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Illinois budget woes: Titanic and sinking

Dollar Sign imageThe financial problems plaguing Illinois government are not new. The state has spent the past several years struggling under the growing weight of a massive deficit that has increased the costs of credit and is now disrupting routine operations such as reimbursements to vendors who contract with the state. The state legislature and governor have not developed a strategy for resolving the situation and it is rapidly growing worse.

Fiscal analysis by researchers at the University of Illinois’ Institute of Government of Public Affairs using a broad measure of the state budget indicates that the state’s fiscal disaster is even worse than commonly believed, will take years or even decades to remedy and can be fixed only by large and fundamental changes in both spending and tax policies of the state.

“As long as the state continues to spend more than it receives while doing nothing but postponing its obligations, the backlog of unpaid bills will grow at a frightening rate,” researchers Richard Dye, Nancy Hudspeth and David Merriman write in a chapter for The Illinois Report 2011. For instance, IGPA’s Fiscal Futures Model indicates that Illinois backlog of unpaid bills could reach $40 billion by July 1, 2013, with an associated delay in paying those bills of more than five years.

The full chapter from The Illinois Report 2011 is now available at The entire report will be available February 1st.

The chapter is based on research done for the Fiscal Futures Project, co-directed by Dye, an economist and Merriman, a professor of public administration at the University of Illinois at Chicago. The IGPA model projects the state budget into future years using past trends in spending and revenue.

For The Illinois Report 2011, the authors find that:

  • If personal income, corporate income and general sales tax revenue all returned to their 2008 peak levels in inflation-adjusted dollars, state revenue would increase by only $2.8 billion – far short of what would be needed to close a gap that is now about $12 billion.
  • If current spending and revenue practices continue, the principal and interest payments on borrowing to keep the backlog of unpaid bills in check would consume all of the state’s personal income tax revenue by 2014, and every dollar received from personal income, corporate income and sales taxes combined by 2019.
  • To achieve a balanced budget in 2012 by raising income taxes, the individual and corporate income tax rates would need to rise to 7.1 percent and 11.3 percent, respectively.
  • To achieve a balanced budget in 2012 by raising sales taxes, the current state rate of 6.25 percent would have to rise to 13.5 percent, before the add-on of any local sales tax.
  • To achieve a balanced budget in 2012 by cutting government spending would require a reduction of 26 percent, exclusive of debt service, pensions and transportation. That’s equivalent to cutting more than the entire current budget for human services and related agencies, or more than the state spends on government operations, economic development, corrections, public safety and natural resources combined.

The researchers conclude that the state’s fiscal problems are so enormous that no single tactic will be enough to balance the budget.

“We start so out of balance that even an absolute freeze on all spending will not achieve balance in a 10-year time horizon,” Dye, Hudspeth and Merriman wrote. “Bringing Illinois to fiscal solvency will require state government to implement multiple and massive policy changes. If nothing is done soon, the state of Illinois faces a very bleak future.”

David Merriman
Richard F. Dye