billion for debt service on general debt and an additional $782 million to cover the first year of repayment on the $6 billion of backlog borrowing, according to budget documents.

The $1.3 billion in savings the budget relies on from shedding pension and healthcare costs includes $262 million in savings from shifting the cost for the state teachers retirement system to districts, $228 from shifting CPS contributions, $101 million from shifting contributions for university pensions, $470 million by removing group health insurance from collective bargaining, $105 million from shifting healthcare costs to universities, and $129 million from eliminating a healthcare subsidy for retired teachers and community college employees. The latter could face a legal challenge as the Illinois Supreme Court has ruled that state constitutional provisions protecting pension benefits from cuts extend to retiree healthcare.

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