Illinois budget targets corporate breaks, spending freeze and one-shots to plug hole

Bonds

Illinois Gov. J.B. Pritzker’s proposed 2022 budget eliminates some corporate tax breaks, reins in new spending and uses a series of one-time maneuvers to manage a structural hole dug deeper by the pandemic’s fiscal blows without an income tax hike.

The fiscal 2022 budget totals $95.5 billion across all funds including a $41.7 billion general fund that spends $41.6 billion leaving a roughly $120 million surplus.

“I had bolder plans for our state budget than what I am going to present to you today,” Pritzker said in his third budget address. “It would be a lie to suggest otherwise. And right now, we need to pass a balanced budget that finds the right equilibrium between tightening our belts and preventing more hardships for Illinoisans already carrying a heavy load.”

Pritzker had warned last year deeper cuts or an income tax increase would be needed if the progressive income tax amendment failed in November. While voters rejected the tax, Pritzker has since moved off his previous position.

Illinois Governor JB Pritzker delivers a press release at the McCormick Place Convention Center in response to the COVID-19 pandemic in Chicago, Ill., April 3, 2020. Approximately 30 members of the Illinois Air National Guard were activated to support the US Army Corps of Engineers and the Federal Emergency Management Agency (FEMA) to temporarily convert part of the McCormick Place Convention Center into an Alternate Care Facility (ACF) for COVID-19 patients with mild symptoms who do not require intensive care in the Chicago area. (U.S. Air Force Photo by Senior Airman Jay Grabiec)

U.S. Air Force/Senior Airman Jay Grabiec

The previously projected $5.5 billion gap was recently lowered to $3 billion thanks to revised revenue projections this month that boost tax estimates and higher federal Medicaid funding in fiscal 2022 that combined trimmed $1.9 billion off the deficit. The state also is paying down early a portion of its Federal Reserve borrowing from the Municipal Liquidity Facility in the current fiscal year.

The remaining deficit is cleared out through a mix of recurring and one-time maneuvers that include delaying the repayment of inter-fund borrowing, eliminating some corporate tax breaks, holding down spending to below maintenance levels set in November, and redirecting existing revenue streams to the general fund.

The reliance on one-time revenues would leave the state with an ongoing structural hole but finance officials could not put a number on where that gap will stand when it heads into fiscal 2023. Officials said they believe the corporate tax changes will enhance base revenues and by holding spending levels “we will be on a course to close the structural deficit going forward.”

As municipal market participants and lawmakers digest the budget, conclusions on its short- and long-term impact will be hard to assess given the potential infusion of federal relief that’s under discussion in Congress.

Lawmakers won’t vote until May. Pritzker is facing opposition form the GOP as he is reneging on some corporate tax policies agreed to in 2019, but the Democratic governor enjoys a Democratic super-majority so it’s his own party members who must get on board.

The budget doesn’t count on federal relief. Estimates in a House committee bill of the Biden plan put Illinois’ direct share of $350 billion earmarked for state and local governments at $7.5 billion.

“Congressional action will help us today, but it won’t solve Illinois’ remaining fiscal challenges. That’s why any money we receive from the federal government needs to be spent wisely, by paying down borrowing and our bill backlog,” Pritzker said in his address.

Highlights
Most areas of state government spending are held steady but the local government distributive aid fund that shares state income taxes with municipalities will take a 10% hit and kindergarten through 12th grade schools won’t see a scheduled $350 million increase for a second consecutive year.

State budget officials said the impact on schools should be offset by already-approved federal relief and the potential for more aid while local governments would benefit from proposed corporate tax changes Pritzker has proposed.

The state will ramp up borrowing to finance projects under its 2019 $45.5 billion capital program, Rebuild Illinois. About $1.55 billion is expected in the current fiscal year with a portion having been sold in a deal last October. Another $2.9 billion is tentatively planned in fiscal 2022 and $2.56 billion in fiscal 2023.

The state is planning a spring sale, senior budget officials said. Pritzker is seeking $4.3 billion in new capital appropriations for fiscal 2022. The state has borrowed $2.1 billion since 2019 to fund projects.

The state will fully fund the general fund contribution to the pension system based on a statutory formula of $9.36 billion for fiscal 2022, up 8.5% or $739 million from the current year. The full contribution to the system that comes from various sources is $10.6 billion.

