The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

Illinois’s fiscal year 2012 (FY12) budget saga ended last week, at least for the time being. Governor Quinn approved a final budget, exercising his amendatory veto to make some further spending reductions. The General Assembly will meet later in the year to take action to approve or reject the amendments. 

The general trend of this budget is both better and worse than it could have been. Illinois needed to take major steps in a balanced approach to solving the state’s immense fiscal crisis. It needed to generate significant new revenue while also getting control of the spending side. In January, the General Assembly passed and the Governor signed legislation that made major progress on the revenue side. Without that step, the carnage in the budget would have been unthinkable, and Illinois would probably be in default on many fronts. On the spending side, however, while austerity was needed and expected, the final budget includes far deeper cuts in programs that serve Illinois’s most vulnerable populations, and some of its most important priorities, than were needed.

The final state budget includes about $2 billion less in spending than Governor Quinn had proposed at the start of the FY12 budget process in February. Some of the most damaging cuts for low-income people and other vulnerable populations are:

• General State Aid to schools. The final budget is $400 million less than the Governor’s proposed budget. In addition, $400 million in federal funding that had been provided pursuant to the American Recovery and Reinvestment Act has ended. The greatest impact will be felt by school districts that rely more heavily on state aid because they are low-income and have lower local property tax revenues.
• Community mental health services – cut by $55 million, or 20%.
• Temporary Assistance for Needy Families (TANF) – 1/3 less funding allocated to TANF in FY12 than the amount needed to serve the current caseload, which has grown due to the recession, persistent high rates of long-term unemployment, and improvements in program access.
• Elimination of the Transitional Assistance program that provided a small amount of income support to 9,000 not employable adults in Chicago.
• Cuts of up to 50% in programs for very high-risk children, including teen after school and children’s mental health programs.
• Early Childhood Block Grant – cut $17 million, a 5% reduction on top of last year’s 10% reduction. Will result in 4,000 fewer three- and four-year-olds being enrolled in preschool for all and 1,000 fewer high-risk children aged 0-3 receiving developmental screenings and other services.

These severe cuts have been justified as necessary to “live within our means,” but the truth is that these cuts were not dictated by economics but rather were the product of political considerations.

The adoption of a temporary increase in the state income tax from 3% to 5% during the January “lame duck” session, just before the newly-elected legislators took office, triggered the series of events that led to these cuts. Speaker Madigan’s immediate concern in the wake of the Democrats’ decision to approve a tax increase was the size and strength of the backlash his members would face for that vote. He used the FY12 budget process to attempt to insulate them from this backlash.

The first thing the Speaker did was to make the budget process in the House bipartisan, a departure from past practice. Speaker Madigan and Minority Leader Cross collaborated closely throughout the budget process, and rank-and-file Republican members were included in budget deliberations.

The next step was to adopt a lowball revenue estimate that would necessitate bigger than needed cuts. The House ignored the revenue estimate of the General Assembly’s own bipartisan revenue-estimating agency and instead worked off an estimate prepared by the Governor’s Office of Management and Budget, making some downward adjustments. As a result of the lowball estimate it used, the House had $1 billion less to appropriate than the Senate. When, later in the session, the Governor’s office, based on more recent economic information about the performance of the Illinois economy, revised its estimate upward to the Senate level, the House did not come along.

Next the House locked itself into the lowball revenue estimate by passing a resolution that required any revenues collected in excess of the lowball estimate be solely devoted to paying off old bills, preventing such additional revenue from being used to ameliorate the effects of harsh budget cuts.

The House and Senate passed separate budgets based on different revenue estimates. There was no real effort to reconcile the two budgets, as House members adhered to their resolution and refused to apply any additional revenues to reduce the cuts. No compromise was offered as the May 31 deadline for adopting a state budget without needing a super-majority loomed. Rather than bring the Senate Republicans, who had earlier proposed a budget with several billion more in cuts, into the budget process, the Senate Democrats capitulated to the Speaker and passed the House budget.

