Another important eect has been a steady deterioration inthe state’s credit rating. Illinois now has the lowest creditrating and highest borrowing costs of the 50 states. The“Illinois eect” on borrowing costs
has also aected localgovernments. Illinois’ state workforce has shrunk andmany government tasks are performed more slowly, or lesscompletely, than in the past.In parallel with its chronic and nagging structuralimbalance, the long-term challenges that Illinois facesdue to its unfunded liabilities
—particularly liabilities forpensions promised to teachers and state workers—havereceived heightened public and legislative aention.Largely due to many years of scheduled underfunding,Illinois’ has accumulated unfunded pension obligations onthe order of $100 billion. Pension payments are scheduledto rise rapidly over the next several years, exacerbatingan already dicult state nancial situation. Even theseescalating pension contributions are too small to keepIllinois’ unfunded pension liabilities from growing over thenext decade. The enactment of a two-tiered system withhigher contributions from and lower benets to employeeshired starting in 2011 was a huge step, but is alreadyfactored into these projections. Despite major legislativeand gubernatorial eorts to further reduce unfundedliability and state contributions, there has been no action asof October 2013.Since 2008, the Fiscal Futures Project has carefullytracked the state of Illinois’ revenue and expendituresand developed an empirical model of the state budget.
Using this historical budget data, information about pasteconomic performance, projections of future economicactivity, and well-documented standard analyticaltechniques, we are able to calculate measures of Illinois’past scal health and are able to project its future scalperformance under a variety of policy choices andeconomic conditions. We believe that it is crucial that publicleaders and the general public understand the implicationsof the scal policy choices currently being discussed inIllinois, and in this paper we use our model to analyzesome of them. In particular, we calculate the baseline scalsituation under current Illinois law—if the temporary taxincreases expire as scheduled—and an alternative scenariowhich assumes that the higher rates are made permanent.
OUR LOOKING GLASS: THE STRUCTURAL GAP IN THECONSOLIDATED FUNDS BUDGET
Assessments of Illinois’ scal condition and changes inthat condition can vary greatly depending on the frame ofreference used to do the analyses, as we have documented
See: Luby and Moldogaziev, “The Scarlet Leer in the MunicipalBond Market: ‘Unpacking’ the Risk Premium on State of Illinois’Debt.” Forthcoming.
For more details see
Report of the State Budget Crisis Task Force:Illinois Report
. 2012. hp://www.statebudgetcrisis.org/wpcms/wp-content/images/2012-10-12-Illinois-Report-Final-2.pdf.
For more details see hp://igpa.uillinois.edu/scalfutures.
In our analyses we use a carefully chosenand consistent frame of reference that provides a realisticassessment of Illinois’ scal situation. In particular,our Fiscal Futures Model uses a budget concept we callConsolidated Funds, which is much broader than the morecommonly reported General Funds. The rationale is thatwith the broader measure, accounting changes or transfers between funds will not be confused with a real change inthe state’s revenues or expenditures.
Structural Budget Gap.
The Illinois Constitution limitsappropriations for the upcoming budget year to “fundsestimated to be available,” which is interpreted to includepre-existing account balances or new borrowing, inaddition to projected tax collections, federal grants, andvarious fees. Our preferred measure of the state’s scalcondition is:
Structural Budget Gap =Total Revenue - Total Spending
where “total revenue” includes the annual ow of taxes,grants and fees but
not the one-time use of asset balances ornew borrowing
. This measure focuses on sustainable revenueand thus the underlying or structural scal situation.Note that the gap can be either positive, zero or negative.A positive gap (revenue > spending) is called a structuralsurplus; a zero gap is called a structurally balanced budget; and a negative gap (revenue < spending) is called astructural decit.
Baseline Projections o Illinois’ structural budget gap.
Figure 1 presents projections of the structural gap in theconsolidated funds budget from the most recent version
For more information, please see work by The Fiscal FuturesProject on transparency in budgeting: hp://igpa.uillinois.edu/system/les/Fiscal%20Futures%20Budget%20Transparency%20Report.pdf
Illinois Consolidated Funds StructuralBudget Gap FY 2005 to 2025
B u d g e t G a p = T o t a l R e v e n u e - T o t a l S p e n d i n g ( b i l l i o n s o f d o l l a r s )