Three weeks before Governor Pat Quinn is scheduled to present his annual State of the State message, his budget office has released a summary of three-year financial projections that indicate just how challenging the state’s already precarious financial condition is likely to become the next few years, according to Senator Jim Oberweis.
Despite an expected increase in state revenues of $600 million in the coming fiscal year, the gains will be offset by nearly $950 million in increased pension costs, the budget office predicted in the annual projection mandated by state law.
Senator Oberweis said the projections serve as a brief snapshot of the financial outlook for the state. It is a preview of the targets the Governor must attempt to hit in his annual budget proposal. But, as it did last year, the brief four-page document and its accompanying chart offer no direction on how the Governor proposes to meet the spending targets.
In the category of education, the budget office predicted Illinois would spend about $450 million more next year than this year. However, the education allocation includes more than $700 million in increased retirement fund payments for public school teachers and administrators and about $100 million more for university employees. Once those figures are backed out of the total, the Governor’s office predicted the amount available for other education spending would drop by about $400 million.
The Governor’s budget office also predicted that healthcare spending would go up by about $250 million, pension fund payments for state employees would increase by just under $100 million and Department of Human Services spending would go up about $200 million more than what was authorized for the current fiscal year.
The three-year projections presume that the bulk of the 67% tax hike approved in 2011 will expire as scheduled on Jan. 1, 2015. The expiration of the tax hike, coupled with other expected changes in revenues, will likely result in a $1.8 billion drop in revenues for the final half of Fiscal Year 2015 and another $2.7 billion drop for the full year in fiscal year 2016.
Although paying down old bills was cited as a key rationale for hiking taxes when Democrats approved the tax hike in 2011, little progress has been made on that front. The budget office predicts that the state bill backlog will drop from $8.28 billion in fiscal year 2013 to $7.42 billion in fiscal year 2014 and then remain unchanged for the next two fiscal years.
In related news, audits of the state’s five pension systems released January 16 confirmed that Illinois had an unfunded liability of more than $94 billion in its pensions when the past fiscal year ended June 30, 2012, Senator Oberweis explained.
The audits reveal that the volatile stock market took a toll on pension system investments during the past fiscal year, with the investment portfolio of the Teachers’ Retirement System (TRS) falling by $968 million. As the largest of the five state pension systems, TRS took the biggest hit in the market.
Because the audits only cover the fiscal year that ended in June 2012, the investment returns do not reflect improvements in the market that occurred over the past six months.
Also during the week, one of the major debt rating agencies issued a warning that Illinois is on a “negative watch.” While not actually lowering the state’s credit rating, the action by Fitch Ratings Services means that if the state does not take action to improve its credit, the agency will likely downgrade the state in the near future, Senator Oberweis said.
Fitch cited concerns over a lack of progress on meaningful pension reform as the catalyst for the change in Illinois’ credit outlook.
Illinois already holds the country’s lowest rating from Moody’s Investors Service.
For years, Illinois and California have seemingly vied for the top spot as the most fiscally dysfunctional state in the nation. However, Illinois appears to be taking the lead in the dubious honor with Fitch’s threat, coupled with the news that California is projecting its first budget surplus in a decade.
In other action, lawmakers continued filing measures for consideration during the coming spring legislative session. Among the bills already filed are:
• A ban on semi-automatic weapons and large-capacity ammunition magazines (SB 42);
• A measure allowing lawmakers, Governor and other eligible officials to drop out of the General Assembly Pension System (SB 40);
• Smoking regulations for outdoor patios of restaurants and other establishments (SB 53); and
• A proposal affecting the mandatory prison sentence for persons younger than 18 who have been convicted of murder (SB 55).