Senate President Cullerton made a last-ditch attempt to restore about half of the House’s cuts by attaching an amendment to the bill authorizing the expenditure of funds on capital projects, e.g., roads. When Gov. Quinn announced that summer construction projects would be halted in mid-June if the capital bill was not passed by both Houses, it appeared that he and President Cullerton might have teamed up to exert leverage on the Speaker. But in the end, Gov. Quinn called on the Senate to give in and drop the amendment so that construction could continue as scheduled. 

How could deeper-than-necessary cuts have been avoided? The Responsible Budget Coalition and others championed a number of reasonable proposals to obtain the revenue needed to avoid devastating cuts without raising taxes. The most obvious one of these was to revise the revenue estimate upwards. Another recommendation was that Illinois “decouple” from a change in federal tax law that accelerated the depreciation schedule for big corporations that make large equipment purchases. Under Illinois’s tax code, absent action by the General Assembly, Illinois tax law would automatically provide this tax break as well. In the past, Illinois has de-coupled from similar changes in federal tax law to avoid major revenue losses. But this time around decoupling was falsely labeled and rejected as a “tax increase,” even though no one’s taxes would have gone up (they just wouldn’t have gotten a windfall reduction in state taxes). Decoupling would have saved the state $600 million in lost revenue and allowed the state to avoid making all of the painful cuts described above.

So what are the prospects for the future? We said above that the general trend was at least partially positive because the revenue increase balanced the state’s approach to the fiscal crisis. Now Illinois needs to return to policy considerations (instead of just political ones) before making any further cuts to vital programs and priorities. It needs to find better ways to deploy state revenues, so that more is dedicated to high priorities in the general revenue fund as opposed to lower priorities in special funds that are off budget. It needs to find a way to address the state’s $4 billion of unpaid bills.

What this budget also shows is that there was very little fat to cut. Much of what was cut was not fat at all, shortchanging wise investments like early childhood education and tragically abandoning vulnerable people. The income tax increase enacted in January is only temporary, with a large part of it phasing out after four years. The Illinois revenue problem was structural -- we did not have enough revenue to pay for the important priorities that Illinois residents rightly expect from their government. That problem was well known before the recession hit. This year’s budget includes the new revenue, makes the pension payment for the first time in years, was overly austere on the spending side – and STILL did not pay the bills. Illinois needs to reconcile itself to the fact that the revenue increase must be permanent. 

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The General Assembly stands adjourned, for now, as legislators took the half-baked state budget pie out of the oven before it could finish cooking so they could rush off to appear at the Memorial Day weekend parades. 

Heading the list of unfinished business is the failure to provide for paying off the state’s $3.7 billion fiscal year 2011 pension obligation. The Governor had sought authority to borrow these funds, as Illinois did last year, but the General Assembly declined his request. 

Since borrowing authorization requires a 3/5 majority, at least one Republican vote was needed in the House. Two retiring Republicans voted in favor and one Democrat voted against, so the pension borrowing measure cleared the House by the narrowest of margins. In the Senate, however, where no Republican votes were needed (and none were forthcoming), two Democrats blocked approval of the pension borrowing authority on the grounds that it would simply aggravate our fiscal problems without being part of a plan, including a revenue increase, to actually solve our fiscal mess.

So where does the General Assembly’s decision not to approve borrowing authority to cover the FY11 pension obligation leave us? The budget approved by the General Assembly assumes that $6 billion in outstanding bills will be unpaid at the end of FY11. If FY11’s pension payment cannot be borrowed, then another $3.7 billion must be added to the $6 billion in unpaid bills that the budget is predicated on, making the grant total of unpaid bills at the end of FY11 $9.7 billion. Or, the pension funds could cannibalize themselves, selling off investments to meet current obligations and thus dramatically lowering future investment income. Given these unpalatable options, the Senate’s leadership may continue trying to find the one vote needed to approve borrowing $3.7 billion to cover the FY11 pension payment.

