A Volcker Alliance report on Truth and Integrity in State Budgeting finds Illinois is missing. Debt, budget tricks and thin reserve funds gave the state poor grades.
Illinois has spent more than it earns for 21 straight years, earning it the second largest total debt burden of any state and the lowest credit rating in the country – though it recently received its first bond upgrades in decades.
Most of the responsibility rests with numerous lawmakers and governors who have made irresponsible financial policy decisions over these 21 years.
But there is another major culprit: the budget process itself.
This is the result of a recently published report by the fiscal watchdog Volcker Alliance. As they rushed to pass their latest budget, Illinois lawmakers made numerous design mistakes that would have prevented the state from spending billions of dollars through the last month of the fiscal year. The lax standards that enable this type of wrongdoing are a primary reason Illinois’ poor performance on the report and the state’s ongoing budget problems.
The report “Truth and Integrity in the National Budget: Preparing for the Storm” evaluates statements in five dimensions. Illinois performed poorly in three categories and didn’t stand out in the remaining two.
Old costs
Illinois received a D-, the lowest possible grade, for the legacy as the state continues to grapple with the worst pension debt in the country. Moody’s Investors Service recently reported that Illinois’ pension debt reached a record high of $ 317 billion as of June 30, 2020.
A major contributor to Illinois’ ever-growing legacy is guaranteed 3% annual cost of living adjustments for Tier 1 workers who entered the state’s pension systems prior to 2011. These overly generous payouts compared to pathetic contributions to government workers are fueling the tax and credit trap that is causing Illinois to deliver on pension promises it has never been able to deliver.
Only a constitutional amendment can enable sweeping reforms to stabilize Illinois’s pension crisis, provide pension security for civil servants, and ultimately address one of the state’s top causes of tax oppressive, declining services, and departing residents.
Budget maneuvers
Illinois also performed poorly on budget maneuvers, which is unsurprising given the state’s tradition of borrowing and approving budgets at the eleventh hour. The state received another D rating for poor household habits and the impact of poor housekeeping on the state’s general financial condition. These poor policies have caused Illinois’ creditworthiness to fall from the highest rating available by S&P Global Ratings and Moody’s Investors Service prior to 1983, when former House Speaker Michael Madigan began his political reign, to the lowest rating in the nation today is.
The state has often relied on a budget maneuver called fund sweeps to make up for deficits in its budget that need to be made up. Fund sweeps make it possible to move funds from funds earmarked for a specific purpose into the state budget, often to pay operating or pension costs.
When budgeted general funds are tight, Illinois simply moves funds from its special funds into the general fund to make up the difference by counting those funds as revenue. This is one of the gimmicks Illinois politicians often rely on to claim they have balanced the budget despite the state’s deficit for more than 20 years.
Reserve fund
Another area that Illinois misses out on is in reserve funds. Illinois received a D rating for its meager reserve funds. That was the lowest grade given to a state, with Kansas receiving the same grade.
The report found that Illinois noted “shortfalls in general fund balances, minimal fund balances on rainy days, and a failure to link reserves to earnings volatility.” Even states with no official rain daily allowances, such as Colorado, performed higher.
While experts suggest states are saving enough money to work for at least a month, Illinois had enough reserves to fund the government for just over 15 minutes in 2020. Illinois has a long history of ignoring calls for adequate funding of its reserves.
The rainy day finally came in the form of the COVID-19 pandemic. Illinois emergency funds were basically empty when they struck and are still nearly empty today. The current $ 7.6 million from the Illinois Budget Stabilization Fund could fund the government for about 90 minutes in a state that will spend $ 42 billion in fiscal 2022.
While other states, such as neighboring Indiana and Michigan, could use their reserves to fill budget gaps, Illinois enjoyed no such luxury.
The lack of adequate savings for rainy days is a primary reason Illinois was the only state to borrow from the Federal Reserve during the pandemic. It did it twice.
transparency
The only bright spot for Illinois was the first-time disclosure of at least $ 25 billion in deferred infrastructure maintenance costs for buildings, universities, roads, bridges and schools in 2019 with a B-grade for transparency. Only four other states make such disclosures public, but the rating is not representative of the overall picture of transparency in the Illinois budget process.
While public disclosure of household debt and business deals is both welcome and necessary, Illinois passes the transparency test in a much more fundamental way by passing secretly negotiated, last-minute budgets. This lack of transparency in budgeting excludes most lawmakers from the process, thereby depriving their voters of the right to vote.
A better budgeting process would use reliable forecasting methods that fund reserves for rainy days, prevent short-term borrowing and fund sweeps, and end poor accounting practices that allow lawmakers to hide Illinois’ real financial health from taxpayers.
Legislative leaders begin using Shell laws to circumvent constitutional requirements to read the law on three different days prior to voting by title. Once they get the shell invoice through the reading process, they modify it to include thousands of pages in new language. Once the actual budget language has been added to the Shell Act, the bill is often only published a few hours before a final vote takes place.
This process is fully controlled by the legislative leaders and often prevents ordinary members from participating in the budget preparation. By creating the budget in this way, the leaders are essentially freezing the grassroots and removing Illinois citizens who have no say in creating the most important piece of legislation that is issued annually by the General Assembly.
Building the budget quickly and in the dark will result in an inferior product. During the last budget process, where lawmakers only had a few hours to read more than 4,000 pages of the output language, it was found that the finished product was riddled with errors. Governor JB Pritzker was forced to use a supplementary veto on the budget package, since due to errors in the drafting of the bill in the budget originally approved by the legislator, significant parts of the state’s operating and capital budgets could only be spent one month before the end of the budget year – June 1st, 2022. The intent was to spend July 1st, the beginning of fiscal year 2022, in Illinois.
Such potentially costly and embarrassing mistakes are the direct result of a budget process that is carried out hastily and without effective oversight by the public or average members of the General Assembly.
Budget forecast
Illinois received a C grade for the budget forecast from the report. State law currently requires two separate units to estimate revenue for the coming year. The executive estimate comes from the governor’s Office of Management and Budget and is used by the governor in his annual budget proposal, while a second estimate comes from the legislative commission on state forecasting and accountability.
The General Assembly is then expected to use these numbers to adopt its own official estimate for the budget process, which it has not done since 2014. Both estimates rarely match actual revenues, resulting in inaccurate numbers that can miss reality by billions of dollars.
From 2008 to 2020, the legislative revenue estimate was only five times on target, while the executive’s estimate was only twice on target.
Conclusion: To achieve better budget results, fix the budget process
The Volcker Alliance report underscores how poorly Illinois is in terms of truth and integrity in budgeting. Massive legacy costs are associated with poor budgeting practices and poor borrowing and forecasting strategies. This has resulted in chronically troubled finances, two decades of unbalanced budgets, poor creditworthiness, and empty reserve funds. Unfortunately, this year too, legislative leaders continued their bad habit of secret budgetary procedures at the last minute.
Despite all of the problems with Illinois finances, there are many possible solutions. A real change to the balanced budget would prevent the budgetary and borrowing regimes that allow lawmakers to claim that the budget is balanced when it is not.
A spending cap would help keep Springfield’s spending under control. Consensus-based sales projections would provide a better and more accurate indication of what revenue might look like, rather than widely varying estimates that would normally fail.
Ultimately, a constitutional amendment to reform public pensions would bring the greatest relief. Without a change, the contaminated sites will drag the state further down.