Forty-nine states finalized their FY 2016 budgets months ago, leaving Illinois the last state without a budget. Until April, Pennsylvania was the only other state without a budget after a nine-month impasse. This raises the question of if, when and how Illinois will follow suit. As the impasse persists into fiscal year 2017, more state contractors, social services and industries relying on state funding will feel the pinch. The great state of Illinois may risk a lower credit rating if an agreement is not reached soon.
In fiscal year 2015 Illinois reported its fourteenth straight budget deficit totaling $6.9 billion. This deficit is not only alarming, but peculiar because the state’s constitution contains a balanced budget requirement. Under Article VIII of the state’s constitution, the Governor is required to propose expenditures that do not exceed estimated state revenue and the Legislature must appropriate funds for all expenditures without exceeding estimated revenue. How, then, did a deficit emerge and grow over the past several years? The balanced budget requirement does not expressly prohibit a deficit carrying over from one fiscal year to another. The problem is only compounded when optimistic revenue estimates fall short of expectations and more borrowing is required to meet the state’s financial obligations. The result is a vicious cycle leaving Illinois with the largest deficit in its history and a general obligation bond rating of Baa1 (down from A3), according to Moody’s. To make matters worse, the deficit is expected to grow to $14 billion by fiscal year 2026.
How They Got Here
Governor Bruce Rauner (R) prioritized tackling the budget deficit since the beginning of his term. During his inaugural speech the Governor asked if people would be willing to make sacrifices and reminded that, “Since the days of Lincoln, we’ve stood as a beacon of freedom and justice.” As it stands now, the Land of Lincoln’s beacon is waning and demonstrating that a house divided struggles to stand.
Governor Rauner’s administration inherited a $6.4 billion dollar deficit and a choked revenue stream after the recent expiration of 2011 income tax increases. The income tax increases, which were approved by Democratic lawmakers and then-Governor Pat Quinn (D), increased personal tax rates from 3% to 5% and corporate tax rates from 4.8% to 7%. Upon the expiration of these tax increases in January 2015, Illinois lost close to $3.8 billion in revenue. With such a severe loss, it was put upon Governor Rauner and the Legislature to address the state’s financial condition and make up for the lost revenue. During a budget speech to the General Assembly in mid-February, Governor Rauner unveiled his ‘Turnaround Agenda’ as the solution. The Agenda includes the following proposals:
- Minimum Wage Reform
- Increases the minimum wage, on a graduated basis, from $8.50 on January 1, 2016 to $10.00 by January 1, 2022.
- Pension Reform Package
- Includes a buyout option to reform cost-of-living adjustments in return for a 401(k)-style defined contribution plan.
- Taxpayer Protection and Property Tax Freeze Package
- Starting in property tax year 2016, payable in 2017, all property tax extensions from local taxing districts will be equal to the extension from 2015.
- Prevailing Wage/Project Labor Agreements (PLAs)
- Repeals the Illinois Prevailing Wage Law and prohibit the use of PLAs for state-funded projects.
- Local Collective Bargaining
- Authorizes local governments to exclude certain topics from collective bargaining such as: third-party contractors, health insurance benefits and wages in excess of aggregate limits.
Governor Rauner proposed $3.5 billion in spending cuts if lawmakers do not accept his Turnaround Agenda. This includes cuts to Medicaid reimbursement for hospital providers, lower dispensing fees for pharmacists and reductions in funding for higher education.
While the Governor has focused on greater economic incentives, Speaker of the House Michael Madigan (D) and Democratic legislators have instead proposed increasing property taxes to make up for the revenue shortfall. Members of the Democratic Party believe that Governor Rauner’s pension cuts would only backload an already ailing pension structure and oppose cuts to major state programs.
Both of these proposals have struck the core of each party’s base resulting in the current stalemate. So much so, that it is possible a budget agreement will not be reached before the May 31 adjournment.
How Illinois is Functioning without a Budget
Despite the impasse, Illinois continues to collect taxes and operate without a budget. As a result, many state agencies and programs are operating based upon fiscal year 2015 budget appropriations because they have yet to be told how much they can spend. Additionally, many of these agencies and programs do not have the authority to spend funds unless a budget is passed. Appointed by Governor Rauner (R) in 2015, Comptroller Leslie Munger (R) has been the one responsible for determining how the state’s finances are divvied up to agencies and programs in three ways:
- With no budget from the Legislature, Comptroller Munger worked with Attorney General Lisa Madigan (D) to determine which programs receive funding. Back in July 2015, a court order specified which programs the Comptroller was required to prioritize, such as programs for adults with developmental disabilities.
