CHICAGO — Warning lawmakers that their toughest task ahead is overhauling Medicaid and pensions, Illinois Gov. Pat Quinn unveiled a $33.9 billion fiscal 2013 general fund budget that holds spending in check through layoffs and state facility closures while leaving billions in unpaid bills.

“Today a rendezvous with reality has arrived. We must navigate our budget out of the past decades of poor fiscal management.  … We must achieve fundamental and lasting budget reform and we must do it now,” Quinn told lawmakers Wednesday.

Quinn devoted a significant portion of his budget address to the need to tackle Medicaid and pension reforms to stablize the struggling state’s fiscal house, though he offered only ideas on how to achieve the $2.7 billion in Medicaid cuts he said are needed to preserve the system. On pension reforms, again he offered only a series of measures.

In order to protect education, health care and public safety spending in the budget, Quinn said the state must “stabilize and strengthen our public pension systems once and for all. We must fundamentally restructure our Medicaid program.”

The budget projects total general funds of $33.94 billion, with appropriations of $33.77 billion. The $163 million balance would go to pay down the state’s backlog of bills. Agency spending accounts for $24.8 billion of the general fund budget, down from $25.3 billion in fiscal 2012. Quinn asked most state agencies to cut spending by 9%.

Quinn proposed shuttering and consolidating dozens of facilities across Illinois to save $100 million and cutting 750 positions through attrition and layoffs. Education spending was spared and will rise slightly to $8.95 billion from $8.86 billion.

The Democratic governor wants to close tax loopholes to provide targeted tax relief in the form of tax credits for hiring veterans, a child tax credit, and abolishing the natural gas tax.

Quinn will push for $4.3 billion of borrowing authorization to support the state’s ongoing $31 billion public works program and will seek approval for an additional $3 billion for schools, water improvement, and state building projects. Finance team members said a revenue source to support the extra $3 billion is still needed.

“I believe jobs follow solid infrastructure,” Quinn said in his address. A three-fifths majority is required to approve new bonding.

The budget is balanced based on anticipated revenues but it leaves the state with about $8 billion in unpaid bills. Various estimates project Illinois will close the current fiscal year June 30 with $8 billion to $9 billion of unpaid vouchers, employee health care payments and corporate tax refunds. Quinn did not resurrect his past proposal to issue debt to pay down the backlog.

The state closed fiscal 2011 with $82.9 billion of unfunded pension obligations for a funded ratio of just 43.4%. Quinn said the government would fully fund the scheduled fiscal 2013 payment of $5.2 billion in the budget. That figure is up from $4.1 billion in the current fiscal year. Pension payments in the next fiscal year account for 15% of the general fund budget, up from 6% in 2008.

Quinn laid out a series of possible reforms to rein in costs. They include changes in employee and employer contributions, cost-of-living adjustments, and increasing the retirement age. He recently named a working group of lawmakers to meet with stakeholders and come up with a reform plan for legislative action by April 17.

Quinn’s administration has floated the idea of requiring suburban and downstate school districts to contribute to their teachers’ pensions, which are now paid for by the state. Quinn noted in his address and budget documents that $2.7 billion of the state’s fiscal 2013 payment will go to cover teachers’ pensions and $1.4 billion for universities.

Other proposals floated by lawmakers include revising the payment plan that is supposed to bring Illinois’ pension system to a 90% funded ratio by 2045. The reform task is complicated by state constitutional protections afforded to employee pensions. Accrued benefits of current employees are clearly protected, but lawmakers and legal experts disagree over the constitutionality of cutting future, as-yet-unearned benefits of current employees.

On Medicaid, Quinn offered up a menu of ideas including changes in eligibility, services covered, and the way and amount the state pays for services. He said any action must cut $2.7 billion in costs to “keep the system alive and well.” Officials anticipate closing fiscal 2012 in June with $1.9 billion in unpaid Medicaid vouchers.

Quinn is a Democrat whose party controls the General Assembly, though lawmakers largely ignored his influence in the budget process last year. Few disagreed Wednesday that Illinois faces daunting challenges; Democrats praised Quinn for articulating the issues while Republicans attacked his lack of detail.

House Speaker Michael Madigan, D-Chicago, said, “He delivered a very strong message.”

Comptroller Judy Baar Topinka, a Republican, criticized the budget proposal for a lack of substance. “I appreciate his stated intention of working with the General Assembly to find solutions, but hoped that he would share more of his vision in this budget proposal,” she said.

The Illinois Hospital Association raised concerns over the size of Medicaid cuts demanded by Quinn, saying $2.7 billion amounts to 18% of the program. It wants the state to adopt a multi-year approach to phasing in reforms.

The General Assembly’s nonpartisan Illinois Commission on Government Forecasting and Accountability this week told lawmakers that any revenue growth expected in the next fiscal year would be consumed by increased pension payments, while $8.5 billion in unpaid bills “will continue to put massive pressure on the state’s financial condition.”

Quinn’s warnings on Medicaid and pension reforms echo those of rating agencies, investors and government review groups that are closely watching the state, which pays an interest rate penalty to borrow because of negative financial headlines.

The Civic Federation of Chicago recently warned in a report that a fiscal meltdown awaits the state as its bill backlog rises to $34.8 billion in fiscal 2017 unless state lawmakers act.

Illinois’ challenges prompted Moody’s Investors Service earlier this year to lower its rating on $27 billion of GO debt one notch to A2 with a stable outlook. Fitch Ratings affirmed its A rating and stable outlook. Standard & Poor’s affirmed its A-plus rating and negative outlook.

The state’s fiscal strains will grow in the coming years as a portion of the income tax increase approved last year is phased out beginning in 2015. The tax hike temporarily eased the state’s budget and liquidity crisis last year.

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