State Budget Update: What s Next for Illinois?

70 East Lake Street Suite 1700 Chicago, IL 60601 www.ctbaonline.org State Budget Update: What s Next for Illinois? FRIDAY, OCTOBER 27, 2017 HOUSING ACTION ILLINOIS HOUSING MATTERS! CONFERENCE DOUBLETREE BY HILTON 10 BRICKYARD DRIVE BLOOMINGTON, ILLINOIS Presented by: Ralph M. Martire, Executive Director

2

The Core Problem Remains a Structural Deficit 3 Adjusting solely for historic rates of inflation & population growth Assuming historic rates of economic growth Cost of maintaining same level of services + Paying for existing debt Grows faster year-to-year than does state revenue

$5.97 or 24% Deficit Spending The Illinois General Fund FY2015 $35.5 B Overall Two Primary Elements: (i) Hard Costs No Discretion Approx. % of Total Debt Service 26% Pension Contributions 56% Statutory Transfers Out 18% (ii) Current Service Expenditures Discretion Varies (Approx. $24.49 B) Education (PreK, K-12, Higher-Ed) 35% Healthcare 30% Human Services 21% Public Safety 5% 91% 4 $11 B $24.49 B +Group Health 5% +Everything Else 4% 100%

FY2016 General Fund Deficit Walk-Down ($ Billions) 5 Step Revenue $ Billions Spending $ Billions Remaining Revenue (Revenue Spending) (i) FY2016 Revenue $30.37 FY2016 Hard Costs $12.07 $18.30 (ii) Revenue After Hard Costs $18.30 Accumulated Deficit Carry Forward from FY2015 ($5.97) $12.33 (iii) Projected Net FY2016 General Fund Revenue Available for Services $12.33 Projected Net General Fund Service Spending $21.74* ($9.41) ($9.45) Projected Accumulated FY2016 General Fund Deficit Projected Deficit as a Percentage of General Fund Service Appropriations ($9.45) -43.47% *NOTE: Service Spending cut by $2.75 B from FY2015 levels

FY2017 Projected General Fund Deficit Walk-Down ($ Billions) Step Revenue $ Billions Spending $ Billions (i) Estimated FY2017 Revenue $30.88 (ii) Revenue After Hard Costs $18.21 6 FY2017 Hard Costs (Current Law) Estimated Accumulated Deficit Carry Forward from FY2016 Remaining Revenue (Revenue Spending) $12.67 $18.21 ($9.45) $8.76 (iii) Projected Net FY2017 General Fund Revenue Available for Services $8.76 General Fund Service Spending (Net) $21.74 ($12.98) (iv) Surplus/Deficit Remaining after General Fund Service Spending (Net) ($12.98) FY2017 Group Health Liability ($1.81) ($14.79) Projected Accumulated FY2017 General Fund Deficit ($14.79) Projected Deficit as a Percentage of General Fund Service Appropriations -68.03%

FY2018 General Fund Budget 7 I. HARD COSTS FY 2018 Pensions * $7,076 Debt Service $2,235 Transfers ** $339 HARD COSTS TOTAL $9,650 II. CURRENT SERVICES Healthcare $7,174 K-12 Education $7,760 Early Childhood Education $444 Higher Education $1,836 Human Services $5,905 Public Safety $1,912 Group Health $1,858 Other $1,105 GENERAL FUND SERVICES TOTAL $27,994 GRAND TOTAL (Hard Costs + Current Services) $37,644 5% Across the Board cuts -$809 NET APPROPRIATIONS $36,835 *Pension payment is reduced from prior years due to five year smoothing now permitted. Overall FY2018 payment is increased from legislative amount by $520 M, because it is unlikely the state will realize that amount of savings from passage of Tier III pension system. **The $1.2 B in transfers to the Local Government Distributive Fund, and the $450 M in transfers for various transit programs have been eliminated from the General Fund, making this line look artificially lower than prior years. Source: CTBA Analysis SB6 and SB9

SB9 Increased Individual Income Tax Rate from 3.75% 4.95%: NET $4.2B Increased Corporate Income Tax Rate from 5% 7%: NET $514 M Eliminate some Corporate Tax Expenditures (QPAI, Combined Reporting, Continental Shelf Exemption): NET $125 M Misc New Revenue (tax lien registry, Uniform Unclaimed PPTY Act Means test residential PPTY tax deductions): NET $196 M 8 TOTAL: $5.05 B

