March 24, 2022
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Click here to read the press release for this analysis.
SUMMARY
Governor JB Pritzker’s proposed fiscal year 2023 budget benefits from extraordinary revenue growth as the State has recovered strongly from the pandemic, with surpluses projected for both FY2022 and FY2023. The Governor has prudently prioritized the use of much of the FY2022 and FY2023 surplus to pay down debt, increase reserves, make supplemental pension payments and advance other important priorities. The State is in a much stronger financial position than it has been for many years, as evidenced by two recent general obligation credit rating upgrades, and its backlog of unpaid bills is the smallest it has been in many years.
The State of Illinois entered the pandemic with the worst credit rating of all states, no rainy day fund, chronic budget deficits and a severely underfunded pension system. All of these challenges put the State in a worse condition than other states to be able to address the economic dislocations caused by the pandemic. Illinois was the only state to borrow from the Federal Reserve Bank’s Municipal Liquidity Facility to backfill severe losses in tax revenue during the worst of the pandemic shutdowns. However, significant federal support to the U.S. economy and to states and municipalities has helped ensure the impact of the pandemic recession has been short and galvanized the strong revenue recovery in Illinois and other states. Illinois is now in a position where it can make plans to support budgetary stability, including increasing budgetary reserves and avoiding future bill backlogs.
For these reasons, the Civic Federation supports the Governor’s budget proposal for FY2023. However, we, caution that significant long-term challenges remain that must be addressed through long-term planning. Without the pressure of a budget deficit and billions of dollars in unpaid bills, the State should embrace this opportunity to come up with a long-term vision for how it will maintain budgetary balance and financial stability into the future.
The Federation therefore recommends the State develop a comprehensive, long-range financial plan, as recommended by the Government Finance Officers’ Association. Such a plan should be bolstered by a multi-year process to build budgetary reserves as a bulwark against future economic instability, identify and fund key spending priorities and plan for future economic downturns. The ongoing pandemic and significant disruptions in the international economy will generate much uncertainty for all government budgets in the next several years. Therefore, it is critically important that State leaders make plans and investments now that will ensure Illinois is in a strong position to weather the next financial storm.
The Civic Federation offers the following key findings on the governor’s recommended FY2023 Budget:
- The $45.4 billion General Funds operating budget is $1.6 billion, or 3.4% below estimated FY2022 spending of nearly $47.0 billion.
- The FY2022 total expenditure number includes $1.6 billion in proposed supplemental agency appropriations: $898 million to eliminate the group health insurance bill backlog, $230 million for the College Illinois! Prepaid Tuition Program liability and $487 million for other supplemental appropriations.
- FY2022 spending also includes paying off the remaining portions of a total of $2.0 billion in Municipal Liquidity Facility short term borrowing the State made in December 2020.
- The State is projected to end FY2023 with a $178 million surplus.
- General Funds revenues are budgeted at $45.8 billion for FY2023, a decrease of $460 million, or 1%, from $46.3 billion in FY2022.
- The revenue estimates for both FY2023 and FY2022 have been significantly revised upward twice—in November 2021 and again in February 2022 in the Governor’s budget. Projected General Funds revenues for FY2023 have been increased by nearly $3.5 billion from the State’s expectations in June 2021 and FY2022 revenues by $3.3 billion.
- The General Assembly’s Commission on Government Forecasting and Accountability updated its revenue estimates in March to include data from January and February that came in after the Governor’s budget was released. Their FY2023 estimates are higher than the Governor’s by $484 million.
- Agency spending, excluding group insurance payments, pension contributions, required transfers for debt service and other purposes will increase by $622 million or 2.0% in FY2023. However, if the FY2022 proposed supplemental appropriations are excluded, the increase is $2.2 billion, or 7.6% to $31.5 billion in FY2023 from $29.3 billion enacted for FY2022.
- The budget proposes $1 billion in tax and fee relief measures, including $475 million in property tax rebates, a freeze in the 1% state-imposed grocery sales taxes and a suspension of the scheduled automatic increase to the gas tax. Local governments would be held harmless for the grocery sales tax suspension (a $360 million total).
- The budget fully satisfies the State’s 50 -year pension-funding plan and also uses surplus funds to make $500 million in supplemental pension contributions in FY2022 and FY2023.
- The budget increases the Budget Stabilization Fund (“Rainy Day Fund”) by $600 million in FY2022 and another $279 million in FY2023.
- If the supplemental appropriations for FY2022 are approved, the projected FY2023 year-end bill backlog will be reduced to $2.7 billion (down from $16.7 billion in 2017 and $3.6 billion on January 31, 2022)
- The State of Illinois received $8.3 billion in Coronavirus State Fiscal Recovery Funds and Coronavirus Capital Projects Funds within the American Rescue Plan Act. About $2.8 billion from the Coronavirus State Fiscal Recovery Fund was appropriated in FY2022, mostly outside of the General Funds. The FY2022 budget plan also reserves $1.5 billion within the General Funds to replace lost revenues to the State, as allowed under the American Rescue Plan. The fiscal year 2023 proposed budget includes $535 million in ARPA fund appropriations to support violence prevention grants and state COVID-19 response appropriations, all outside of General Funds.
- The State of Illinois was one of 23 states that borrowed from the U.S. Department of Labor to fund the extraordinary number of unemployment claims during the worst of the pandemic. The $4.5 billion in borrowing must be repaid with interest. The Pritzker Administration notes in the budget that they are working with the General Assembly, business and labor communities to finalize a plan to pay off the debt. If the State does not use federal relief funds, it will need to increase the state unemployment tax rate for employers and/or cut benefits for employees.
The Civic Federation has the following recommendations on the FY2022 state budget:
- Develop a comprehensive long-term financial plan to stabilize the State’s finances.
- Now that the State’s backlog of unpaid bills has been significantly reduced, the State should amend the Prompt Payment Act to reduce penalty interest rates that have not served as a deterrent to delaying vendor payments.
- Use a portion of remaining American Rescue Plan Act funds to pay down unemployment trust fund liabilities.
- Develop a long-term recovery plan for Illinois’ tourism and hospitality industry.
- Build a Rainy Day Fund of 10% of General Funds Revenues.
- Increase transparency in the Illinois General Assembly by archiving videos of committee and floor debates online.
- Consider Civic Federation ideas for consolidating and streamlining government in Illinois.
- Review and evaluate the effectiveness of all existing business and other tax treatments.