Illinois` Choice: Pay For Essential Services/Investments Or Cut Them

Illinois’ Choice: Pay For Essential
Services/Investments Or Cut Them
December 11, 2014
David Lloyd
Director, Fiscal Policy Center
Voices for Illinois Children
ILfiscal.org
[email protected]
Tax Cuts Expire Three Weeks from Today
Enormous Revenue Losses Create Huge New Hole
Estimated Revenue Loss
Due to the Expiration of Income Tax Rates ($ millions)
FY 2015
FY 2016
Income Tax Revenue with Rate
Expiration
$18,058
$15,748
Income Tax Revenue Maintaining
Current Rates
$20,342
$21,155
Revenue Change Due to Rate
Expiration
-$2,284
-$5,408
Source: Fiscal Policy Center analysis of estimates from the
Commission on Government Forecasting and Accountability
 Even if pension law upheld, state
faces at least $3.6 billion hole in
FY16
 Roughly 60% of current general
funds budget cannot easily be
cut
Cuts needed to non-mandated
areas to balance budget in FY16:
 25% to non-mandated
programs
 33% if pension law overturned
So far, no credible proposals of
where to make up revenue losses
2
What Areas Most Vulnerable?
Areas to Cut to Close $3.6 Billion Hole
What if you don’t cut
education?
 Need to cut other areas
by nearly two-thirds to
balance budget
25% cuts to nonmandated areas
(in $ millions)
3
Important Investments Again At Risk
Budget Area
Cuts Since 2009
What 25% Cut Could Mean
K-12 Education
Funding 9% lower than in FY09
13,000 teachers laid off
Child Care
11,000 fewer children get assistance
35,000 fewer children get assistance
Homeless Prevention
60% cut  8,600 fewer families
receive help
1,000 fewer families receive needed
help
Teen REACH (afterschool)
13,500 fewer youth participate
3,700 youth lose access
Preschool
25,000 fewer children participate
each year
17,000 fewer slots for kids
MAP (Tuition Assistance)
Insufficient $$  170,000 students
turned away
45,000 college students lose tuition
help
State Parks
70% cut  staff layoffs, poor
maintenance
Cuts equal to funding for 8-11 state
parks
www.voices4kids.org/strongerillinois/
4
Won’t State Find a Way to Avoid Huge Cuts?
I hope so…
Responsible Way to Avoid
Irresponsible Ways to Avoid
 Raise the revenue
necessary to meet state
obligations and fund
essential services/
investments
 More borrowing
 Interest costs  deeper
cuts later
 Ignore balanced budget
requirement
 More unpaid bills
 Don’t make pension
payments
 Would increase future
contributions
 Accounting gimmicks
 Just kicks can down the
road
5
What About the Current Fiscal Year?
Gimmick-Filled FY 2015 Budget Will Cause Big Problems
 $650 million in short-term borrowing
 Must be repaid within 18 months
 Used tactics to shift funding forward a
year  Disappears from FY15 books
 Underfunded obligations
 Problems in Corrections, DHS, and
other areas without more $$
 Huge child care underfunding
 Could run out of money by early
spring
 Reverse course on paying down $4
billion in unpaid bills
6
Why Didn’t ‘Extra’ Revenue Solve Problem?
Before 2011, Average Spending But Below-Average Taxes
Source: Bill Testa, Federal Reserve Bank of Chicago
7
Revenue Didn’t Cover Spending
Per Capita Government Taxation in IL Below Average (1995-2010)
Source: Bill Testa, Federal Reserve Bank of Chicago
8
Underfunding of Pensions Caught Up to IL…
Pension Contribution Ramp Coincided with Great Recession
 Chronic underfunding of pensions — state instituted a plan to catch
up in the mid 1990s. Pension benefit levels not to blame.
 Great Recession — Billions in lost revenue during largest increases
in state pension payments
 Other Long-Term Structural Factors
 Lagging revenue growth
o From 2000-2008, state personal income increased 4.2% annually,
but General Funds revenue from state sources increased 3.3%
annually
o Flat income tax doesn’t capture income gains that have gone to
wealthiest in state
 Narrow sales tax base — excludes most services
 Economy shifting towards services
 Spending elsewhere also not to blame – discretionary spending
grew at basically same rate as economy
9
2011 Increase to Income Tax Rates
Stopped the Bleeding
Backlog of Unpaid Bills (end of fiscal year)
 Cuts to programs largely
stopped
 Backlog of unpaid bills that
skyrocketed in 2010 and
2011 began to decrease
 Even after increase, taxes
not out of line compared to
other states
$9.0
$8.0
$8.8B
$7.0
Billions
 But mostly treading water
due to need to make up for
previous failure to pay into
pensions
$10.0
$6.0
$6.3B
$5.0
$4.0
$4.0B
$3.0
$2.0
$1.0
$0.0
FY2012
FY2013
FY 2014
 State’s credit ratings
stabilized due to increase
10
Expiration of Rates Won’t Help Economy
Top 2 factors for CEOs
when deciding where to
locate:
 Educated workforce
 High-quality infrastructure
Both impossible without revenue
to fund investments
** The most rigorous studies have
found little, if any, connection
between state income tax rates
and interstate migration **
11
Getting Back on Right Track
Need to Maintain Stable and Sustainable Revenue To:
 Educate our children
 Pay our bills
 Fund essential services
When Revenue Collapses, We Can Expect:
 Huge cuts to critical investments in future
 More unpaid bills and credit downgrades
 Increased economic uncertainty
We must pay for the essential investments that help children, families and
communities thrive, create a stronger future workforce, and decrease highcost interventions later.
12
Resources
ILfiscal.org
fiscalnotesblog.org
The Fiscal Policy Center is funded by the Annie E. Casey Foundation, the Center on Budget and Policy
Priorities, the Chicago Community Trust, and the Ford Foundation. We thank our funders for their
support but acknowledge that the findings and conclusions presented herein do not necessarily reflect
the views of these organizations.
13