As Governor Rauner prepares to deliver his second budget since taking office, this is perhaps a good time to review where the Illinois budget conflict stands, what’s at stake and how it’s impacting businesses across the state.
What does this mean for business?
The Illinois budget impasse is creating increasingly difficult conditions for all companies doing business with the state as unpaid bills increase. Here are a few examples of the negative impact of this situation:
- On October 29, 2015, Southwestern Electric Cooperative sent a disconnection notice to Illinois, potentially impacting “22,000 homes, hospitals, schools, businesses and industries throughout the state of Illinois.
- Nonprofits that provide social services are severely hurt by the budget impasse. Lutheran Social Services of Illinois announced it is closing 30 services and cutting 750 jobs throughout the state due to the impasse.
- Illinois public colleges are struggling to stay afloat. CNN reports that, “Thirty teachers at Western Illinois University were laid off. Hiring is on hold at Kishwaukee Community College and faculty members were asked not to travel. Chicago State University says it won’t be able to pay the bills after March 1.
Also, the state is not going to be allocating funds for maintaining infrastructure, from buildings to roads, to bridges. Illinois will likely have to raise revenues by a combination of raising tax rates for both companies and individuals, while simultaneously broadening the tax base to include expanding a state sales tax on transactions by including more service businesses.
The key issues
The state has been without a budget since July, the start of fiscal year 2016. This situation is creating turmoil for a large range of businesses doing business with the state and is creating uncertainty over future tax policy. As a reminder, under state law, the Governor is required to present a balanced budget funded solely by existing revenue sources. At the start of 2015, the state reduced individual and business taxes, which resulted in a 22% decline in income tax revenue. This decline has helped create a $6 billion budget shortfall for Illinois. State spending, however, has continued more or less unabated. In accordance with rulings by the Illinois Judicial branch and laws ordering some services to continue, the state is funding nearly 90% of its general funds obligations under FY2015 spending levels, despite having collected only 78% of that year’s tax revenues.
The Illinois State Comptroller’s Quarterly report states that, “Illinois finished the second quarter with a general funds payables backlog of $3.992 billion, which is an increase of about $337 million from the first quarter but $368 million lower than the second quarter of fiscal year 2015. Comptroller staff estimates another $3 billion in invoices were held at the agencies, which would put the backlog at $6.992 billion.”
Along with the budget impasse, the state is not addressing its largest budget issue: the massive $111 billion pension shortfall. Due to the budget impasse and despite a favorable economic environment, the state is now more vulnerable to further revenue shortfalls, should a national recession begin, than it was in 2008.
Impact on Illinois’s credit rating
As a result of the ongoing budget crisis, the State of Illinois’s bond rating is the worst in the country, and it is the only state rating below the ‘A’ category. Fitch Ratings has downgraded Illinois seven times in the last five years. They state: “The downgrade reflects the continued deterioration of the state’s financial flexibility during its extended budget impasse. Illinois’s inability to balance its operations, eliminate accumulated liabilities, and grow reserves during a period of economic expansion leaves it far more vulnerable to the next economic downturn.” Moody’s shares the concerns: “The state’s negative outlook is consistent with the potential for additional credit weakening following this year’s extended budget impasse.”
The gap between Gov. Rauner and Democrats
Previously, we covered Gov. Rauner’s first budget, which attempted to balance the Illinois state budget by adopting large spending cuts and legally questionable assumptions on pensions. The Governor proposed a $31.5 billion general funds budget that had $4 billion in spending cuts and $2.2 billion in estimated pension savings. The total of $6 billion is the amount of the budget gap in fiscal year 2016 assuming there are no substantial changes from the 2015 fiscal year spending. For the 2015 budget, a compromise was devised to bridge a gap of over $1.5 billion left over from the previous administration.
To reach a compromise and enact a balanced budget, Gov. Rauner has stated he requires his “Turnaround Illinois” reform plan to be put into action. The plan includes changes to: “wage and collective bargaining requirements, workers’ compensation costs, public employee pensions and unions’ ability to exercise influence through campaign contributions. His proposals also would prevent local property tax hikes without voter approval, impose term limits on the General Assembly and extend bankruptcy protections to municipalities.” (Chicago Tribune) These are policies favored by key Democrat constituencies and therefore will be difficult for Democrat leaders Madigan and Cullerton to change.
In May, the Illinois General Assembly passed its own general operating budget for fiscal year 2016 that spends $36.3 billion and has an acknowledged $3.0 billion shortfall in revenues. As of today, the legislature still has not formally sent the budget to Rauner.
Gov. Rauner has stated he is open to revenue or tax increases, but only with the accompanying reforms. As an example of where additional revenue may come from, Rauner has proposed expanding the sales tax to more sectors of the Illinois economy.
Without resolving the budget issue, Illinois won’t be able to rehabilitate its business image from one that is unfriendly and uncertain to one that fulfills the promise that it has traditionally proffered, given the state’s central location, educated workforce, strong manufacturing base, and bountiful natural resources, among many other such blessings.
This article was featured on MBFinancial.