CHICAGO - Illinois' decision to conduct a revenue volatility study that could aid in the eventual development of a more robust rainy day fund won the struggling state some rare praise in a report from Pew Charitable Trusts.
Senate Bill 274, establishing the Illinois Revenue Volatility Act, took effect July 1. It orders the legislature's Commission on Government Forecasting and Accountability to conduct an analysis on the volatility of state-sourced revenues and report back to the governor and lawmakers by the end of the year.
"By initiating their state's rainy day fund policy discussion with a data-driven study aimed at answering critical questions that can inform policy design, Illinois policymakers are putting in place the tools needed to manage future budget uncertainty and are laying the foundation for greater financial flexibility in the future," Pew writes in the report, "Illinois Moves Toward Evidence-based Rainy Day Fund."
Illinois has a small reserve in the form of a budget stabilization fund, but it held just $276 million at the close of fiscal 2013. The legislative commission suggested the state should hold a $2 billion reserve equal to 5% of fiscal 2013 general fund revenues to provide a cushion during tough economic times. Gov. Pat Quinn in his recommended fiscal 2015 budget proposed bolstering the fund but did not provide details. Lawmakers rejected the budget plan, which relied on an extension of expiring income tax rates.
The lack of an adequate rainy day fund made the state's navigation through the last recession all the more difficult, the Pew report warned.
Under the volatility study act, the commission will examine the state's tax base, volatility of revenues, identify economic variables that impact tax collections, and recommend reserve levels needed to manage through tax volatility.
Illinois budgetary and liquidity struggles -- underscored by a nearly $5 billion bill backlog - have pushed reserve discussions to the backburner given the looming $2 billion drop in income tax revenues expected when 2011 income tax rate hikes partially expires Jan. 1.
The state passed reforms late last year that overhauled its pension system burdened by $100.5 billion of unfunded liabilities but those reforms face a legal challenge that could undercut efforts to stabilize the state's weak credit.
"Although these problems are formidable, policymakers are thinking in the long term by considering evidence- based policies for a rainy day fund that can take effect when the state is once again in a position to save," said the Pew report, published Wednesday.
Illinois is one of just four states that does not maintain a true rainy day fund that can be accessed over multiple years to lessen economic and fiscal pressures. Pew said Illinois' budget stabilization fund better meets the definition of what it considers a working cash flow account.
Few states with formal reserves have tied their funds to underlying economic and revenue fluctuations although Utah and Minnesota have recently enacted changes to their rainy day funds that reflect similar volatility studies.
Though it may take some time, establishment of a solid rainy day fund could help rebuild the state's general obligation battered rating that at the low-single-A level is the weakest among states, Pew said.
"In April 2014, Standard & Poor's noted that Illinois' financial flexibility will continue to be constrained without a meaningful budget stabilization or rainy-day fund,'" the report quotes the agency as writing.
It further cited the rating agency's support for California's proposal to connect fund deposit rules to revenue volatility, saying that for state governments that are subject to balanced-budget requirements, harnessing periods of relatively stronger revenue growth to build up a reserve makes intuitive sense.