FY2018 General Fund Deficit Walk-Down ($ Billions) 9 Step Revenue $ Billions Spending $ Billions Remaining Revenue (Revenue Spending) (i) FY2018 Revenue $35.82 FY2018 Hard Costs $9.65 $26.17 (ii) Revenue After Hard Costs $26.17 Accumulated Deficit Carry Forward from FY2017 ($14.71) $11.46 (iii) Projected Net FY2018 General Fund Revenue Available for Services $11.46 Projected Net General Fund Service Appropriations $27.19 ($15.73) Projected Accumulated FY2018 General Fund Deficit Projected Deficit as a Percentage of General Fund Service Appropriations ($15.73) -57.85%

Change in Net General Fund Budgeted Appropriations 10 Change in Net General Fund Budgeted Appropriations for Current Services During Recovery Post Great Recession (Nominal, non inflation-adjusted dollars) $ Billions $28.0 $27.0 $26.0 $25.0 $24.0 $23.0 $27.5 $25.9 $25.7 $24.3 $24.2 $24.9 $24.9 $27.2 $22.0 $21.0 $21.5 $21.7 $20.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fiscal Year

Growth in Hard Costs for Debt Service 11 14 12 10 Mostly Debt 8 6 $1.6 $0.0 $4.2 $4.1 $5.1 $6.1 $6.2 $6.8 $7.1 4 2 0 $1.2 $3.1 $3.0 $2.9 $3.1 $3.2 $1.2 $0.7 $1.0 $2.4 $2.6 $1.4 $2.0 $2.1 $2.5 $2.5 $2.7 $2.7 $2.1 $1.8 $2.2 $2.1 $2.3 $2.2 $2.2 $2.4 $0.0 $0.5 $0.4 $0.4 $0.5 $0.5 $1.2 $3.57 $3.79 $3.61 $3.88 $4.43 $4.79 $3.24 $8.58 $9.38 $10.19 $11.31 $10.76 $12.03 12.67 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Debt Service (Pension & Capital Bonds) Statutory Transfers Out Pension Notes: Legislation passed in 2005 cut the state s pension contributions for fiscal years 2006 and 2007 In 2010 the state used Pension Obligation Bonds to pay its pension contribution In 2011, the state also used Pension Obligation Bonds. AS such, while the state budgeted for $4.2 billion in General Fund pension contributions the actual General Fund pension contribution in 2011 was $0 2015 statutory transfer is artificially low because it exclude $600 million Healthcare Provider Relief Fund transfer, which took place in 2014 instead (that $600 million IS NOT reflected in the 2014 figure) 2016 statutory transfer does NOT reflect the $650 million repayment of inter-fund borrowing that will take place in 2015

What About Pension Benefits? Not the Problem 12 Change in Unfunded Liabilities 1996-2016 $50 $45 $40 $30 $31 $ Billions $20 $16 $15 $10 $6 $0 -$10 -$4 Salary Increases Benefit Increases Changes in Assumptions Other Factors Investment Losses Borrowing from Contributions

Current Pension Ramp, FY2013-2045 13 $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 2013 2014 2015 2016 2017 $ Millions 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 Source: COGFA, November 2012 Special Pension Briefing.

Illinois Economic Growth Lags U.S. Long Term (1997-2016) 14 55.0% 50.0% Long Term GDP Growth 1997-2016 48.1% 45.0% 40.0% 35.0% 30.0% 25.0% 24.9% 20.0% 15.0% 10.0% 5.0% 0.0% United States Source: Bureau of Economic Analysis Illinois

BUT: Are High Taxes Hurting Illinois? No: Illinois is Low Tax Overall Illinois total state AND local tax burden, as a percentage of personal income ranked in the bottom 10 of all states, for most of this period. 15 Illinois consistently had the second lowest tax burden in the Midwest to Missouri.* *Data from Federation of Tax Administrators

Illinois is Low Tax Overall 16 Total State and Local Tax Burden as a Percentage of Income in 2010 Midwest States % National Rank Iowa 17.0% 10 th Michigan 16.9% 12 th Wisconsin 16.6% 16 th Indiana 16.6% 17 th Ohio 16.1% 26 th Illinois 14.2% 42 nd Missouri 13.5% 47 th Source: Federation of Tax Administrators. Includes all state and local taxes and fees.

Total State and Local Tax Burden as a Percentage of Income in 2014, with Temporary Tax Increase 17 Midwest States % National Rank Iowa 16.5% 14 th Ohio 15.4% 21 st Wisconsin 15.3% 22 nd Michigan 15.2% 25 th Illinois 15.1% 27 th Indiana 14.7% 32 nd Missouri 13.2% 48 th Going to around 29 th after SB9 Source: Federation of Tax Administrators. Includes all state and local taxes and fees.

