CHICAGO — Illinois Gov. Bruce Rauner unveiled a fiscal 2016 budget that would rely on spending cuts across state government and savings from a far-from-certain pension reform proposal to close an estimated $6 billion gap without tax increases.
The plan, released Wednesday, sets the stage for a legislative battle between the rookie GOP governor and Democrats who control the General Assembly and had hoped for tax increases to soften the blow.
Rauner has long warned that the state's financial problems would require painful solutions and he delivered on the pain in his first spending plan, slashing $1.5 billion from Medicaid, $400 million from higher education, while also cutting transit and local government aid.
Kindergarten through 8th grade education was spared; it would receive a $300 million boost in the $32 billion general fund budget proposal.
Rauner also proposed pension reforms that won't likely sit well with unions.
House Speaker Michael Madigan, D-Chicago, labeled it "reckless" for the budget to depend on $2.2 billion in savings from those reforms.
In a briefing Wednesday after the budget was released, Rauner's budget director, Tim Nuding, acknowledged that the deficit elimination plan depends on proposals with uncertain prospects such as the pension reforms, which could leave a gaping hole to plug if they fail to come to fruition.
"There are all kinds of assumptions in this budget," Nuding said.
"We must be willing to take actions we rather avoid and make decisions that may seem unpopular in the short run," Rauner said, calling his proposed spending plan for the fiscal year beginning July 1 "the budget Illinois can afford."
Rayner faces a veto-proof Democratic majorities in the General Assembly and his proposed cuts drew fire from Democrats, public interest groups, hospitals, and local governments worried over the impact on their budgets and on the poor.
The governor said it will take years to fully "restore Illinois to fiscal health," but that "now is the time to start on a responsible path after years of financial recklessness."
Rauner ignored pleas from Democrats and some budget watchdog groups to raise revenue in order to avoid too many budget cuts, and did not propose any new tax increases in his spending plan. The budget anticipates that income tax rates will remain at their current level following the partial expiration of the 2011 tax hike on Jan. 1.
Rauner did leave the door open to raising new revenue, but only if government reforms are adopted. The position puts Democrats on the hook to either agree to Rauner reforms or push through tax increases on their own to ease the impact of cuts.
Before asking people to pay more to fund government, Rauner said, the state must ensure "taxpayers are getting value for their money" by eliminating waste and inefficiency in the system through various proposals outlined recently in his turnaround agenda.
Before tackling the fiscal 2016 red ink, Rauner said lawmakers must solve what he estimated as a $1.6 billion shortfall in the current budget. He blamed former Gov. Pat Quinn, who lost his re-election bid to Rauner, for signing a shaky budget.
Quinn had pushed to extend the higher income tax rates approved in 2011 but lawmakers balked with the November election looming and they also refused to cut spending. The expectation was that the General Assembly would return this year and raise the tax rates.
Rauner said he believes his administration and lawmakers are close to a resolution. Rauner has asked lawmakers to give him authority to transfer funds from various governmental funds to cover this year's shortfall.
Once solved, the state's focus will shift to the fiscal 2016 plan that faces what Rauner estimated is a $6.2 billion hole.
"This huge deficit is the result of years of bad decisions and slight-of-hand budgeting," he said.
Investors, rating agencies, analysts, government watchdogs, and lawmakers have eagerly awaited release of the budget to see where Rauner would land on the issue of tax hikes and spending cuts.
Illinois has the lowest ratings of any state at the A-minus level, with negative outlooks across the board due to budget and pension pressures. The state is carrying a $4 billion to $5 billion bill backlog that could skyrocket in coming years. Illinois is saddled with $111 billion of unfunded pension liabilities in a system just 39% funded, and a court struck down a 2013 overhaul of pension benefits on state constitutional grounds in a case the Illinois Supreme Court will hear in March.
The state pays steep interest rate penalties to borrow, as do local governments and other issuers based in Illinois. Rauner's proposed cuts would inflict further pain on some municipal credits and the public higher education sector already pressured by rising pension, healthcare, and other costs.
