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Pritzker budget plan doesn't resolve structural deficit, other financial ills, report says

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Gov. J.B. Pritzker was able to come up with a balanced state budget plan for the next fiscal year despite voters turning down a proposed move from a flat to a graduated income tax in November.

But that feat, which still requires the General Assembly to eliminate more than $900 million in tax breaks prized by businesses, doesn't hide the fact that Illinois needs structural tax reform and refinancing of its pension debt to stabilize finances and avoid more cuts to education and other state services, according to a Chicago-based tax policy think tank.

"The problem is still there," said Allison Flanagan, co-author of a new analysis of Pritzker's fiscal 2022 spending plan released Thursday by the progressive Center for Tax and Budget Accountability.

Elected officials can't escape the fact that when adjusted for inflation, the state has reduced funding for education, human services, public safety and other state services over the past 20 years, especially affecting people in low-income communities and people of color, center officials told The State Journal-Register.

Republican critics of the Democratic governor say the state should make unspecified cuts and live within its means rather than asking taxpayers for more money. They add that voters, through the defeat of the "Fair Tax" initiative pushed by Pritzker and other Democratic leaders, indicated they don't want more tax increases and don't trust state politicians with their money.

Gov. J.B. Pritzker discusses investments in infrastructure. 

But Flanagan, director of policy analysis for the nonprofit center, said: "We are not overspending on services. We are living within our means. We're actually living below our means."

Pritzker's $41.58 billion proposal for general fund spending in the fiscal year that begins July 1, a plan that is being debated in the Democratic-controlled General Assembly, wouldn't increase general taxes and would hold state spending basically flat.

But it would forgo a recommended $350 million increase in the K-12 school aid formula for a second consecutive year.

And when taking inflation into account, the plan actually would reduce spending on state services by $434 million from the current year, according to the center's report.

Pritzker's budget outline would amount to an inflation-adjusted reduction of 22%, or $7.9 billion, from spending in fiscal 2000, when Republican George Ryan was governor, the report says.

With that perspective, the 40-page report says, "the oft-repeated contention that Illinois' fiscal problems are caused by profligate spending on services are simply not supported by the data."

"Indeed, quite the contrary is true," the report says. "As Gov. Pritzker noted during his budget address: 'Illinois state government already spends less money per person than the majority of states in the nation.' So much so that according to the National Association of State Budget Officers, Illinois ranks 34th in spending on services per-capita despite having the sixth-largest population and the fifth-largest economy of any state."

Illinois' chronic under-spending, a "structural deficit" resulting from the state's failure to raise enough money each year to cover the growing cost of state services, and the failure to refinance $133 billion in unfunded pension liability since 1995 have caused many problems, Flanagan said.

Among them, she said, are net declines in education funding — when accounting for inflation — that have led to higher local property taxes and tuition at state universities, longer waits for services, a thinning of the social-service safety net for the poor and a backlog of overdue bills to state vendors expected to exceed $8 billion at the end of this fiscal year and next.

For example, the $8.35 billion in K-12 education spending proposed by Pritzker for fiscal 2022 would be level with current-year funding. But after factoring in inflation, that spending would amount to a 2% cut, or $168 million less, than the current year and $437 million less than last year, according to the report.

The chronic backlog of unpaid bills means that almost one-third of annual general-fund spending can effectively be considered deficit spending — a situation that Flanagan said is unsustainable to adequately serve the public.

A "pension ramp" was established in 1995 for repayment of Illinois' pension debt. During the first 15 years of the ramp, the payments that were required "were dramatically below the actuarially required contribution ... this was done to avoid dealing with the structural deficit by raising taxes or significantly cutting spending on current services," the report says.

The ramp established a debt repayment system "that was so unrealistically backloaded as to be unaffordable," according to the report. Pritzker's proposed appropriation for pension debt in fiscal 2022 is $672 million more, or 7.4% higher, than the current fiscal year appropriation of $9.12 billion, the report says.

Overall revenue to the state is projected to decline during that period by $1.77 billion.

The report says that because of "flaws in the state's tax policy" — primarily because Illinois is one of only eight states with a flat income tax — the $41.7 billion in projected general fund tax revenue for fiscal 2022 would be about the same amount collected by the state seven years ago and 2% less than nine years ago, when adjusted for inflation.

State sales tax revenue has declined in real terms over time because Illinois has "one of the narrowest sales tax bases of the 45 states that impose a general sales tax," the report says.

The $7.5 billion that Illinois state government is in line to receive from the new federal stimulus bill passed by Congress would help the state deal with COVID-19-related revenue declines but wouldn't change the state's long-term fiscal trajectory, Flanagan said.

The center supported the switch to a graduated income tax, which failed as a constitutional amendment referendum when 53.27% voted "no" and 46.73% voted "yes."

A graduated tax would have raised an estimated $3.6 billion in net, new revenue for the general fund by increasing tax rates on the wealthiest 3% of Illinoisans.

To raise the same amount of money and spare middle- and low-income residents, the current flat tax of 4.95% would need to increase by 1.5 percentage points, and lawmakers would need to approve refundable tax credits for certain income groups, according to Ralph Martire, the center's executive director.

Regardless of the rationale or reasonableness, raising taxes and refinancing the pension debt would be complex and politically tricky, requiring bipartisan support from lawmakers, Martire said.

Cross-party agreements between lawmakers and the governor on budget cuts or revenue solutions — in the long or short term — seem to be elusive in the Statehouse in Springfield, according to David Merriman, a senior scholar at the University of Illinois' Institute of Government and Public Affairs.

"They're so divided politically," he said. "It's very hard to get movement to fix that situation. It's pretty dysfunctional right now."

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