"I won't support new revenue unless we have major structural reforms to grow more jobs and get more value for taxpayers," said Illinois Gov. Bruce Rauner.

CHICAGO — Illinois Gov. Bruce Rauner told members of the legislature's Democratic majorities — with whom he remains at bitter odds over the state's seven-month overdue fiscal 2016 budget -- to support at least some of his proposed governance and policy reforms or give him sweeping powers to balance the state's books.

The Republican governor laid out the choices in his fiscal 2017 budget address to lawmakers Wednesday.

The release of next year's budget proposal without a current spending plan in place marked a first in Illinois history.

Democrats want a mix of cuts and tax hikes to balance the budget and Rauner won't support a tax hike without passage of his reform agenda items. Democrats won't push a tax hike through on their own.

"I won't support new revenue unless we have major structural reforms to grow more jobs and get more value for taxpayers," Rauner said. "That leaves us with only two choices: either you give the executive branch the authority to cut spending to live within our revenues. Or, we agree — together — on economic and governmental reforms, to accompany a negotiated balance of spending reductions and revenue, that ensures that Illinois can be both compassionate and competitive.

"You choose. But please, choose now," he told lawmakers.

The powers would be granted under legislation Rauner called the unbalanced budget response act which would give him carte blanche to move around revenues and manage state spending.

"It's not my preferred course of action. It wouldn't solve our long-term challenges. But it would, at the very least, allow us to stop digging the hole deeper," he said.

The two options are also laid in budget documents. If a budget agreement is reached, Rauner is proposing a $36.3 billion spending plan that includes some savings from cuts and reforms and new revenues from unnamed sources. An income tax hike and broader sales tax are among the streams on the table.

Without a budget agreement in place, state spending would be limited to $32.8 billion of revenues that are expected in the next fiscal year. That would require $3.5 billion in additional cost cutting.

Rauner sought to strike a more conciliatory tone, offering to drop some items from his agenda, as he has done in the post to no avail.

"To take this path, we don't have to enact every item of our turnaround agenda in their current forms, but we must pass real reforms this year," he said. His proposals call for action on term limits and redistricting, a local government property tax cap with curbs on union powers, and worker's compensation and tort reforms.

The state's fiscal position is precarious as it struggles with a $5 billion to $6 billion gap in the current fiscal year that runs through June 30 and a bill backlog that could top a record $10 billion in the coming months. The state is saddled with $113 billion of unfunded pension liabilities.

Two rating agencies have socked the state — which already was the lowest rated state -- with downgrades and there is risk of further deterioration.

While much state spending continues unabated through continuing appropriations and court orders and decrees, higher education institutions and social service organizations have warned of layoffs and even closure because state funds are cut off without a budget.

Democratic leaders were not moved by Rauner's speech.

Senate President John Cullerton, D-Chicago, said it's within Rauner's existing power to cut the budget to his liking and pieces of the speech were just not "accurate."

Last year, Democrats approved a $36 billion plan, much higher than Rauner's $32 billion general fund, and he vetoed it with the exception of education spending.

"With all due respect to the governor, his budget speeches don't help Illinois. At this point the courts are running more of the state than our governor. It's going to require real plans and real action on his part to resolve the impasse he created," Cullerton said.

House Speaker Michael Madigan, D-Chicago, called Rauner's policy desires part of an "extreme right wing" agenda that would harm the middle class and reiterated his position that the budget be tackled alone.

"We must address the number one problem facing the government….the budget," Madigan said.

Rauner and his fellow Republicans believe the two are tied. Their position is that reforms will improve the state's economy and in turn, generate more revenues, and improve the state's budget picture.

While both sides remain stuck in political muck, Rauner said he would submit a separate appropriation for early childhood education and kindergarten through 12th grade spending.

"No matter how this session unfolds, send that education bill to my desk — clean — no games — and I'll sign it immediately," he said. The budget proposal fully funds the general state aid foundation level for the first time in seven years and provides an additional $75 million for early childhood education, bringing funding to nearly $400 million.

The state's public universities would see a 20% cut from fiscal 2015 levels. The budget does not cut funding for transit agencies or to the local government tax sharing program, both areas hit in the budget unveiled by Rauner last year.

The budget anticipates a $2 billion road funding program on a pay-as-you-go basis. That's up by $150 million from this year. A reauthorization of capital projects relies on $800 million of borrowing.

The administration argued for the special powers to cut spending absent an agreement because 60% of general fund revenues are locked up by statutory requirements — like Medicaid and pension payments -- limiting the governor's ability to trim spending or adjust the timing of some payments. "It's just not feasible," an official said.

As the state's bill backlog mounts, the Rauner administration said if a budget is enacted it would consider a financing to bring down the backlog which currently carries a 12% interest penalty.

The administration put a dollar amount of $3 billion to $4 billion on the size of a potential borrowing.

Rauner chided Cullerton during his speech for failing to introduce a pension reform package he's endorsed.

"Unfortunately, as of today, no bill has even been introduced. Now is the time to set politics aside and do what is right for taxpayers. No more delays. No more stalling," Rauner said.

Cullerton counted that his office has informed the administration that the bill is still being crafted.

No savings from the reforms are expected until fiscal 2018. The budget says a half billion dollars could be saved from the proposed reforms with $1 billion in future years. Contributions are set to rise by $290 million in fiscal 2017 to $7.8 billion.

Under Cullerton's plan, employees would be offered the choice of keeping their current cost of living adjustments without having future pay increases count toward retirement benefit calculations, or accepting reduced COLAs and continuing to have pay raises counted.

The state's previous pension reform plan was overturned by the Illinois Supreme Court last May after justices found proposed cuts violated the state constitution. Supporters believe the legality of Cullerton's plan lies in contract law provisions that allow for "consideration" of changes to contract terms with employees if a cut is offset with a benefit.

To help trim the state's red ink headed into the next year, Rauner wants to forgo repayment of about $450 million to non-general funds owed in fiscal 2017. The state dipped into various fund surpluses to help balance the fiscal 2015 budget. The budget also anticipates $780 million in fiscal 2017 savings from several pension-related changes. The state would phase in over five years the impact of changes in actuarial assumptions to soften the near-term impact on pension contributions and state agencies and offices would no longer cover any employee pension contributions. The changes, along with the Cullerton crafted pension reforms, if enacted, would save $5 billion over four years, according to budget documents.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.