Illinois government’s already shaky finances face a hit from the coronavirus greater than that leveled by the Great Recession, with massive losses in tax revenue, higher health care spending and additional damage to the state’s vastly underfunded public employee pension systems, a University of Illinois study released Thursday said.
“It is too early to precisely quantify the fiscal gap that is likely to be created by reductions in state revenue and increases in the cost of delivering state services, but we believe that it will almost certainly cost billions of dollars and possibly cost tens of billions of dollars,” said the authors of the report from the University of Illinois’ Institute of Government and Public Affairs.
“Federal legislative efforts to date in response to the COVID-19 pandemic have been massive but are unlikely to fully insulate Illinois from the fiscal damage,” they said.
Using various economic models amid the continued uncertainty over the response and duration of the pandemic, the study forecast that “the revenue loss for the individual and corporate income taxes and the state sales tax is likely to be substantial.” Those three taxes make up over three-fourths of total tax revenue and almost half of state revenues.
If the pandemic leads to a short economic downturn followed by a strong and fast recovery for this year and next, state revenues could fall $4.3 billion, according to the report.
But if the economic impact is similar to the 2007-09 recession, revenues could drop $6.4 billion; more serious fallout could lead to revenue losses anywhere from $8.7 billion to $14.1 billion.
A more protracted downturn and a weak recovery, dragging out to 2023, could lead to revenue losses of anywhere from $10 billion to more than $28 billion, according to the report.
The total state budget is $40 billion.
At the same time, the U. of I. researchers said the pandemic will increase the need for state spending to protect vulnerable populations from the health and economic consequences with more people likely to be forced onto Medicaid, the federal-state funded health care program for lower income wage earners.
However, the report credits actions already taken by the state to secure equipment and inform people about the risks of the coronavirus and said that due to “the extraordinary efforts of existing state employees,” the overall impact on the budget is likely to be “relatively modest.”
Even anticipating a potential doubling or tripling of state public health expenditures in this budget year and next “would have modest impacts on the overall budgetary situation,” the report said. Still, it forecast an increase of $4 billion to $5 billion in annual Medicaid expenditures over the next several years.
Illinois’ long underfunded public employee pension systems, the worst-funded in the nation, are also forecast to take a significant hit.
“While the finances of many pension systems have stabilized since the 2007-2009 recession, the finances of the worst-funded ones, like Illinois’, have continued to deteriorate,” the report said.
“Because of this, the Illinois pension systems may be more vulnerable to the effects of the COVID-19 pandemic than those of other states,” the study said, adding, “the effects could be devastating for plans with already impaired funding levels.”
It said increased state pension contributions, which already makes up about a quarter of the budget, represent a future impact from the coronavirus that should not be dismissed.
“The coming period is likely to require substantial sacrifice from many groups. The perceived legitimacy of public officials’ decisions will require a transparent account of the constraints and reasons for the choices that are made,” the report said.
“Because sacrifice is required, the most vulnerable segments of society (children, the poor, those in ill health) with the least capacity for sacrifice should be protected to the greatest extent possible. Efficiency — making necessary changes in the most cost-effective manner — will minimize the sacrifice that is required,” it said.
The report was the first in a series on the impacts of COVID-19 as part of the work of more than four dozen faculty experts from the University of Illinois system.
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