The fiscal year 2011 budget passed by the General Assembly (H.B. 859) resembles last year’s. Rather than making line-by-line appropriations as in the past, and as the Governor had proposed, the General Assembly continued last year’s practice of providing lump-sums to the agencies and leaving it to the Governor to decide which programs to fund and which programs to cut. The overall amount appropriated for grants remained about the same as last year but the appropriation for state operations was cut by 5 percent. The Governor was again given $3.2 billion in unallocated funds to spread around as he sees fit. Different state agencies fared differently – the Illinois Department of Human Services, for example, was appropriated only $2.5 billion, $1.5 billion less than its current appropriation of $4 billion, although the Governor can use the $3.2 billion in unallocated funds to cover some or all of this gap.

The General Assembly also passed an Emergency Budget Act, which gives the Governor sweeping powers to make cuts without legislative review (S.B. 3660, House Amdt. 9). It allows him to put more than $2 billion into a contingency reserve that could not be spent by the agencies. It also makes all state programs, whether authorized or required by state law, “subject to appropriation,” i.e., not operational unless supported by an appropriation that is not otherwise obligated or reserved. These emergency powers expire on January 9, 2011, at the end of Governor Quinn’s term.

While abdicating responsibility for making unpopular budget cuts, the General Assembly again avoided consideration of the only viable alternative for solving our budget mess – raising revenue, as the Responsible Budget Coalition has advocated, along the lines of House Bill 174, which would increase the individual income tax rate from 3 to 5 percent and broaden the sales tax base to include services, raising approximately $6 billion in annual revenues. The General Assembly also chose not to capture $320 million in annual revenue from a proposed cigarette tax increase. The General Assembly did approve a tax amnesty plan whereby tax cheats can pay off their debts without penalty, which is estimated to raise $250 million (S.B. 377, H. Amdt. 3). The legislators threw $50 million of this back by approving a “sales tax holiday” for back-to-school purchases in August.

The budget also relies on various one-time revenue sources, including $1.2 billion obtained by borrowing against the proceeds from the remaining 17 years of a tobacco settlement fund.

As the Illinois General Assembly was wrapping up last week, word came that the U.S. House of Representatives had stripped the enhanced Federal Medical Assistance Percentage (FMAP) six-month extension from the unemployment insurance extension package, considered the best vehicle for its enactment. Unless restored by the Senate and agreed to by the House-Senate conferees, or included in a different legislative package, this continuation of ARRA federal fiscal relief to the states will come to an end, blowing another $700 million hole in the FY11 state budget.

In sum, regardless of whether borrowing to pay this year’s pension tab is approved, the state will continue to lack the revenues to pay its bills. By the time this fiscal year comes to a close at the end of June, Illinois will have racked up $6 billion in unpaid bills. The budget proposed by the Governor and approved by the General Assembly assumes there will still be $6 billion in unpaid bills at the end of the next fiscal year in June 2011. Nobody believes that this number will not grow. While the Governor will make some visible cuts to programs, far more insidious and lethal will be the state’s continuing and expanding practice of not paying its bills. State-funded providers of services to young children, the elderly and disabled, the homebound, the developmentally disabled, the mentally ill, those addicted to alcohol and controlled substances and so on will not have the plug pulled on them all at once. Rather, they will die a slow and agonizing death as month by month the state’s payment for services rendered does not arrive and, one by one, they are forced to give up the ghost.   

List of Enacted State Budget-Related Legislation:

• Senate Bill 3660 – House Amendments 1, 9, 12, 14, 17, 18, 19 ( Emergency Budget Act in amendment 9)
  
• House Bill 859 –Senate Amendments 1, 2, 3, 6, 7, 8 – FY11 state budget
  
• Senate Bill 3662 – House Amendments 1, 3 – FY11 state budget implementation act
  
• Senate Bill 1215 – House Amendments 2, 3 – budget trailer bill (technical fixes)
  
• Senate Bill 377 – House Amendments 1, 3, 6 -- tax amnesty
  

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The General Assembly recessed on their planned adjournment date of May 7, having failed to enact a state budget for fiscal year 2011. May 7 was an artificial deadline. The real deadline is May 31, after which bills may not take effect before January 1, 2011 unless they pass by a 3/5 majority, which would require there to be Republican votes  to pass a budget bill. May 7 may have served a useful purpose for Senate President Cullerton and House Speaker Madigan, however, since it allowed them to determine exactly where the fault lines lie and determine what they must do to get a budget enacted before the May 31 deadline.