Compared to the Rest of the Nation, Illinois is a Very Low Spending and Small Government State 18 Consider that: In calendar year 2016, Illinois had the fifth largest population (Census Data), fifth highest overall state Gross Domestic Product (GDP) (BEA Data), and 12 th highest state GDP per capita in the nation. Despite that, in FY2016 Illinois ranked 31 st in General Fund spending on services per capita, and 39 th in General Fund spending on services as a share of GDP. In 2014, (the most recent year for which there is data) Illinois ranked 46 th among all 50 states, in number of state workers per 1,000 residents. *Data for preceding analysis comes from U.S. Census, U.S. Bureau of Economic Analysis, National Association of State Budget Officers, and the final, enacted General Fund Budgets of all 50 states.

FY2018 Projected General Fund Service Expenditures Relative to FY2000, in Nominal Dollars and Adjusted for Inflation and Population Growth (excluding Group Health) 19 Category Healthcare (including Medicaid) FY2000 (Nominal) FY2018 Projected Net Appropriated Expenditures FY2000 (Adjusted for Inflation and Population) $ Difference % Difference $5.04 B $7.18 B $8.34 B -$1.16 B -13.9% PreK-12 Education* $4.84 B $7.79 B $8.01 B -$220 M -2.7% Higher Education $2.15 B $1.74 B $3.56 B -$1.82 B -51.1% Human Services $4.66 B $5.61 B $7.71 B -$2.10 B -27.2% Public Safety $1.39 B $1.90 B $2.30 B -$400 M -17.4% Other $1.64 B $1.05 B $2.71 B -$1.66 B -61.0% Note: K-12 education and human services have artificially high approps due to shift of pre-existing special funds to General Fund.

Why Switch from Current Model: NO FISCAL ACCOUNTABILITY 20 $300 Dollar Shortfall in State Per-Pupil K-12 Education Funding to Meet EFAB Adequate Education Standard by Fiscal Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -$200 $0 -$120 -$700 -$1,200 -$855 -$899 -$1,107 -$1,169-$1,269 -$1,241-$1,270 -$1,700 -$2,200 -$2,700 -$1,873 -$2,241 -$2,442 -$2,553-$2,648 -$2,780 -$2,913 -$3,200 Sources: CTBA analysis of January 2013 EFAB data. Education Funding Advisory Board, Illinois Education Funding Recommendations, (Springfield, IL: January, 2017).

Local and State Share of Education Funding Spending 21 70.0% 65.3% 60.0% 50.0% 45.2% 45.5% 40.0% 30.0% 26.1% 20.0% 10.0% 0.0% State % Share Local % Share Illinois US Average Source: CTBA analysis of U.S. Department of Education, National Center on Education Statistics, 2016. Revenues and Expenditures for Public Elementary and Secondary Education: School Year 2012-2013 (Fiscal Year 2013).

Illinois Total Property Tax Revenue Growth vs. State Median Income Growth 22 60% 50% 40% 30% 49.76% Total Property Tax Revenue Growth State Median Income Growth 20% 10% 0% 2.71% 6.33% -0.96% 1990-2005 2005-2013 All data inflation adjusted to 2013 using CPI-U-RS Income Data: US Department of Census, Current Population Survey Property Tax Data: Illinois Department of Revenue -10%

Bottom Line: Bottom Feeder Funding Gaps 23 Source: Funding Gaps 2015, The Education Trust By far the largest gap is in Illinois, where the highest poverty districts receive nearly 20% less state and local funding than the lowest poverty districts.

Key Features of the EBM Formula 24 1 Evidence-Based Adequacy Model 2 Local Contribution Target 3 Funding Tiers 4 Accountability & Updates

Distribution 25 Districts in one of 4 Tiers based on current adequacy % Adequacy % = (Adeq Local Share CPPRT Base Funding Min)/Adeq Tier 1 = all districts 64% or more below Adequacy get 50% of new state $ Tier 2 = all districts Above Tier 1, but with less than 90% Adequacy share next 49% of new state $ with Tier 1, pro-rata Tier 3 (.9% of New State $) = all districts between 90 and 100% Adequacy Tier 4 (.1% of New State $) = all districts over 100% Adequacy

SB1947 Works Equitably Statewide 26 Proportional Distribution of New Education Funding Under SB 1947 50% 40% 34% 34% 30% 29% 27% 20% 19% 19% 19% 20% 10% 0% Cook CPS Collar Downstate % of State Enrollment % of New Funding Source: CTBA analysis of ISBE, House Amendment 1 to Senate Bill 1 (Manar/Davis)

