Fiscal Rehabilitation for Illinois: A Plan

The Institute for Illinois Fiscal Sustainability at the Civic Federation has issued a “Fiscal Rehabilitation Plan” for the state. The entire document can be reviewed at:  http://media1.suntimes.com/multimedia/illfiscalplan022210.pdf_20100221_15_28_27_19.imageContent

Here is some background and the key components of the Plan proposal:

Illinois’ Fiscal Crisis

Illinois is facing a financial crisis that is expected to result in a deficit of at least $12.8 billion going into fiscal year 2011, which begins on July 1, 2010. As in other states, the economic recession that started in December of 2007 has contributed significantly to Illinois’ poor fiscal health.

However, Illinois also entered the recession in worse fiscal condition than most other states because of a failure to deal with its structural deficit, a situation in which a government’s growth in expenditures consistently outpaces its growth in revenues. One of the biggest problems has been Illinois’ historically underfunded retirement systems, which have put increasing pressure on the State’s operating budget.

The Civic Federation is deliberately proposing this plan as a comprehensive package. Without pension reforms and spending cuts included in this plan, the Civic Federation opposes any new revenue increases.

The Civic Federation offers the following proposal:
• The State must first enact reforms of its retirement systems. These reforms must include additional employee contributions and reduced benefits for new State employees.
• Expenditures must be cut by at least $2.1 billion. General Funds spending should be rolled back to FY2007 levels, with the exception of Medicaid and General State Aid to elementary and secondary education. These areas will be kept at FY2010 levels to prevent loss of federal stimulus funds and protect critical funding to local school districts.
• Employee contributions to the retirement systems and the State’s group health insurance plan must be increased. Along with other changes detailed in the report, these measures are expected to save the state more than $400 million.
• The Civic Federation opposes any revenue increases until pension reforms are undertaken and at least $2.5 billion in budget cuts and savings have been made.
• The state income tax rate should be increased from 3% to 5 % for individuals and 4.8% to 6.4% for corporations. This increase is expected to raise about $6.0 billion in new revenues.
• The State should repeal the income tax exemption for federally taxed portions of retirement and Social Security income. This step is expected to raise $1.6 billion at the personal income tax rate of 5%.
• The State should enact a $1 a pack increase in cigarette taxes and end specific business tax deductions or credits that are outdated and economically inefficient, such as the income tax credit for research and development.
• If this budget plan were enacted, the State would pay down more than $10 billion or nearly 84% of its $12.8 billion deficit in FY2011.
• Because the remaining $2.1 billion budget gap would not be closed until FY2012, the State should continue to spend at FY2007 levels until the backlog of bills associated with the deficit are paid off.
• All other new revenue in FY2012 and beyond will be needed to make the required statutory pension contribution, which will increase in future years.

TheFundamentals will comment on this Plan Thursday, March 4, 2010. We welcome reader participation.