Coming on the heels of a sizeable tax increase, Illinois governor Pat Quinn recently unveiled a $35.4 billion state budget proposal that included borrowing an additional $8.75 billion to payoff the state's backlog of unpaid bills.
Robert F. Rich, director of the Institute of Government and Public Affairs at the University of Illinois, spoke about Quinn's budget proposal and the prospects of the state achieving financial stability with News Bureau business and law editor Phil Ciciora.
Next year's deficit is estimated to be at least $7 billion. Will Governor Quinn's budget proposal help Illinois get out of debt?
Governor Quinn did recognize that one of the biggest challenges facing Illinois is a massive long-term structural deficit. Researchers at the Institute of Government and Public Affairs have shown that the state's fiscal situation is much worse than commonly believed. It will take both tax increases and spending cuts to bring the state back from insolvency.
Governor Quinn's plan to pay off the more than $6.5 billion in unpaid bills has to consider new options in difficult areas including pensions and healthcare. Illinois has the worst pension underfunding in the nation. And, the state spends about one-third of the budget on health care. Although Governor Quinn did not address these programs in his speech, they are the biggest contributors to the deficit.
What about the recent income tax increase and spending growth cap? What does this policy change mean for the deficit?
The governor signed a significant increase in the corporate and individual income tax at the beginning of 2011, and put in place a spending growth cap at 2 percent per year for next four fiscal years. However, the resulting revenue will not be enough to eliminate the deficit. It is important to note that both the tax increase and growth cap are temporary. When they are phased out, the deficit could return to $10 billion in fiscal year 2016.
The current debate is centered on what should be done with the new revenue generated by the policy change. The governor proposed borrowing to cover the backlog of bills, rather than using the new funds. Although borrowing will help vendors like the University of Illinois, because they will finally receive much-needed payments from the state, it only worsens the long-term deficit due to high interest payments, and essentially punts the problem further down the road.
What other options might the state consider?
Illinois will have to consider changes similar to changes other states in the region have been forced to make. There are several options. For example, similar to several other states, Illinois could start taxing retirement and social security income. IGPA researchers found that this could reduce the deficit by $1.1 billion in fiscal year 2012. Another option is taxing consumer services, which most Midwestern states - including Indiana, Iowa, Michigan and Wisconsin - already do.
As for cuts, Governor Quinn did provide several vague areas for improvement through increased efficiency. This is a good start. However, cuts alone will not be enough to fix the state's fiscal situation. IGPA researchers found that to balance the budget through cuts, total spending would have to be cut by 26 percent. That's equivalent to cutting more than the entire budget for education, or more than the state spends on government operations, economic development, corrections, public safety and natural resources combined.
Governor Quinn's budget has not been met with enthusiasm by either side of the aisle. What does this mean, politically, for Illinois?
Illinois legislators, like most politicians, often have the next election in mind, which makes long-term thinking difficult. Illinois has not addressed the deficit because legislators have not been willing to make unpopular decisions that may hurt their chances for re-election. However, as recent elections demonstrated, the state and the nation are expecting leaders to make tough decisions. Leaders should recognize that voters understand that now is the time to collaborate and address the critical issues facing Illinois. And no issue is more critical than the state's fiscal future.