Rauner called further pension reforms a top priority and his budget includes a gamble that the state can obtain $2.2 billion in savings from pension reforms, some of which rely on collective bargaining. Rauner's budget summary says the changes are within the state's constitutional framework, but that won't prevent a potential legal challenge.
The state's scheduled payment for its pension system next year is $6.6 billion, up $580 million from this year. Although the state approved pension reforms in 2013, the budget did not assume those savings this year because of the expected legal challenge.
Rauner's proposed changes would shave $100 billion off state payments owed over the next 30 years and $25 billion off the state's unfunded tab. The plan would freeze as of July the level of benefits earned by employees hired before 2011 when a tier 2 benefit structure was adopted.
The tier 2 scheme would be applied to benefits earned by older employees going forward. The tier 2 structure offers lower cost of living adjustments, higher retirement age, and caps pensionable salaries. Public safety employees would be exempt from the changes. Rauner also now wants to exempt overtime pay from salary that counts toward an employee's annuity.
The plan also offers an optional buyout for employees who started before 2011 who agree to lower a lower COLA and move to a 401(k)-style plan. The budget documents stress that accrued benefits earned by retirees and current employees would be protected.
"These benefit changes are expected to be upheld as constitutional by the Illinois courts as they do not reduce earned benefits," the budget summary says. Unions will likely take issue with that position, arguing that pension benefits as they exist are protected against impairment or diminishment under the constitution.
If the Illinois Supreme Court voids the 2013 pension cuts, the budget summary notes: "The General Assembly and governor may decide to enact a new plan that combines the best reforms in SB1 (the 2013 package) and this proposal."
The pension changes also would raise the 90% funded target for pensions in 2045 to 100%. Rauner also wants to smooth the impact of changes in annual investment earnings assumptions adopted by the retirement system to five years — similar to how investment returns are incorporated — from an annual basis.
The budget eliminates state retiree healthcare subsidies for retired downstate and suburban teachers and retired community college staff, shifting the burden to the actual employers at a savings of $125 million.
Nuding said the state began the budget process by setting a general revenue baseline of about $38 billion based on the maintenance of agency spending needs. The current general fund budget is about $35 billion but it's $1.6 billion short of needed funds.
The state heads into the new fiscal year with about $32 billion in expected revenue to spend. That resulted in the estimated $6.1 billion hole to plug in fiscal 2016. The Rauner administration decided to add $500 million to the figure to begin chipping away at an estimated $6 billion bill backlog, bringing the deficit up to $6.6 billion.
The deficit is whittled away with $2.9 billion in savings from employee benefit reforms from pension cuts and group healthcare cuts, a $1.3 billion cut in subsidies to local governments, $1.2 billion in provider rate reductions, and $200 million in operating efficiencies. Additional savings are carved out by shifting some to healthcare exchanges and cuts in earmarks, according to the budget.
Group employee healthcare funding would be cut by $700 million, but Nuding acknowledged that the state does not have specific plan for achieving those savings which will be the subject of collective bargaining. Employee salaries are left intact and headcount will rise slightly due to new corrections hiring.
State funding for the Regional Transit Authority of Illinois would drop by $127 million from $500 million and downstate transit systems would see a cut of $75 million. The state would cut in half the amount of income tax revenue it distributes to local governments, reducing the amount to 4% of total collections from 8 %. Nuding said the state shares a total of $6 billion with local governments through various revenue streams. Funding for community colleges will remain level.
No new capital spending is proposed. The budget does "repurpose" $250 million in borrowing approved for capitol renovations. Quinn later vetoed the allocation which Rauner now wants to use for deferred maintenance at state buildings. Nuding said Rauner will work with lawmakers to craft a new capital bill in hopes of winning its passage before the end of the spring session in May.
The budget also proposes establishing a consensus style form of revenue estimates as many other states do.