The failure of the General Assembly to agree on a budget is a temporary victory for the Responsible Budget Coalition since the only budgets that were on the table on May 7 were fiscally irresponsible and would have inflicted severe pain on our most vulnerable state residents. The House resoundingly rejected both proposed budgets – one that would have required massive cuts in services and the other that would have resulted in massive borrowing. Speaker Madigan did not allow a vote on the other option – raising revenue.   

In the waning days of the session before the May 7 recess, the General Assembly also gave serious consideration to enacting an Emergency Budget Act. The proponents apparently believed that putting all responsibility for budget cuts on the Governor would allow them to escape detection when the residents of Illinois dust for fingerprints on the elimination of services to the mentally ill, developmentally disabled, homebound elderly, infants and toddlers, and so on. The Emergency Budget Act would allow the Governor to implement emergency rules to cut programs, make all state programs “subject to appropriation” and thus optional instead of mandatory, and establish contingency reserves that could be used to eliminate budgeted state programs. In short, the Emergency Budget Act would give the Governor unilateral power to cut spending and eliminate programs as he sees fit, without legislative review.

Governor Quinn would exercise these extraordinary powers for the first six months of the fiscal year that begins on July 1. If Quinn were to lose the November election – and all the polls show him trailing -- then the power to eliminate any and all state programs would fall into the hands of Senator Bill Brady for six months until the emergency powers expire on July 1, 2011.  Brady has proposed cutting taxes by $1 billion in the face of Illinois’ $13 billion revenue shortfall, a position so extreme that it’s not even embraced by the radical free market Illinois Policy Institute.

So how do you close a $13 billion budget shortfall?  Here’s what the General Assembly was considering:

That's right--$4 out of every $5 used to "balance" the state budget would be either borrowed or obtained by not paying our bills.

Last week's action shows that the messages of the Responsible Budget Coalition are penetrating. There is growing momentum to find a real solution to our fiscal crisis and not simply to postpone the problem and, in the meantime, make it worse. Slowly the conventional wisdom that revenue increases are not possible during an election year is being whittled away. The game is far from over though and advocates for a responsible budget that raises the revenue needed to begin to dig us out of our deficit hole still face an uphill climb. Nor is there any sign that the leadership of the General Assembly is willing to seriously entertain a proposal to significantly increase state revenues. In the meantime, there will also be great pressure on the budget holdouts to end their resistance to the enactment of a bad budget. It's still all hands on deck for a responsible budget.

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“Act like leaders, not like fools,

Save our services, save our schools!”

So chanted 15,000 people gathered in front of the State Capitol on Wednesday, in the largest Springfield rally ever. The  demonstrators demanded that the General Assembly not return to their home districts on May 7 as scheduled, or at any other time, until they have enacted a responsible budget that raises the revenue needed to avoid the human catastrophe facing  Illinois in the form of draconian state budget cuts.

Reasonable minds do not disagree: a substantial increase in the state’s revenues is an indispensable piece of the fiscal puzzle if our state is to avoid financial collapse. Earlier this year, the Civic Federation, the voice of Chicago’s business community for over 100 years, released its report on the state’s fiscal crisis and called for an $8 billion tax increase, saying:

We do not enjoy advocating a significant tax increase in the middle of a difficult recession. However, continuing to do nothing would be by far a worse option.   

In jeopardy unless there is a revenue increase are programs that provide vital services to people in need – seniors, the disabled, low-income single parents, people with drug addictions or suffering from mental illness, children at risk of academic failure, adults with developmental disabilities. These same programs provide jobs for teachers, home health care workers, substance abuse and mental health counselors, child care workers, persons who work with adults with developmental disabilities, and others. 

Those who say that raising taxes will cost Illinois jobs are wrong.  The truth is that our continuing failure to raise the revenue needed to pay our bills will result in a devastating loss of the jobs described above as well as those of police, firefighters, and others. 

