State Budget Crisis Task Force Outlines Extent of Illinois’ Budget Crisis
The State Budget Crisis Task Force, a group chaired by former New York Lieutenant Governor Richard Ravitch and former Federal Reserve Board Chair Paul Volcker, recently released a report focused on the critical state of Illinois’ finances. The report details that Illinois has the lowest bond rating of all fifty states, a wildly underfunded public pension system, skyrocketing Medicaid costs, and budget gimmicks galore, and concludes that Illinois’ state budget is “not fiscally sustainable.” A review of the study gives an overview of the multifaceted fiscal mess in the Land of Lincoln.
Illinois’ unfunded pension liability is one of the largest drivers of the state’s fiscal crisis. The report mentions an unfunded liability of $85 billion, although that estimate itself may be far too conservative. Estimates by economist Andrew Biggs have placed the total at over $190 billion.
One reason for the problem is that the state has consistently failed to meet its actuarially determined Annual Required Contribution (ARC). The report explains:
State contributions plummeted in 1982 and 1983 and increased very modestly for the next decade, although annuitants’ benefits payments grew dramatically. Between 1981 and 1995, the state’s pension contributions increased 28 percent, but benefits expenditures increased by a factor of almost 4.5, and unfunded liabilities escalated. In 1995, the funded ratio for the five systems combined was only 53 percent.
Further, in 1994, the state instituted a “50 year plan” to reach a 90% funded ratio by 2045, but the annual payments laid out in that plan did not meet ARC requirements.
Growing obligations to meet the demands of such an underfunded system are already diverting resources from other state budget priorities. “Between FY 2012 and FY 2013, Illinois’ required contributions to the five pension systems increased nearly $1 billion, and that amount does not completely cover the liabilities incurred during the year.” The state has issued bonds three times in the last decade to meet its obligation, including $10 billion worth in 2003. All told, including debt service on pension obligation bonds, pension costs are expected to take up one-fourth of the state’s General Fund resources by FY 2015.
Unless Illinois adopts “serious pension reform,” according to the report’s authors, it “will not be able to fund other priorities.”
“Second to pensions, Illinois’ most challenging fiscal problem is the growth in the Medicaid program, in which enrollment and expenditures doubled between 2000 and 2011. Medicaid’s growth is unsustainable and, without reform, will crowd out other essential areas of Illinois’ budget.”
Illinois’ budget presentation makes Medicaid spending hard to see. The actual cost is not detailed in Comprehensive Annual Financial Report (CAFR) or Detailed Annual Report (DAR). Further, the state is allowed to defer Medicaid payments into the next fiscal year to “balance” its annual budget. From 2000-2010, this process deferred $18 billion in Medicaid payments. In 2012, this procedure was capped at $100 million per year in 2014 and beyond.
The American Recovery and Reinvestment Act (ARRA) threatens to further increase Medicaid costs, even though the federal government will initially pick up much of the cost of new coverage. According to the Kaiser Family Foundation, “[A] 5 percent to 9 percent increase as a result of the PPACA implies an increase of between $400 million and $720 million.”
Budget Laws and Practices:
A gimmick-riddled budget process exacerbates each of the individual factors placing a strain on Illinois’ budget. The Budget Crisis Task Force report identifies “time-shifting,” and “fund-shifting” in the budget process, along with a lack of information and planning, as the state’s main tactics.
Time-shifting budget practices used in Illinois include $10 billion in pension obligation bonds issued in 2003, further pension borrowing in 2010 and 2011, and securitization of $1.5 billion tobacco settlement receipts in 2011. In addition, “the state has perennially pushed its bills off to the future; at the start of fiscal year 2013, unpaid obligations from prior years were approximately $8 billion… Illinois has been doing backflips on a high wire, without a net.”
Fund-shifting budget practices occur as a result of inordinate focus on the General Fund budget. This occurs even though it represents less than half of state spending, and is only one of more than 600 separate funds. That total is up 33% from 1997.
General fund borrowing is largely hidden. The process of “chargebacks,” (General Fund borrowing at the discretion of the Executive) was ended in 2007, but not before Governor Blagojevich took nearly $700 million between 2004 and 2007. “Fund sweeps” that require legislative approval totaled $1.2 billion from 2003-2010. Other types of General Fund borrowing bring the estimated total $2.2 billion.
The budget process is also plagued by a stunning lack of information and planning. For example, the Governor’s Office of Management and Budget presented a three-year budget forecast for the first time in January 2012, and only covering the General Fund.
Although the report identifies pensions, Medicaid, and budget gimmickry as the largest drivers of Illinois’ budget crisis, they are not the only contributors to the problem. The state is far too reliant on federal funds, for example. Federal dollars account for nearly one-fourth of the state’s all-funds budget. Even after the expiration of ARRA funds, they total $14.8 billion. As the report says, federal budget cuts in coming years are virtually inevitable. “While grants to state and local governments account for about 16 percent of the total federal budget, they make up more than 40 percent of discretionary spending, so they are likely to be targeted for cuts.”
Along with reduced federal funds, deteriorating infrastructure needs are likely to total $300 billion over the next several decades.
The report’s recommendations are vague on both pension and Medicaid reform, although it makes clear that “pension reform must be a priority,” and “Medicaid costs and reforms must be addressed.”
The bulk of the recommendations are focused on reforming state budget and fiscal reporting practices. It offers a list of 10 ways to “revamp the state’s fiscal toolkit.”
1) Timely reporting, including a Governor’s report on the enacted budget within one month of passage, and a Comptroller’s report on actual revenues and expenditures within six months. The Governor should issue a report on the enacted budget within one month.
2) Supplement cash based reports with accrual accounting tables required in CAFR’s.
3) Provide pension ARC amounts alongside actual contributions.
4) Reduce the focus on the General Funds budget and present an “all funds” budget to expose gimmickry.
5) Present itemized fund transfers in the prospective and enacted budget, as well as on the Comptroller’s “drill down” website.
6) Continue and expand multi-year forecasting.
7) Incorporate more long-term planning.
8) Legislation should include a fiscal note presenting costs to legislators.
9) Ensure reliance on apolitical revenue estimates.
10) Adopt the budget as a single spending bill rather than a series of appropriations bills.
Each of the recommendations is vital to an accurate and transparent budget process. Along with these steps, State Budget Solutions urges Illinois to take immediate action to reduce taxpayer risk and stem the explosion of unfunded pension liabilities by shifting public employees into a defined-contribution 401(k) style retirement plan.