The 50-year schedule established in 1995 to reach a 90% funded ratio falls short of what’s needed on an actuarial basis to stave off growth of the unfunded liability. It rose to $141 billion in fiscal 2020 from $137.2 billion.

Digging deeper
The $41.7 billion plan is up slightly from a $43.5 billion general fund for the current year if you don’t count $2 billion of three-year borrowing through the Federal Reserve program. If you count the MLF debt the general fund is down $1.8 billion or 1.4%.

Lottery, gambling, recreational cannabis, corporate income and sales tax are all expected to grow by modest levels while personal income tax will drop slightly and federal sources will fall by 9.4% as higher Medicaid reimbursements can only be counted on through half of the state’s fiscal year.

Fresh revenue projections reflect a more optimistic picture of a recovering economy and veer from the grim projections last spring.

The state’s base revenues were lifted upward in November by $2.6 billion and this month were raised by another $2.47 billion for fiscal 2021 with another $1.7 billion in fiscal 2022.

The state will keep the evidence-based funding formula aid level at $7.2 billion for kindergarten through 12th grade. That means it’s skipping for the second consecutive year a planned $350 million hike under the 2017 formula revisions. Budget officials say federal aid of about $2.8 billion expected from approved packages and the potential for more will help offset the impact.

Higher education funding will remain steady at $1.16 billion for universities and $250 million for community colleges. Healthcare will fall 8% at $7.4 billion while human services spending will rise 4.5% to $7.4 billion.

Revenues for the current fiscal year were revised upward in November but the state still faced a daunting gap $4.8 billion heading into fiscal 2022 given the failure of the progressive tax amendment that would have generated $3 billion. It rose to $5.5 billion when counting a $690 million scheduled pay down of the state’s second MLF borrowing.

The new February forecast, however, trimmed that by $1.5 billion thanks to higher tax collections that are now expected and an additional $421 million of federal Medicaid funds.

The governor will put off repayment of $276 million of inter fund borrowing by removing a repayment deadline and redirect $565 million of non-general fund money such as higher than expected cigarette tax proceeds that were supposed to flow to the capital projects fund. The administration also wants a one-year delay in shifting sales tax revenues from motor fuel sales to the road fund; and adjustments to state income and sales tax sharing with local governments.

The $565 million figure includes a $130 million cut to the local distributive fund formula of 10% a move that will draw the ire of local governments and the redirection of any funds slated for the capital fund will draw opposition from construction groups.

The elimination of various corporate tax measures allowing the state to keep $932 million further closes the gap along with nearly $1.3 billion in reduced spending by holding many agency budgets below projected maintenance levels that were built into the November forecast.

After removing the $690 million MLF repayment off the fiscal 2022 books by repaying it this year, the state now projects closing out fiscal 2022 with a $120 million surplus. That surplus doesn’t take into accounts the short-term debt that remains on the books.

As the state adopted its fiscal 2021 budget last May it grappled with a projected $4.6 billion tax loss and the need to repay the $1.2 billion in MLF borrowing from fiscal 2020. The fiscal 2021 budget relied on up to $5 billion of new MLF borrowing banking on the prospect that new federal aid would be forthcoming and potentially another $1.2 billion should Pritzker’s proposal on the November ballot to move to a progressive income tax structure failed.

The tax was supposed to raise more than $1 billion for fiscal 2021 and $3 billion for a full fiscal year.

The amendment failed and a federal package never came to fruition. Pritzker used a mix of structural measures and one-shots to address it. He cut spending by $700 million and borrowed $2 billion of three-year notes through the MLF and there was good news in both the November and new February forecasts that cleared out fiscal 2021 hole.

The numbers could improve for fiscal 2021 by $500 million if lawmakers abide by Pritzker’s request to decouple from the federal government fiscal 2021 corporate tax relief measures relating to losses. Lawmakers shot down decoupling legislation last month but the administration hopes to bring it back for a vote in March.

In looking at what debts the state might repay with potential federal relief, the state still owes $2.87 billion of its $3.2 billion MLF borrowing. The state owes $1 billion from inter fund borrowing and another $400 million is owed to the state treasurer that went to pay down bills.

The state has received $9.9 billion from five federal packages enacted last year including $3.5 billion from the CARES Act, $3 billion for public education, $1 billion for airports and highways, and for Medicaid and other grants.

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