Hopes it will act as impetus for cooperation and action

SPRINGFIELD, IL – State government is unprepared for an economic downturn that may already be underway because it has failed to address numerous long-standing budgetary issues, Comptroller Dan Hynes warned in a special report released to the General Assembly today.

The report represents a "fiscal state of the state" for legislators and state policy makers to consider as they begin the process of enacting a new budget for Fiscal 2009. "It is my hope that this sobering report will serve as an impetus for cooperation and determined action as the state enters an extraordinarily challenging period," Hynes said in an accompanying letter to all legislators. "It is imperative that policy makers recognize the gravity of the situation that Illinois is facing in the immediate future."

The analysis states that Illinois General Funds revenues from FY03 through FY07 increased nearly $5.5 billion, or 5.5 percent per year, driven by a 24 percent growth in income and sales taxes. If current year government projections hold, revenue growth will be over $6 billion. And yet, even with the large growth in spending, key areas were not addressed, according to the report:

• The state's budget has remained consistently out of balance. The deficit was $4.16 billion at the end of FY03. At the end of FY07, it was nearly $3.6 billion, based on preliminary unaudited estimates. "During this period of national economic growth, many states took advantage of their increased revenues to stabilize their financial positions," Hynes told legislators. By contrast, Illinois "retained its status of having the worst deficit in the nation for the fourth year in a row," he said.
• The state continues to abuse the loophole that allows Medicaid and other health care bills (Section 25 liabilities) to be paid from the following year's appropriations, which in turn contributes to persistent structural deficits, payment delays to state vendors and limited access to quality healthcare. Section 25 liabilities were over $1.8 billion in FY03, and had increased to nearly $3.4 billion at the end of FY07, based on preliminary unaudited estimates.

The report further details how issues of critical importance have gone largely unaddressed, as revenue growth was directed primarily toward new spending:

• The state's five retirement systems remain among the most poorly funded in the country. Even with the infusion of the $10 billion pension funding bond proceeds in 2003, the funding ratio remains in the mid sixties, well below the 75 percent level reached prior to the last recession. Meanwhile, pension liabilities of the system continue to grow, and nothing has been done to address a growing liability for retiree health insurance benefits that was estimated to be $43 to $53 billion in a 2006 report by the Civic Committee of the Commercial Club of Chicago.
• Although education has received significant funding increases, investment in education is still below recommended levels and the state's education finance system remains unchanged, resulting in continuing funding disparities in school districts across the state. Higher education will actually receive less in FY08 than it did in FY03. Further, despite major spending increases on health care, by some estimates the number of uninsured Illinoisans has increased.

Hynes predicted "difficult" days ahead as a new budget is crafted, in part because Medicaid and pension liabilities alone are expected to consume all FY2009 revenue growth.

At the same time that these fiscal problems loom, the economy appears to be slowing. Corporate income tax collections are down, sales tax revenues are well below projections, and payment delays and bill backlogs stood at record levels at the end of the first half of the fiscal year, the report said. With unemployment rates rising in Illinois, there is a concern that income tax revenues may also be impacted in the coming years. On top of this is the Governor's promise to expand health care programs without a permanent revenue source to pay for them, said Hynes.

"The fiscal outlook for Illinois is not optimistic," Hynes concluded. "The State has made no effort to build up reserves or address the underlying structural problems of the state's budget. This lack of reserves, and the Medicaid and pension payments ‘albatrosses,' will be a drag on the state when it faces an inevitable economic downturn, likely already underway."