Illinois Gov. J.B. Pritzker unveiled a $49.6 billion general fund fiscal 2024 budget that banks on still-healthy economic trends to allow deposits into the budget and pension stabilization funds while lifting spending for education and other areas.
The $49.6 billion general fund is part of a $118.9 billion spending package and taps most of $49.9 billion of expected revenues in the fiscal year that begins July 1, leaving a $303 million balance.
While the healthy pace of growth that has swollen tax coffers is expected to slow in the coming fiscal year, strong collections have exceeded prior estimates and the administration revised upward the level of revenues expected in the current fiscal year by $1.24 billion to $51.4 billion.
The $1.24 billion comes on top of a $3.7 billion surplus from last November’s forecast. The state previously committed those additional dollars to items such as a rainy-day deposit and paying off the balance on its $4.5 billion federal unemployment trust loan taken out to help cover pandemic-driven unemployment claims.
“When the economy began to recover, we paid off overdue debts, improved our long-term fiscal outlook, and gave tax relief to every Illinoisan,” Pritzker, a Democrat who won a second term in November, said in his state of the state/budget address to the General Assembly Wednesday. “Which is why, here in Illinois in 2023, I’m confident in saying the state of our state is stronger than it has been in decades.”
The governor’s Office of Management and Budget also raised its revenue estimate by $2.3 billion to $49.9 billion for fiscal 2024. While better than expected in November, it’s down 2.8% from what’s now expected to be collected in the current fiscal year.
Individual income taxes are expected to grow by 3.3% or $778 million to $24.66 billion in fiscal 2024 while corporate income taxes will fall by about $200 million to $5.55 billion and sales taxes mostly hold steady at $10.4 billion.
Pritzker led off his speech with a focus on the state’s fiscal progress since he took office in 2019 when the state was still dealing with the fiscal aftermath of a two-year budget impasse and made his case for the affordability of new spending.
The budget launches an expansion of early childhood education programming committing $250 million for the first year. General fund spending on kindergarten through 12th grade would grow by $572 million to $10.3 billion, including the scheduled $350 million increase under the evidence-based formula adopted in 2017. Higher education spending rises by $219 million from the general fund to $2.47 billion. Human and social services and public safety are also in line for increases.
Over the last three years, with the help of an infusion of billions in federal COVID-19 relief and ballooning tax collections, the state paid off $8 billion in overdue bills reducing accounts payable to $963 million, paid off short-term cash and inter-fund borrowing, built up a depleted budget stabilization fund, and won two rounds of rating upgrades.
The upgrades lifted the state’s general obligation ratings to the Baa1/BBB-plus level, but they remain the lowest among states and far weaker than the double-A category state average. The state’s spreads narrowed in tandem with the upgrades and strong investor sentiments but remain the widest among states with the 10 year at a 163 basis point spread to the AAA benchmark.
That’s up two notches from where the rating landed on the edge of junk during the 2015-2017 budget impasse. The state has also made $500 million in supplemental pension contributions over the last two years.
“What was once a state with no cushion to protect it in an economic downturn is now an Illinois on track to have a $2.3 billion rainy-day fund. What was once an Illinois with a credit rating on the verge of junk status is now an Illinois getting credit upgrades,” Pritzker said.
The state has directed billions in tax revenue surpluses and a portion of its $8 billion of federal COVID-19 American Rescue Plan Act relief to pay off $10.5 billion of debts.
The proposed budget makes some additional positive steps, albeit modest ones, on the fiscal front, with $50 million going to further pay down accounts payable and a supplemental $200 million payment above the $9.8 billion statutory contribution from the general fund, which is up $200 million from this year.
The proposed budget would send another $138 million from the anticipated $303 million fiscal 2024 ending balance to the rainy-day fund. The rainy-day account would also receive $45 million in what marks the first installment of the unemployment trust fund repayment of a $450 million 10-year state loan.
Those additions along with a $1.17 billion deposit coming from a fiscal 2023 surplus would bump the rainy-day fund to over $2 billion by the close of fiscal 2024.
The state, as previously announced, also still plans to defease its remaining $450 million of tobacco bonds with proceeds of settlement funds received from tobacco manufacturers for $60 million in interest savings. The bonds are callable in 2026.
Fiscal 2023 ends with a $194 balance and fiscal 2024 with a $165 million balance after the rainy day deposits in both years.
The administration believes the combined $700 million of supplemental pension contributions between fiscal year 2022 and 2024 will trim $2.4 billion of liabilities in addition to an ongoing bond-funded pension buyout program that is estimated to save $1.6 billion. The statutory contribution consumes about 25% of the general fund.
Critics contend the state needs to do far more given the burdensome size of the unfunded liabilities at $139 billion, weak funded ratio of 44%, and reliance on statutory formula over an actuarial one that allows the unfunded tab to grow in down investment years.
The Civic Committee of the Commercial Club of Chicago recently laid out a proposal that uses a temporary income tax surcharge to tackle the pension tab, but there’s little stomach currently for any tax hikes.