Unemployment Highest Among Least Educated, 2012 27 20.0% 18.0% 18.0% 17.6% 17.4% 16.0% 14.0% 12.0% 10.0% 11.4% 10.4% 9.9% 11.8% 8.8% 8.8% 8.0% 6.0% 4.0% 2.0% 6.5% 6.2% 5.4% 4.7% 4.1% 3.5% 0.0% LTHS HS Some College Associate's Bachelor's + Illinois Midwest National Source: The State of Working Illinois 2013

Education Wage Gaps Over Time 28 Education wage gaps 1979 1995 2007 2011 College/high school 23.5% 42.5% 46.4% 46.9% Advanced degree/high school Source: The State of Working in America 32.4% 62.3% 66.6% 69.6% *NOTE: The gaps doubled over the 1979-2011 sequence!

Getting it Wrong Has Led to Racial Inequities 29 Median hourly wages for Whites increased modestly between 1980 and 2014, but : Ø The White-Hispanic wage gap is larger in amount, growing from $4.36 per hour in 1980 to $5.98 in 2014, an increase of 37% over 1980 Ø Median wages for African-Americans declined, in real terms. The hourly wage gap between Whites and African-Americans grew from $1.74 in 1980 to $5.18 in 2014, an increase of 197% over 1980

Solution #1 30 $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Reamortizing the State Pensions Total Annual State Payments (Normal Cost and Debt), $ Millions Current Law v. Level Dollar to 80%, 70%, and 65% Funded Ratios in 2045 Current Law 80% 70% 65%

SOLUTION PART 2 MORE TAX REVENUE IS NEEDED 31 v Expand the sales tax base to include consumer services = $2.0 B v Tax some retirement income = $1.2B v Work for a Graduated Rate Income Tax

Revenues of Goods and Services as a Percent of Gross Domestic Product: Illinois (SIC 1965-1985, NAICS: 1997-2012) 32 80.00% 70.00% 63.35% 64.70% 66.59% 70.74% 71.90% 72.95% 72.49% 60.00% 51.35% 53.35% 54.23% 57.44% 50.00% 40.00% 40.53% 36.74% 35.29% 32.54% 30.00% 26.78% 25.42% 23.71% 20.00% 19.93% 18.54% 16.46% 17.47% 10.00% 0.00% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2012 Services as a percent of State GDP Goods as a percent of State GDP Source: Bureau of Economic Analysis

One Issue with Responsiveness is a Base Problem the Exclusion of all Retirement Income 33 Illinois is one of three states that does not tax retirement income Illinois would raise $1.2 billion in revenue if some retirement income was subject to the income tax AGI Bracket Portion of Retirement Income Added to Base Revenue from Retirement Income $50,000 or LESS 0% $0 $50,001-$75,000 25% $99,057,446 $75,001-$100,000 50% $190,998,341 $100,001-$150,000 75% $341,199,479 $150,001 or MORE 100% $565,534,861 TOTAL $1,196,790,127 Source: CTBA estimate using IDOR Illinois Individual Income Tax Returns with Retirement Subtractions: Tax Year 2012, http://tax.illinois.gov/aboutidor/taxstats/2012/iit-retirement-2012-final.pdf

Illinois State & Local Taxes Paid as a Share of Family Income for Non-Elderly Taxpayers 34 16% Total Tax Burden as a Percentage of Income 14% 13.80% 12% 10% 12.10% 10.90% 10.30% 9.00% 8% 7.60% 6% 4.90% 4% 2% 0% Lowest 20% Second 20% Middle 20% Fourth 20% Next 15% Next 4% Top 1% (Less than ($18,000- ($36,000- ($57,000- ($93,000- ($182,000- ($445,000 $18,000) $36,000) $57,000) $93,000) $182,000) $445,000) or more) Source: Institute on Taxation and Economic Policy, Who Pays? A Distributional Analysis of Tax Systems in All 50 States, p 52, Fourth Edition January 2013. Includes all State Sales, Excise, Property, and Income Taxes.

