A Fiscal Review of Illinois Budget

70 East Lake Street Suite 1700 Chicago, IL 60601 www.ctbaonline.org A Fiscal Review of Illinois Budget T H U R S D A Y, J U N E 1 5, 2 0 1 7 ; 6 : 3 0 P M S U M M E R S P E A K E R S E R I E S H O S T E D B Y S E N A T O R B E R T I N O - T A R R A N T S T. M A R Y I M M A C U L A T E P A R I S H 1 5 6 2 9 R T. 5 9, P L A I N F I E L D, I L Presented by: Ralph M. Martire, Executive Director

Illinois General Fund Structural Deficit 2 Source: Growth rate for state revenue sources is approximately 2.8 percent. For the revenue growth rate for federal revenue CTBA used the Congressional Budget Office s Nominal Wage Growth for Workers Covered by Social Security (Percent) from its 2015 Long-Term Budget, which are the same projections used for spending on current services.

$5.97 or 24% Deficit Spending The Illinois General Fund Two Primary Elements: (i) (ii) FY2015 $35.5 B Overall 3 Hard Costs No Discretion Approx. % of Total Debt Service 26% Pension Contributions 56% Statutory Transfers Out 18% 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% $11 B $24.49 B +Group Health 5% +Everything Else 4% 100%

FY2016 Maximum Authorized Spending Compared to FY2015 4 Category FY2015 FY2016 Maximum Authorized Spending Nominal Difference Nominal Difference (%) K-12 Education $6,262 $6,193 ($69) -1.1% Early Education $293 $315 $22 7.5% Higher Education $1,950 $627 ($1,323) -67.8% Human Services $5,134 $5,072 ($62) -1.2% Healthcare $6,826 $6,950 $124 1.8% Public Safety $1,735 $1,317 ($418) -24.1% Group Health $1,565 $1,726 $161 10.3% Other $1,232 $1,010 ($222) -18.0% Governor Discretionary $57 $0 ($57) -100.0% Gross Appropriations $25,054 $23,210 ($1,844) -7.4% Less Unspent Appropriations ($562) ($1,468) Net Appropriations $24,492 $21,742 ($2,750) -12.5%

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 Projected Net FY2016General Fund (iii) Revenue Available for Services Projected Accumulated FY2016 General Fund Deficit Projected Deficit as a Percentage of General Fund Service Appropriations $12.33 Accumulated Deficit Carry Forward from FY2015 Projected Net General Fund Service Appropriations ($9.41) ($9.45) -43.28% -43.47% ($5.97) $12.33 $21.74 ($9.41) ($9.45)

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%

Governor s FY2018 General Fund Budget Proposal FY2018 Category Authorized Spending Healthcare $7.134 Early Childhood Education $.444 K-12 Education $6.781 Higher Education $1.825 Human Services $5.947 Public Safety $1.823 Group Health $1.415 Other $1.172 SUBTOTAL $26.541 Hard Costs $11.385 GRAND TOTAL $37.926 Revenue $32.744 ON BUDGET DEFICIT (-$5.182 B) 7 CLAIMED DEFICIT OFF SETS Savings from Working Together on Grand Bargain Below the Line Adjustments Was $12.67 in FY2017 $4.572 B $1.109 B $5.681 B Of Non- Verifiable Savings

FY2018 Projected General Fund Deficit Walk-Down (SANS MAGIC) 8 Step Revenue $ Billions Spending $ Billions (i) Estimated FY2018 Revenue $32.744 (ii) Revenue After Hard Costs $21.359 FY2018 Hard Costs (Gov s Estimate) Estimated Accumulated Deficit Carry Forward from FY2017 $11.385 ($14.79) (iii) Projected Net FY2018 General Fund Revenue Available for Services $6.569 FY2018 General Fund Service Spending $26.541 (iv) Surplus/Deficit Remaining after General Fund Spending ($19.972) FY2018 Group Health Adjustment ($.395) Projected Accumulated FY2018 General Fund Deficit Projected Deficit as a Percentage of General Fund Service Appropriations ($14.686 B) if Grand Bargain & other savings materialize to ($21.767 B) if none of the Gov s proposed savings materialize -55.3% to -82%

$ Billions Change in Net General Fund Budgeted Appropriations 9 $28.0 Change in Net General Fund Budgeted Appropriations for Current Services During Recovery Post Great Recession (Nominal, non inflation-adjusted dollars) $27.5 $27.0 $26.0 $25.0 $24.0 $25.9 $25.7 $24.3 $24.2 $24.9 $24.9 $23.0 $22.0 $21.5 $21.0 $20.0 2009 2010 2011 2012 2013 2014 2015 2016 Fiscal Year

Growth in Hard Costs for Debt Service 10 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 $3.2 $3.1 $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 $0.0 $0.5 $0.4 $0.4 $0.5 $0.5 $1.2 $1.8 $2.2 $2.1 $2.3 $2.2 $2.2 $2.4 $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 Notes: Debt Service (Pension & Capital Bonds) Statutory Transfers Out Pension 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

$ Billions What About Pension Benefits? Not the Problem 11 $50 Change in Unfunded Liabilities 1996-2016 $45 $40 $30 $31 $20 $16 $15 $10 $6 $0 -$10 -$4 Salary Increases Benefit Increases Changes in Assumptions Other Factors Investment Losses Borrowing from Contributions

2013 2014 2015 2016 2017 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 $ Millions Current Pension Ramp, FY2013-2045 12 $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Source: COGFA, November 2012 Special Pension Briefing.