And let’s consider the private sector. The belief that businesses make decisions on where to locate based solely on tax rates is demonstrably wrong. Does anyone really believe that a crumbling infrastructure and an educational system in shambles create a favorable business climate?

Those who say we over-spend and over-tax have their facts wrong. The facts are that Illinois’ three percent state income tax rate is the lowest of all 41 states that have a state income tax, and Illinois is 43^rd in the country in general funds spending as a percent of the state’s gross domestic product.

Nobody likes to pay higher taxes. Nothing is politically easier than to say, “I didn’t raise your taxes.” But we cannot afford to remain on the path of expediency.

Franklin Delano Roosevelt said: “Taxes are the dues that we pay for the privileges of membership in an organized society.”

Oliver Wendell Holmes put it even more succinctly: “Taxes buy civilization.”

We’re not going to climb out of our $13 billion hole in one year, but we can’t wait to start.

“Show some guts,

Stop the cuts!”

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There is something almost purely ideological about opposition to the revenue reforms that knowledgeable analysts agree Illinois needs right now – not only to escape its fiscal crisis but to make its tax system more fair and sustainable.

I suppose ideological biases are fair enough among some anti-government zealots and politicians who hope to use them and lead them.  But somehow one would hope for a more balanced and dispassionate approach from mainstream media, such as the Chicago Tribune.

It can only be ideology that justifies the anti-tax position by reference to taxpayers “already devastated by the recession.”  In fact, under leading revenue-reform plans, many lower- and moderate-income households would pay no increased income tax or a modest increase; the lowest-income households would pay less. 

But for those who’d pay a few dollars more per paycheck in income tax – is that more weighty than maintaining state-assisted care for their elderly relatives, safe roads and bridges, schools with a full complement of teachers and educational programs, or the public health programs that protect us from epidemics?

This crisis demands a balanced approach that includes significant new revenues raised in a fair way. Polling and history show that, while nobody likes to pay higher taxes, people appreciate honest leadership in a crisis and understand and support a balanced approach.  We already are suffering from severe cuts; we are already borrowing; we will continue to seek as much help as possible from the federal government. But those measures are not enough. We need significant, new revenue to complete the balance and navigate out of the crisis with a sounder future in store.

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Medicaid is a vital safety net for Illinois residents who cannot afford increasingly expensive private health insurance and fills the gap in employer-provided insurance for the growing ranks of the unemployed and their families. But a recent report by Heather O’Donnell, of the Center for Tax and Budget Accountability (CTBA), Medicaid Plays a Critical Role in Illinois’ Economy, reveals the tremendous additional impact that Medicaid dollars have in bolstering our economy. The report shows that Medicaid not only provided health care coverage to 2.6 million Illinoisans (over half of whom were children) in 2008, it also supported “wages, employment, business income, consumer spending, state tax revenue, and overall economic output.”

The Medicaid program is financed by both the state and federal government. In fiscal year 2008, 53% of the total funding for Medicaid came from the federal government. Under the federal American Recovery and Reinvestment Act (ARRA), states receive increased federal funding through December 2010 to help during the recession. The CTBA report explains that, with this enhanced federal share, if Illinois cuts Medicaid spending by $10 million, it will actually lose $16.2 million in federal matching funds.  

But that would only be the beginning of the impact of such a cut. Medicaid spending reimburses health care providers, and then providers pay employees’ wages. The employees then purchase goods and services in the local economy. According to the CTBA report, Illinois’s 2009 state and federal Medicaid spending resulted in approximately $46 billion in additional business activity and supported about 385,742 jobs. This would mean that a cut of just $10 million in state Medicaid spending would result in an estimated loss of more than $80.4 million in business activity and $27.6 million in lost wages across Illinois.  

This positive ripple effect of Medicaid spending means cuts to Medicaid programs would hurt the Illinois economy, increase unemployment, and prolong the recession. Cuts to Medicaid would not only deprive people of health coverage and health care, but also exacerbate the financial strain felt by businesses and workers and cause Illinois’ economy to further deteriorate. 

 

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