- Secondly, Continuing Statutory Payments, like the State Pensions Continuing Appropriations Act, do not need a budget to continue to receive and make payments.
- Lastly, there are payments that need the approval of the Legislature, which are neither listed in the court order or as Continuing Statutory Payments. The Legislature has been passing line-item appropriations for K-12 education, municipal payments, domestic violence centers, universities and the recent stopgap funding measure (S.B. 2059), which supplied $600 million for higher education, including Monetary Award Program grants for college students.
The process is leaving many Illinoisans in the dark including Illinois’ homeless population. Housing Action Illinois is a program that provides funding for 14,640 affordable housing units and serves the housing needs of 172,350 people. It relies on the Illinois budget to receive its funding and now waits for $107.8 million to continue its operations. Meanwhile, Illinois’ public universities have received downgrades in their credit ratings. Even two state parks have had to shut down indefinitely. As Illinois struggles to pass a budget, even more state programs will feel the strain of the impasse.
However, the problem is not confined to state agencies and programs. Businesses have felt the budget pressure too:
- Solar companies and alternative energy projects, relying on budget appropriations for the Energy Efficiency Trust Fund, have had their support cut.
- The Department of Commerce and Economic Opportunity (DCEO) was forced to lay off employees due to financial constraints.
- The Statehouse lights may go out on account of an unpaid $10 million utility bill.
- Insufficient funding for the Solid Waste Management Fund has resulted in less support for the waste diversion industry.
Governor Rauner is willing to pay for a special session if a budget agreement is not reached. The clock is definitely ticking as the Legislature is expected to adjourn May 31. However, the May 31 adjournment is not the same as a sine die adjournment, which will likely be in December or January. Illinois is one of several states without a limit on their session length and has a continuous legislative body. Last May 31, pursuant to H.J.R. 85, Speaker Madigan called the Legislature into a “continuous session” to work on the budget. The joint resolution required the House to return June 4 and the Senate June 9. Additionally, it allowed the Speaker and the Senate to call legislators back to the capitol. The House met 15 times throughout the summer and legislators were unpaid for each of those days. A handful of new bills were introduced as well as numerous amendments. It’s likely a similar resolution will be passed if no agreement is made before May 31.
However, a special session for the budget is still a lurking possibility. The constitution establishes that either the Governor or the Legislature’s presiding officers (the Senate President and House Speaker) may convene a special session. If Governor Rauner or the Legislature were to call a special session, both would need to issue a proclamation stating the purpose of the session. For a special session, the Legislature could only consider matters that are determined by the proclamation. If a budget were pending before the Legislature prior to adjournment the budget would retain the same status as it did before the special session. It would have not have to begin from scratch.
A special session could prove to be a liability for Governor Rauner’s Turnaround Agenda. Under Article IV of the state’s constitution, bills passed after May 31 are not effective before June 1 of the next calendar year unless the Legislature, by a three-fifths vote, adopts an earlier effective date. This is especially concerning for a budget bill because Illinois’ fiscal year begins July 1 and ends June 30 of the following year. A budget bill passed after May 31, with a simple majority vote in both chambers, would be implemented a year later, rendering it useless. This means any budget bills passed after May 31 would need to meet a supermajority threshold in order to become effective July 1.
A special session might not be so bad for the Legislature if the outcome is ultimately determined by the supermajority. However, there is some disagreement between both chambers, putting the supermajority’s unity into question. Last February, the Governor exercised his veto authority by rejecting a Senate proposal (S.B. 2043) that would have allocated $721 million to the state’s higher education system. The House failed to secure the necessary three-fifths to override the Governor’s veto and the proposal failed. These differences between the House and Senate highlight a history before the budget impasse as well. In March 2015, two Democratic legislators opposed a tax pushed by House Democrats, which would have added a 3% surcharge on incomes earned over $1 million. As the budget impasse extends into fiscal year 2017, more cracks may develop between party members.
Much like Alex Trebek’s tenure on Jeopardy, Illinois’ financial woes are nothing new. They even predate Al Capone’s famous tax evasion conviction. With the longest budget impasse in recent history, the financial condition of Illinois looks bleak. In the coming weeks, the Legislature and Governor Rauner will decide the fate of Illinois’ fiscal future. Whether that future establishes a budget before the Cubs win the World Series remains to be seen.