A capital budget of $46.5 billion represents $41.5 billion of re-appropriations including projects in the state’s 2019 $45 billion Rebuild Illinois capital program with another $5 billion brings in new appropriations. The state anticipates borrowing $2.2 billion using general obligation bonds to support projects and $200 million of sales tax-backed Build Illinois bonds. The state also has $840 million of remaining GO authority for its accelerated pension buyout program to tap.
Moody’s Investor Service rates the sales tax bonds the same as the GOs at Baa1 and stable, S&P Global Ratings rates them A-minus and positive, Fitch rates them A and stable, and Kroll Bond Rating Agency rates them AA-plus and stable.
The capital budget anticipates receiving an infusion of $18 billion from the federal Infrastructure Investment and Jobs Act in the coming years. The state also plans to compete for millions more in discretionary funds in addition to $2.2 billion of competitive grants in the package already awarded.
Local government income tax sharing levels known as the Local Government Distributive Fund — an area targeted in the past for cuts to help deal with deficits — is held steady.
Whether the budget offers enough positive steps to persuade rating agencies to move the state up the ratings scale remains to be seen. If approved, the budget does hit some points laid out by rating agencies but a potential recession could prove a setback.
S&P in its last state report in the fall said ongoing progress in improving pension, retiree healthcare, and budget stabilization levels while shrinking the statutorily created structural deficit could help draw an upgrade while increases in pension, OPEB, or other fixed-cost obligations could trigger a downgrade.
Fitch said it would view positively progress toward structural balance, which requires improved pension funding and building reserves to $2 billion or roughly 4% to 5% of spending. Reverting to past patterns of contentious fiscal decision-making, which could include delayed budgets with unsustainable fiscal measures, such as pension funding deferrals or a return to late bill payments, could draw a downgrade.
Moody’s said factors that could lead to an upgrade include policies that support growth of the fund balance and paying down pensions, and economic expansion that leads to sustained revenue growth while slowing growth that pressures the budget or growth in debt or unfunded pension liabilities could drive a downgrade.
Reaction
Democrats, who hold a super majority, called the budget a good starting point and praised the education funding and fiscal measures.
“My hope was that Gov. Pritzker would propose a balanced budget that shores up our rainy-day fund and the pension stabilization fund; that avoids any major commitments for new programs and instead uses revenue surpluses on existing programs that have proven a good return on investment for Illinois taxpayers,” said state Comptroller Susana Mendoza. “His proposed budget does all that.”
Republicans warned the higher spending at a time when economists warn of a recession could drive a tax increase. Some also called for tax relief over new spending and questioned the lack of structural reforms on spending or pensions that could put the state back in the hole during economic downturns.
“Today we heard a long list of expensive promises totaling $2.7 billion in new spending,” Illinois House Minority Leader Tony McCombie, R-Savannah, said. “This will require future tax increases or cuts to vital programs serving our most vulnerable.”
“The bottom line is we have to keep our spending within our revenue,” said Sen. Sue Rezin, R-Morris. “Next year our economy is going to slow down so we have to make sure we are very prudent” or spending will drive a “tax increase.”
Legislation
Lawmakers face a series of legislative proposals that stand to impact state finances.
Mendoza is pressing for passage of HB2515 that calls fiscal triggers on deposits into the rainy-day fund and the pension stabilization fund.
The Illinois Municipal League is pressing for passage of HB 1116 and SB 180 that would increase the Local Government Distributive Fund funding formula from 6.16% to 8.5% in 2024, 9% in 2025, 9.5% in 2026 and 10% in 2027.
The Illinois Municipal League also backs HB 1185 that would extend the amortization date to reach a 90% funded ratio for suburban and downstate public safety pension funds to 2050 or longer from the current target of 2040.
The National Football League’s Chicago Bears are also making a pitch for some public support for a new stadium in suburban Arlington Heights in the form of a property tax break.
The team wants to freeze the property tax assessment for the development of the 326-acre former Arlington International Racecourse for several decades with revenue growth to support development.
The team would make a payment in lieu of taxes, a structure used to fund projects in other areas of the country, to compensate local taxing bodies, which would have the ability to borrow against the revenue.
Legislation filed paves the way for such a structure for the Bears and other major projects.
The Bears announced late Wednesday they had finalized the nearly $200 million purchase agreement for the property although the team said more due diligence is needed to determine the feasibility of building a stadium and multi-purpose entertainment district.
“For the development to move forward, and for this effort to be financially feasible, a public-private partnership addressing predictable taxes and necessary infrastructure funding for public uses is essential,” the team said in a statement said.
Chicago Mayor Lori Lightfoot is making her own pitch to keep the team by offering to make further renovations to the team’s current home — the Chicago Park District-owned Solider Field — including enclosing the facility in a dome. Debt issued in 2001 for a makeover of the field aren’t retired until 2032.