Report of the State Budget Crisis Task Force ILLINOIS REPORT This is a report of the State Budget Crisis Task Force prepared in collaboration with Richard Dye of the Institute of Government and Public Affairs at the University of Illinois. Task Force member Donald Boyd oversaw the production of this report. More information is available at www.statebudgetcrisis.org State Budget Crisis Task Force, October 2012 Table of Contents A Statement from the Task Force Co-Chairs ........................................................................................ 3 Foreword ............................................................................................................................................... 6 Summary............................................................................................................................................... 7 Introduction .......................................................................................................................................... 9 The Fiscal State of the State of Illinois ............................................................................................... 11 Fiscal Year 2011 .................................................................................................................................................... 11 Fiscal Year 2012 .................................................................................................................................................... 12 Fiscal Year 2013: Encouraging Budget Actions, But Much to be Done ............................................................. 12 Economic Forces Affecting Illinois’ Budget ........................................................................................ 14 Politics and the Budget Process in Illinois ......................................................................................... 16 The Politics of Spend, but Don’t Tax ..................................................................................................................... 16 The Budget Process ............................................................................................................................................... 17 Illinois’ Squishy Balanced Budget Requirement .................................................................................................. 17 The Run-Up to the Current Fiscal Crisis ................................................................................................................ 18 Big Strides, But a Long Way to Go ........................................................................................................................ 18 Underfunded Retirement Promises Are Crowding Out Other Needs ................................................. 19 The Way Pension Cost Are Reported Can Obscure the Problem ........................................................................ 20 Background and History ........................................................................................................................................ 20 Recognizing the Problem but Putting Off the Painful Solution for Years ............................................................ 21 Changing Pensions in Illinois: Small Strides ........................................................................................................ 21 Serious Problems Remain ..................................................................................................................................... 22 Medicaid Spending Growth is Crowding Out Other Needs ................................................................. 24 Illinois Medicaid: High Coverage and Costs, Low Expenditures per Enrollee ..................................................... 24 Budget Presentation Makes Medicaid Hard to See ............................................................................................. 25 Big Strides: 2012 Medicaid Changes ................................................................................................................... 26 The Affordable Care Act and Future Medicaid Spending in Illinois ..................................................................... 26 Illinois Budget Laws and Practices Hinder Fiscal Stability and Mask Imbalances ............................ 28 Time-Shift Budgeting: Pension Obligation Borrowing and Nonrecurring Resources ......................................... 28 Time-Shift Budgeting: Payment Delays ................................................................................................................. 28 Fund-Shift Budgeting: Narrow Focus on General Funds Budget Obscures True Picture .................................. 29 Fund Sweeps and Related Special Fund Transfers ............................................................................................. 30 Threat to Fiscal Stability: Illinois Has No Real Rainy Day Fund ........................................................................... 30 2 Uses and Misuses of State Borrowing ................................................................................................ 32 Special Obligation Debt: Hard to See .................................................................................................................... 33 Downgrades: Illinois is the Worst State in the Nation .......................................................................................... 33 Growth of State Debt .............................................................................................................................................. 34 Reliance on Short-Term Cash Borrowing .............................................................................................................. 35 Educating Illinois for the Future in a Time of Fiscal Stress ................................................................ 37 Background and History: PreK-12 Education ....................................................................................................... 37 Higher Education .................................................................................................................................................... 39 Underinvestment in Infrastructure ..................................................................................................... 41 Condition of Illinois’ Infrastructure ........................................................................................................................ 41 Capital Financing .................................................................................................................................................... 42 Consequences of Underinvestment in Infrastructure .......................................................................................... 43 Narrow, Eroding Tax Bases and Volatile Revenues Undermine Illinois’ Finances ............................. 44 General Sales Tax ................................................................................................................................................... 44 Personal Income Tax .............................................................................................................................................. 45 Corporate Income Tax ............................................................................................................................................ 45 Selective Sales Taxes: Cigarette, Motor Fuel, Telecommunications ................................................................... 46 Federal Deficit Reduction Threatens State Budget and Economy ..................................................... 48 Federal Funds in Illinois ......................................................................................................................................... 48 Local Government Fiscal Stress Poses Challenges for Illinois and Vice Versa .................................. 49 Conclusions and Recommendations .................................................................................................. 51 Make the Tough Choices Sooner Rather than Later ............................................................................................ 51 Revamp the State’s Fiscal Toolkit ......................................................................................................................... 51 Other Issues ............................................................................................................................................................ 52 Endnotes ............................................................................................................................................. 54 Reports of the State Budget Crisis Task Force Illinois Report 3 Paul A. Volcker and Richard Ravitch introduced the July 2012 Full Report of the State Budget Crisis Task Force with the following statement: Reports of the State Budget Crisis Task Force Illinois Report 4 Reports of the State Budget Crisis Task Force Illinois Report 5 Reports of the State Budget Crisis Task Force Illinois Report 6 Foreword Former New York Lieutenant Governor Richard Ravitch and former Federal Reserve Board Chair Paul Volcker created the State Budget Crisis Task Force because of their growing concern about the long-term fiscal sustainability of the states and the persistent structural imbalance in state budgets, which was accelerated by the financial collapse of 2008. After extensive planning and fundraising in 2010 and early 2011, Messrs.