Temporary Tax Increases Phase Down: Illinois Fiscal Cliff 13 $38 $37 $36 $35 $34 $33 $32 $31 $30 $29 $28 $36.7 $34.1 $30.4 $30.9 $32.7 2014 2015 2016 2017 2018 2014-2017 data from COGFA. 2018 from Governor s proposed budget. Revenue

Impact on People 14 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.

YES, Illinois Economic Growth Lags U.S. Long Term (1997-2014) 15 45% 40% Long Term GDP Growth (1997-2014) 40.7% 35% 30% 25% 20% 20.4% 15% 10% 5% 0% United States Illinois Source: Bureau of Economic Analysis

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. 16 Illinois consistently had the second lowest tax burden in the Midwest to Missouri.* *Data from Federation of Tax Administrators

Illinois is Low Tax Overall 17 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 18 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 Down to 37 th by 2016 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 19 Consider that: In calendar year 2014, Illinois had the fifth largest population (Census Data), fifth highest overall state Gross Domestic Product (GDP) (BEA Data), and 15 th highest state GDP per capita in the nation. Despite that, in FY2014 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.

FY2016 General Fund Service Actual Expenditures Relative to FY2000, in Nominal Dollars and Adjusted for Inflation and Population Growth (excluding Group Health) 20 Category FY2000 (Nominal) FY2016 Actual Expenditures FY2000 (Adjusted for Inflation and Population) $ Difference % Difference Healthcare (including Medicaid) $5.04 $6.21 $8.04 -$1.84-22.8% PreK-12 Education* $4.84 $6.51 $7.72 -$1.22-15.7% Higher Education $2.15 $0.62 $3.43 -$2.81-81.9% Human Services $4.66 $4.50 $7.44 -$2.94-39.5% Public Safety $1.39 $1.24 $2.22 -$0.97-43.9% Other $1.64 $0.94 $2.62 -$1.68-64.1% FY2015 appropriation for K-12 Education excludes $200 million from the Fund for Advancement of Education that is appropriated for General State Aid. The Illinois State Board of Education includes that $200 million in its FY2015 General Fund budget report.

Why Switch from Current Model: NO FISCAL ACCOUNTABILITY 21 $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).

No Real Increase in School Funding for Poverty 22 $5,000.0 Changes in GSA Spending, FY2008-FY2016 ($ in Millions, Inflation Adjusted) $4,500.0 $4,000.0 $3,500.0 $3,000.0 $2,500.0 $3,628.0 $3,534.5 $3,345.5 $3,042.5 $2,855.0 $2,731.1 $2,711.9 $2,675.2 $2,660.2 $2,000.0 $1,500.0 $1,000.0 $500.0 $0.0 $785.4 $919.3 $1,075.8 $1,271.1 $1,448.4 $1,608.9 $1,718.1 $1,722.0 $1,610.7 2008 2009 2010 2011 2012 2013 2014 2015 2016 Supplemental GSA GSA - Formula

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.

Unemployment Highest Among Least Educated, 2012 24 20.0% 18.0% 18.0% 17.6% 17.4% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 11.4% 10.4% 9.9% 11.8% 8.8% 8.8% 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 25 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 Leads to Racial Inequities 26 Median hourly wages for Whites increased modestly between 1980 and 2014, but : 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 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

SB1 The Evidence-Based Model Created by Drs. Odden and Picus it: 27 ties funding to those educational practices which the evidence and/or research show have a statistically meaningful correlation to enhancing student achievement. creates an Adequacy Level of education funding for each school district that adjusts for demographics.

Solution #1 28 $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 29 Expand the sales tax base to include consumer services = $2.0 B Increase income tax rates (5.25% personal = $5.33 B, and 6% corporate = $387 M) Tax some retirement income = $1.2B An Aside: Taxing Internet Sales? $212 M FY2013 THAT R RIGHT A TAX INCREASE!

One Issue with Responsiveness is a Base Problem the Exclusion of all Retirement Income 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 30 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

BUT WAIT.. 31 WON T TAX INCREASES KILL THE ECONOMY?

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% 32 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

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 And Their Results 33 112.0 110.0 108.0 106.0 104.0 102.0 100.0 98.0 96.0 94.0 92.0 Total Nonfarm Employment in Minnesota and Kansas (Indexed to 2009 recession) Source: St. Louis Federal Reserve Minnesota Kansas

Increasing Taxes the Right Way Won t Hurt the Economy 34 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

And if Illinois Raises Income Taxes People won t run screaming out of the state: 35 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 36 Ralph M. Martire Executive Director (312) 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