CHICAGO - Illinois needs both spending cuts and tax hikes to fix a chronic budget imbalance that will hit $9 billion next year and grow to $14 billion over the next decade without change, an academic research group warns.
"Years of pay-later budgeting has resulted in a massive imbalance between sustainable revenue and spending," Richard Dye, co-director of the Fiscal Futures Project, says in the new report from the Fiscal Futures Project at the University of Illinois Institute of Government and Public Affairs. "Like a person in deep credit card debt, the state has been spending more than it can afford, and is covering the gap by issuing IOUs."
The state faces a nearly $2 billion drop in revenue in fiscal 2016 beginning July 1 due to the partial expiration earlier this month of a 2011 income tax hike.
In addition to the budget deficit, the state is awash in obligations totaling $159 billion when unfunded pension obligation, bonds, retiree healthcare, and the bill backlog are counted.
"It's a monumental problem that will require a long-term fiscal plan that includes tax increases, spending cuts, and economic growth," the report warns.
The group cautions there's no easy fix that's palatable to taxpayers or state leaders.
If new Republican Gov. Bruce Rauner and the Democratic-controlled General Assembly were to agree to restore the expired rates, only about half of the budget gap could be closed in the coming years. Economic growth, even projected at an optimistic level of one-half percent annually over the next decade, would have just a modest impact on the red ink.
With pension contributions and debt service payments set in statute, a 20% cut in discretionary areas of spending would be needed, impacting funding for education, Medicaid, public safety, transportation, and corrections.
Borrowing more to help reduce the existing red ink or pay down bills doesn't offer a viable solution. Paying back that debt crowds out future spending on other priorities and is a major factor in the current fiscal crisis, the group cautions. The state borrowed to help cover annual pension payments due in 2003, 2010, and 2011.
"Illinois' fiscal problems are so large and have been developing for so long that one single policy option will not be enough to solve them," the report warns.
The group applies a fiscal model that looks at all projected state revenues on a sustainable basis verses expected expenses, based on projected growth. Total spending is expected to be $74 billion in fiscal 2016. It puts the looming deficit at $9 billion, or 12% of all funds, and without change will grow to $14 billion in a decade, the report said.
Potential revenue sources to help shore up the budget include eliminating some tax credits, taxing retirement income, shifting from a flat income tax to a graduated rate structure, increasing the sales tax or broadening the tax base, overhauling business taxes, or raising so-called sin taxes.
The state put off long-term structural solutions in part due to temporary revenue surges between 2005-2008, federal stimulus funds in 2009-2011, and the temporary income tax increase of 2011-2014, the report says. Lawmakers also did nothing to prepare for this year's looming loss of revenue.
The state Office of Management and Budget recently released a three-year forecast that projected the state would close out the current fiscal year with a $180 million general funds deficit that would grow to nearly $6 billion in future years. The state's bill backlog is expected to rise from an estimated $4.1 billion this year to more than $9.9 billion in fiscal 2016 and reach $21 billion in 2018.
Rauner has warned that state finances are in even more dire shape than he thought and has backed away from his campaign pledge not to extend the higher rates although any extension would likely be temporary.
Rauner's fiscal 2016 budget is due Feb. 18 unless he asks for a delay.