Illinois Gov. Bruce Rauner’s budget proposal assumes new tax revenue, such as that proposed in the state Senate’s “grand bargain.”

CHICAGO – Illinois Gov. Bruce Rauner's proposed fiscal 2018 operating budget banks on $3 billion of savings from a series of initiatives and the sale of the state's downtown Chicago headquarters, along with billions in additional tax revenue, to fund $37.3 billion of spending.

"The upper limit on proposed spending totals $37.3 billion with a solution of structural changes, reductions and revenues enacted to reach a balanced fiscal year 2018 budget," budget documents say.

If Rauner and lawmakers can't agree on a compromise package that includes a mix of policy reforms and tax increases to end more than 19 months of budget gridlock, the state will have just $32.7 billion to spend based on current projections. The budget figures include a line item under the list of revenue "resources" that anticipates $4.6 billion from the "Grand Bargain" package.

If the savings can't be achieved or if spending is left on "auto-pilot" at current levels based on continuing appropriations, consent decrees, court orders and special appropriations, the state's red ink will grow.

With no changes in fiscal year 2018, expenditures will hit $39.7 billion, an increase of $1.6 billion over what the state currently expects to spend in fiscal 2017 which ends June 30, according to budget documents released Wednesday. A good chunk of the increase would come from a roughly billion-dollar hike in the state's fiscal 2018 pension contributions.

"If a comprehensive plan is not enacted to ensure a balanced budget in fiscal year 2018, the governor asks that the General Assembly pass the Unbalanced Budget Response Act which would enable him to balance the budget by making cuts to the spending now locked into statute and keep total spending within existing revenues," the Rauner administration asks in its budget document.

Budget Director Scott Harry defended the plan as balanced at a committee hearing Thursday during which Democrats drove home the differential between expected revenues and the governor's preferred spending level of $37.3 billion. "The governor has said from day one he is open to new revenues" if enacted along with structural reforms, he said.

Rauner asked for similar authority last year but the Democratic legislative majorities said he already enjoys the power to cut spending in his budget proposals and through his line item veto powers should lawmakers add appropriations. Rauner countered that the authority does not cover all spending.

Democrats slammed Rauner's proposal for depending on a budget compromise as negotiations continue on the "Grand Bargain."

"The governor for the third year in a row shirked his constitutional duty today by presenting an unbalanced budget that spends $5 billion more than it takes in," state Comptroller Susana Mendoza said in a statement. "I urge him to shift gears and work constructively with the General Assembly now to quickly pass a balanced budget."

The state's backlog of unpaid bills stands at nearly $12 billion and it's projected to grow to $14.7 billion by the end of fiscal 2017 on June 30.

Any additional tax revenue beyond what's needed to fund $37.3 billion in spending could go to pay down the backlog. The "Grand Bargain" would raise $6 billion in new revenue annually.

Rauner has long supported borrowing to pay down the backlog "in conjunction with an overall balanced budget agreement." The "Grand Bargain" would authorize $7 billion of borrowing to catch up on those bills.

The projected $32.7 billion of general fund revenues includes $24.4 billion of personal and corporate income taxes and sales taxes, up 3.7% or $863 million from this year. The estimate anticipates the one-time infusion of at least $240 million from the proposed sale of the state's main downtown Chicago office building, the Thompson Center.

The package offers spending increases. Pre-kindergarten through 12th grade education would receive $7.7 billion in funding, up about $250 million, while higher education would receive $1.8 billion.

Funding would be provided for 170 new state troopers by the end of fiscal 2019 with the goal of increasing patrols on Chicago area expressways to help the city as it works to combat a rise in violent crimes.

The budget relies on some cost cuts and $2.7 billion in savings from various reforms, some which could be difficult to achieve. The budget does not count on the estimated $700 million to $1 billion of savings expected from the "Grand Bargain's" pension funding changes, which would ask workers to accept cost of living changes in exchange for counting future salary increases toward their pensionable salary. That's because a court challenge is expected.

In the meantime, Rauner wants to halve salary spiking, shift the costs of some high-salaried employees off the state's back, smooth the impact on state payments for systems assumption changes and make changes in the funding formula base to save $750 million.

He also wants to create a new optional tier 3 benefit plan offering a 401(k)-style plan for estimated savings of $500 million next year.

The state would no longer fund retiree health insurance for retired teachers and professors under Rauner's plan, to save $130 million. An overhaul of health insurance benefits would generate $520 million of savings.

New authorizations in the state's fiscal 2018 capital budget total $4.8 billion with another $12.8 billion reauthorized for a package of $17.6 billion. It relies on about $1.5 billion of borrowing.

Major new initiatives rely on $777 million of general obligation borrowing including $400 million for technology system upgrades at state facilities, $150 million for deferred maintenance expenses, and $150 million for a new mental health correctional facility.

Another $465 million of its higher rated sales-tax backed Build Illinois bonds would be issued including $400 million for deferred maintenance and $30 million for lead abatement programs.

The Illinois Department of Transportation accounts for $2.6 billion of the $4.8 billion capital proposal. It includes a $2.2 billion road program funded on a pay-as-you-go basis. It's up $200 million from current spending levels.

Rauner recapped his last two budget proposals during his address Wednesday, drawing jeers from Democrats when he characterized them as balanced and also laid out guidelines for winning his support for the "Grand Bargain."

A final spending agreement wasn't reached last year as Democrats continued to push Rauner to tackle a budget alone that cut spending and raised taxes, while Rauner demanded support for his policy and governance reform agenda.

Lawmakers did approve a stopgap plan that saw the state through the first six months of the fiscal year and funding K-12th grade aid for a full year. About 90% of state spending continues unchanged based on continuing appropriations and court orders and consent agreements. Higher education and social services don't benefit from such provisions.

In addition to its budget deficit and record bill backlog, the state's pension obligations total $126.5 billion for a funded ratio of 39.2% and $8.8 billion is owed to the system in fiscal 2018. The state's fiscal strains and political gridlock have dragged the state's ratings down to the mid-triple-B category, making Illinois the nation's lowest-rated state.

Illinois faces a drop to the lowest investment grade level without action by the end of the fiscal year June 30. Its bonds have been trading at a 225 basis point spread to the top-rated benchmark. The state's reserve holds less than $50 million.

In other budget developments Thursday, a St. Clair Circuit Court judge denied Attorney General Lisa Madigan's motion to halt state payroll given the prolonged budget impasse.

"We think the law is clear," Madigan spokeswoman Maura Possley said in a statement. "The Illinois constitution requires an enacted appropriation for state spending. Under the current injunction, the state has spent over $3 billion in taxpayer money without any transparency or legislative debate as required by law. The governor is using this injunction to avoid following the constitution and enacting a budget, irreparably harming the people of Illinois."

"We will appeal the court's order," Possley added. Some had believed blocking state paychecks could help along a budget compromise. Others believed the possibility of a shutdown would distract from negotiations as Democrats and Republicans bickered over the language in legislation to get employees paid.

The Rauner administration's general counsel Dennis Murashko called on Madigan to drop her pursuit of the issue. "It is our hope the attorney general drops this lawsuit so the bipartisan negotiations in the Senate can continue in order to reach a balanced budget with changes to get our state back on track."

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