Impact on People 35 Share of Tax Cut by Net Illinois Income Illinois Residents Only Net Illinois Income Group Total Difference between 3.75% and 5% for Income Bracket % of Tax Benefit Average Cut Average Net Illinois Income Average Adjusted Gross Income % of Tax Filers 13% $0-$25,000 ($301,052,960) 8.1% ($106.89) $8,550.90 $18,964.43 50.4% Bottom 60% $25,001-$35,000 ($189,646,232) 5.1% ($372.32) $29,785.39 $39,082.14 9.1% $35,001-$50,000 ($300,654,609) 8.1% ($526.45) $42,115.75 $51,775.10 10.2% $50,001-$75,000 ($492,169,307) 13.2% ($768.78) $61,502.31 $71,740.42 11.5% $75,001-$100,000 ($418,908,679) 11.2% ($1,080.17) $86,413.26 $97,258.15 6.9% $100,001-$200,000 ($809,279,182) 21.7% ($1,677.04) $134,162.76 $146,324.98 8.6% 54% Top 11% $200,001-$1,000,000 ($717,656,313) 19.2% ($4,371.34) $349,706.85 $365,598.00 2.9% $1,000,001 or Greater ($503,206,395) 13.5% ($36,797.54) $2,943,802.83 $2,976,255.53 0.2% Total ($3,732,573,676) 100.0% ($668.28) $53,462.03 $64,072.49 100.0% Source: CTBA analysis of the Illinois Department of Revenue s Personal Income Tax data for tax year 2011. Numbers do not add up due to rounding.

BUT WAIT.. 36 DON T TAX INCREASES KILL THE ECONOMY? & TAX CUTS STIMULATE IT?

NOPE: Two Approaches to Tax Policy Kansas Cut top personal income tax rate from 6% to 4.5% in 2012 Projected to reduce revenue by $920 million in FY2017 Income tax as share of state revenue fell from 50% to 40% 37 Minnesota Raised income taxes in 2013 Third-highest top marginal personal income tax rate (9.85%) Middle rates, covering income from $25,180 to $146,270, are 7.05% and 7.85% $1.4 billion budget surplus for FY2018-19

Increasing Taxes the Right Way Won t Hurt the Economy 38 2002-2011 Comparison: 9 States with Highest Graduated Income Tax Rate vs. 9 States with No Income Tax 10% 8% 6% 6.1% 6.0% 8.2% 5.2% 4% 2% 0% -2% -4% -6% Average Unemployment Rate -4.2% -4.5% Change in Real Median Household Income Growth in Per Capita Real GSP High Rate Personal Income Tax Rate States No-Personal Income Tax States Source: Institute on Taxation and Economic Policy, States with High Rate Taxes are Still Outperforming No-Tax States (Washington, DC: February 2013). Figures 2,3 & 4

What About Supply Side Economics Nationally? 39 Lowering tax rates on affluent folks will Trickle Down and benefit everyone because: It will stimulate increased economic growth (by freeing up the income of rich folks to invest in creating jobs). This enhanced growth benefits everyone (i.e. trickle down ) in the form of faster/better quality job growth. Economic and individual income growth will be so much greater that despite cutting taxes on top earners revenue will at worst be undiminished, but most likely grow So no deficit problems.

How d the Theory Work? 40 From 1947 1980: 1. Federal income tax rates for wealthy 70-92% 2. Annual GDP increased by an average of 3.8 Percent - per year (BEA) while.

41 3. Income Growth Went 70% 66% 60% 50% 40% 30% 34% Bottom 90% Top 10% 20% 10% 0% 1

Then Came Supply Side 42 Marginal Tax Rates for Top Earners Cut From 74% to 38.5% in 1981; and again From 39.6% to 35% in 2001

From 1981 2007 (Pre-Great Recession) 43 1. Annual GDP growth declined from 3.8% to 2.8% (in 2011 that d be ~ $150 billion less in activity. 2. Income distribution went.....

2. Income inequality Got Worse 44 Change in Average US Income Accounted For By Income Group Income Group 1979 2011 Top 10% 139.8% Bottom 90% -39.8% Source: Economic Policy Institute's website: http://stateofworkingamerica.org/who-gains/ Data used is from Piketty and Saez, "Income Inequality in the United States, 1913-1998", Quarterly Journal of Economics, 118(1), 2003, 1-39 (Tables and Figures Updated to 2011 in Excel format, January 2013), http://elsa.berkeley.edu/~saez/. 3. And Federal Deficits Exploded

45

When Illinois Raises Taxes People won t run screaming out of the state: 46 Since 1925, IL has had net outmigration every year except one Illinois outmigration rate actually declined in 2011, the first year of the temporary tax increase A greater % of the populations of IN and WI moved into IL since the temporary tax increase, than vice-versa

For More Information 47 Ralph M. Martire Executive Director (312) 332-1049 martire@ctbaonline.org CTBA's principal goal is to ensure major policy systems work to promote social and economic justice. You can help strengthen our efforts by making a tax-deductible donation at www.ctbaonline.org/donate