CHICAGO — Illinois faces a dire fiscal reckoning unless it acts sooner rather than later to tackle its mammoth unfunded pension obligations and make tough choices on taxation and spending, warns a new report from a national task force examining state budget crises.

“Illinois’ budget is not fiscally sustainable,” said Richard Dye, a professor in the University of Illinois’ Institute of Government and Public Affairs and a lead author of the report.

“Oxes will be gored,” Dye warned of the state’s reckoning if it fails to shore up its fiscal foundation. Untenable choices loom as funding for public services and infrastructure are crowded out by pension payments.

The nearly 50-page report from the State Budget Crisis Task Force formed last year by former New York Lieut. Gov. Richard Ravitch and former Federal Reserve Board chairman Paul Volcker offers a stinging assessment of the state’s poor fiscal decisions of the past, their impact, and harm to economic growth.

Some of those decisions date back decades and have left the state with the lowest state credit rating from Moody’s Investors Service and the worst-funded state pension system with $83 billion of unfunded liabilities for just a 43% funded ratio, and a debt per capita that is among the highest among states.

The report credits the current administration of Democratic Gov. Pat Quinn for making some fiscal strides, including a $2.7 billion overhaul of Medicaid funding approved earlier this year, pension reforms previously adopted for new employees, and spending cuts.

The state’s current budget also pays down about $1.3 billion of backlogged bills.

But those accomplishments fall short of what’s needed to stabilize the state’s balance sheet.

After chipping away at a $12 billion deficit with spending cuts and an income tax increase that took effect in 2011, the state still carried $8 billion in overdue bills into the current year and faces ongoing deficits.

Dye called the state’s carryover of bills a “clumsy form of borrowing.”

Based on its current revenue picture, the state is headed toward a $4 billion gap in fiscal 2014. That’s due in part to the partial expiration of the state income tax hike. Even if the General Assembly eventually moves, as some speculate it will, to make the increases permanent the state still is looking at ongoing deficits.

The budget gap in 2022 is estimated in the report at about $5 billion at the higher tax rate and at $13 billion if the tax expires. 

The report pins the blame on the state’s crisis primarily on its failure to fully fund its five pension funds at an amount that meets the actuarially required contribution, or ARC; on skyrocketing Medicaid costs that doubled between 2002 and 2011; and a tripling of debt service between 2002 to 2011 due in large part to the state’s decision to issue $10 billion of general obligation pension bonds in 2003.

The report also cites poor fiscal management and the state’s narrow tax base which has eroded and saw just flat growth in the decade leading up to the Great Recession.

The state also has perennially relied on budget gimmicks such as pushing one year’s bills into the next fiscal cycle.

“Illinois has been doing backflips on a high wire, without a net,” the report reads.

As most states do, Illinois stands to feel the effects of federal budget-deficit reduction efforts that will heat up after the November election. Federal dollars make up $14.8 billion of the state’s all-funds budget.

The looming choices without swift action are dire.

“Somebody has to pay … there are going to be bad outcomes,” Dye said.

Aside from huge spending cuts, he offered the possibility that funding for pensions could run dry even though they are afforded strong contractual protections in the state constitution.

Illinois’ current strains also leave it ill-prepared to address its aging and deteriorated infrastructure with an estimated price tag of $300 billion needed in the next several decades.

If not addressed, the state faces greater congestion, pollution, and travel delays that will erode economic growth, the report warns.

“Illinois’ past fiscal choices and future threats challenge the state’s ability to meet its population’s basic needs, let alone accommodate future growth,” the report warns. “Infrastructure is deteriorating. Education is threatened. Public safety, public health, and care for the needy all are at risk. Taxpayers and the state’s competitiveness are also at risk.”

Standard & Poor’s rates Illinois A with a negative outlook. Only California is rated lower. Moody’s rates the state’s $32.8 billion of general obligation debt A2 with a stable outlook and Fitch Ratings assigns an A rating and stable outlook.

The report lays out a series of recommendations leading with a plea for state leaders to make tough choices sooner rather than later after the crisis worsens. Pension reform is a must. Both spending cuts and revenue increases likely will be needed.

Other suggestions include controlling Medicaid costs, establishing a rainy day fund, disclosing the ARC versus the state’s appropriated pension payment, adopting more long-term fiscal planning policies, and adopting a budgeting process that doesn’t push off costs.

Quinn’s budget director, Jerry Stermer, who participated in a panel discussion that followed the task force’s release of the report, endorsed the report as “required reading” for lawmakers and said he remains hopeful that the General Assembly will tackle pension reform in early January.

Legislative leaders believe a lame-duck session in early January before the new legislature convenes, when only a simple majority will be needed, offers the best shot at passage.

The General Assembly failed to act on pension reform during its regular session and again during a special session over the summer

“This would be a stabilization plan” that would move the state to full-funding status in 30 years without a dramatic increase in state contributions, Stermer said of the administration’s pension proposal.

Stermer also acknowledged the likely legal challenge any adopted reforms face given union opposition, meaning the state would not expect to see any savings in its contribution levels in the next few budgets.

The task force is examining in detail the fiscal condition of six large states: California, Illinois, New Jersey, New York, Texas and Virginia. It released an overview in July of its work to date finding that many of the states were on a fiscally unsustainable path and identified common themes behind their struggles, including growing Medicaid and debt costs, and pension obligations.

The goal of the task force is to spotlight the states’ fiscal conditions in the wake of the 2008 financial crisis.

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