Illinois governor sounds budget alarms
Illinois Gov. J.B. Pritzker ramped up warnings over the dire measures that lay ahead without more federal relief to make up for COVID-19-inflicted revenue wounds, ordering cabinet members to identify cuts and lobbying the state's representatives in Congress.
Pritzker is laying the groundwork for potential cuts and layoffs at the state and local government level should the federal government fail to act soon on relief following up on the CARES Act funding that helped cover pandemic related expenses but not revenue losses.
“I can promise you that for everyone and anyone who got into public service who actually wants to serve the public, this is a nightmare scenario,” Pritzker said during a public appearance Tuesday.
Asked how long before the state would make cuts, Pritzker said, “if we get to the end of September [without fiscal relief], then we are going to have to start seriously looking at all these cuts and making sure we are implementing the beginnings of what it would take."
On Tuesday, Pritzker’s deputy on fiscal matters Dan Hynes and budget head Alexis Sturm ordered department heads to identify measures setting aside 5% of fiscal 2021 allocations and to submit fiscal 2022 budget proposals based both on a maintenance level and at a 10% reduction.
“The enacted fiscal 2021 [budget] is only affordable in its current form with federal support to bridge the pandemic-related shortfalls and that now appears not to be forthcoming. Fiscal 2022 will also have significant budgetary challenges,” Hynes and Sturm wrote.
The 2021 budget includes authorization to borrow up to $5 billion through the Federal Reserve’s short-term Municipal Liquidity Facility lending program. The administration has long said it might use the program if no aid is forthcoming before the end of the year with the hope that aid would be forthcoming and used to repay the debt. If the program is tapped and no aid is on the horizon, the administration told rating agencies it would trim spending. The administration said it had no update Wednesday on when, or if, the state would tap the authority.
Whether the alarms help or hurt the chances of Pritzker’s plan to raise more than $3 billion annually by moving to a progressive income tax rate structure is unclear. Voters will be asked on the November ballot to adopt a constitutional amendment lifting the requirement for a flat tax. If voters reject the measure, the state would tap $1.2 billion of GO issuance to cover fiscal 2021 expenses as the budget relies on revenue from the tax taking effect midway through the fiscal year.
Backers and critics are ramping up efforts with frequent prime-time television commercials. Backers stress the state would raise rates only on the top 3% of earners. Opponents warn the change will make it easier for the state to raise taxes on lower brackets in the future.
Pritzker made public Wednesday a letter sent this week to Illinois’ congressional members pressing the state’s case to combat a combined $6.5 billion in revenue losses between fiscal 2020 and 2021 that began July 1.
The state’s fiscal 2021 $43 billion general fund budget holds most spending steady. Negotiations have been stalled with the GOP resisting efforts to include local and state aid in a relief package. House Speaker Nancy Pelosi said this week the chamber would remain in session until a deal is reached.
“Without such support, the state would have no choice but to cut funding across the board to bring the budget into balance. Setting aside mandatory payments and debt service, this could translate into cuts as much as 15% to all programs and services,” Pritzker warned in the letter.
“This could possibly include over a billion dollars in cuts to PreK-12 schools alone, but also will lead to human services being decimated and thousands of layoffs in state and local government, colleges and universities, first responders, and among human service providers – potentially undoing many of the stimulus benefits that the federal government has worked hard to achieve,” Pritzker said.
With the state facing backlash from national GOP figures who have labeled Illinois’ requests as a bailout that would reward bad management, Pritzker cites the deficits bearing down on other states and lays out his attempts to stabilize state finances since taking office early last year.
The state’s bill backlog is on the rise after being trimmed by an infusion of federal CARES Act funding and the state’s $1.2 billion short-term borrowing through the MLF. The state’s accounts payable totaled $7.6 billion Wednesday, up from $5.4 billion at the start of the fiscal year and $4.4 billion early last month.
The backlog includes bills currently at the Illinois Office of Comptroller and an estimated $1.6 billion reported by state agencies. It does not include $2.25 billion in short-term borrowing. That figure includes the $1.2 billion of certificates sold through MLF and $1 billion owed to non-general funds. The state would repay $1.23 billion in fiscal 2021, $420 million in 2022, $242 million in 2023, and $360 million in 2024.
The state’s spreads have narrowed sharply from the beating they took in the spring market turmoil that saw record outflows. The state’s spreads to the Municipal Market Data’s AAA benchmark were at 185/215/203 bps on the 1-year/10-year/longer bonds this week. That compares to 305/325/310 bps in mid-June.
August revenues grew by $299 million with about $275 million of that increase due to a carryover of personal and income taxes filed in July, according to the Commission on Government Forecasting and Accountability’s August report.
The state moved the April deadline to July in tandem with the federal government due to the pandemic. Base receipts were up by $1.1 billion for the first two months of the fiscal year due to the July surge. Through August, combined net income tax receipts were up by $1.5 billion while net sales taxes were down $21 million.
Warning signs lay ahead. “The coming months may find the sledding tougher as the higher $600 per/week unemployment benefits under the Cares Act have expired,” the report warned. “Uncertainty is building as to what effect that sudden drop in assistance will have on the consumers caught up in pandemic-related job losses.”
Motor fuel taxes are lagging expectations. The tax was doubled as part of the state’s capital budget last year. The state collected $422 million between April and June of 2019 so, in theory, that would translate into $844 million in collections this year. “Instead, the slowdown of activity in Illinois resulted in only $654 million being receipted … a differential likely attributed to COVID-19,” the report read.