Large Gap Remains in FY2011 State Budget

June 04, 2010

Before adjourning for a second time this session on May 28, 2010, the Illinois General Assembly sent a series of budget bills for FY2011 to the Governor. Both houses passed $26.0 billion in appropriations, emergency budget powers for the Governor, several one-time revenue sources and some borrowing for operations.

The State’s budget for FY2011, which begins in less than 30 days on July 1, 2010, is still unbalanced. It relies heavily on debt, deficit spending and extending the State’s lag time in paying its bills to get through the year. The appropriations approved by the General Assembly result in a $5.6 billion operating deficit in FY2011. This deficit is then cut in half by borrowing up to $2.8 billion through securitization of the tobacco settlement[i] and interfund borrowing. Even after the State borrows billions for operations, without additional cuts or revenues, the current budget will end the year adding at least $2.8 billion to the $5.9 billion deficit carried forward from FY2010 for a total deficit of roughly $8.7 billion. The borrowing for FY2011 operational spending will also complicate future budgets because those revenues are not sustainable and will not be available in the next fiscal year. Moreover, even though $1.8 billion of the borrowing will be paid back by securitizing half of the State’s annual tobacco settlement revenues, the rest will have to be paid with FY2012 General Funds plunging the following year further into deficit.

The House passed authorization for the State to sell Pension Obligation Bonds to make its FY2011 required contribution to the retirement systems, which is expected to total $3.8 billion after subtracting savings from the pension reforms for new employees passed earlier in the year. However, the Senate did not take up that bill. According to source in the Governor’s office, the Senate is tentatively planning to reconvene on June 15, 2010 to consider the pension-borrowing plan approved by the House on May 25, 2010.

The following chart shows the bills that have passed both houses and bills that are still under consideration.

Although the $26.0 billion appropriated for General Funds spending is a slight reduction from the $26.3 billion enacted in FY2010, as previously discussed in this blog the appropriations do not include debt service, pension contributions and other expenditures that increase spending well beyond the State’s expected resources for next year. The following chart compares total General Funds revenue sources to total expenditures, showing a $2.8 billion operating deficit for FY2011.The FY2011 budget reduces the $12.9 billion deficit the State faced going into the new fiscal year by 31.8% or $4.2 billion. However, $3.3 billion worth of the reductions are one-time revenue sources or savings that will not be available in subsequent fiscal years, including the tobacco settlement securitization, interfund borrowing, procurement reform and the revenue increase expected from the tax amnesty bill.[ii] Legislative leaders have also said that they will only borrow $1.2 billion based on the tobacco settlement securitization even though the approved legislation authorizes the State to borrow $1.75 billion. If the State borrows less the reduction in debt based revenue would increase the FY2011 General Funds deficit to $3.4 billion and the total State deficit including the FY2010 carry forward to $9.2 billion, up from $2.8 billion and $8.7 billion respectively. The $1 billion of interfund borrowing would also need to be repaid out of FY2012 General Funds, further stressing the State’s future funding for operations.

As part of the Emergency Budget Act, the Governor would have sweeping authority to cut up to $2 billion of the total General Funds appropriations from the total approved in HB859. However, Governor Quinn was given similar unilateral authority to cut spending from the current fiscal year budget by up to $1.1 billion and it is estimated that he held back only $300 million.[iii]

[i] Illinois received a total of $9.1 billion in 1998 to settle its part in a civic liabilities lawsuit against the Tobacco Industry. Under the agreement, the State will receive annual installment payments from the cigarette producers, which currently average $300 million, through 2025.
[ii] SB377 allows delinquent taxpayers to pay back taxes owed from June 30, 2002 through July 1, 2009 without penalty or interest.  The amnesty period will run from October 1, 2010 until November 8, 2010 and the State hopes to generate approximately $250 million for FY2011.
[iii] Illinois State FY2011 Budget, p. 2-26.