Report: Illinois Needs Urgent Reforms to Avoid Financial Disaster

Published February 1, 2012

The Illinois state government could see its backlog of unpaid bills balloon from $9.2 billion to nearly $35 billion over the next five years unless major reforms are implemented soon, says an Illinois-based research institute.

“The governor and General Assembly must act now,” said Laurence Msall, president of the Civic Federation, whose report analyzes the state’s current fiscal position, reviews Gov. Pat Quinn’s (D) three-year budget plan, presents a rough five-year budget projection for FY2013 to FY2017, and provides recommendations to improve the state’s financial condition.

“Failure to address unsustainable trends in the state’s pension and Medicaid systems will only result in financial disaster for the State of Illinois,” Msall said.

Illinois will end the current fiscal year with approximately $9.2 billion of unpaid bills. ¬†Without budget reforms, these will total $34.8 billion at the end of FY2017, the report says. And that’s after the state in 2011 raised the corporate tax 46 percent and the personal income tax 67 percent. Those tax rates are supposed to be cut in 2015, though some political observers expect the cuts not to happen.

Ballooning Medicaid Burdens

Soaring costs in Medicaid, government employee pensions, and health insurance are the biggest budget problems the state faces, Msall said.

The report cites an analysis by the Illinois Department of Healthcare and Family Services which concludes current trends of rising Medicaid costs and insufficient state Medicaid appropriations could cause the backlog of unpaid Medicaid bills to reach a staggering $21.0 billion by the end of FY2017.

The Civic Federation urges aggressive implementation of Medicaid reform legislation passed in January 2011 which addressed two of the program’s major shortcomings: inadequate use of managed care and overuse of institutional care for the elderly and disabled.

The Federation also recommends the state continue working to control prescription drug costs and eliminate programs that do not qualify for federal reimbursement, such as Illinois Cares Rx.

Nation’s Worst Pension Funding

Illinois also has the nation’s largest unfunded pension liability. The Civic Federation writes the funding problems have worsened because of investment losses in FY2008 and FY2009 but are mainly due to a history of insufficient state funding.

As of June 30, 2011, the five State of Illinois retirement systems had total unfunded liabilities of $83.1 billion and a combined funded ratio of 43.3 percent.

“Illinois can no longer afford to grant automatic pension benefit increases that are not tied to cost of living increases,” said Msall.

The Civic Federation is recommending that for the first time current Illinois retirees and employees hired before January 1, 2011 receive the same annual benefit increases as new workers: 3 percent a year or one-half of the increase in the consumer price index, whichever is less, increased by a simple interest rate.

Huge Rise in Operating Deficit

In addition to an unprecedented level of unpaid bills, the state’s operating deficit is expected to increase dramatically to $3.2 billion in FY2017 from $508 million in FY2012.

“The State of Illinois’ continued practice of spending more than it takes in and pushing operating expenses into future fiscal years is a growing threat to our most vulnerable social service providers, local governments, and anyone doing business with the State of Illinois,” said Msall.

Legislators Call for Reform

Legislators are also calling for reform.

The Senate President and House Speaker have both expressed support for making local school districts assume more of the costs of funding teacher pensions, a move backers expect would make local school boards more sensitive to the impact of their hiring and compensation decisions.

At least one state representative, Kent Gaffney (R-Lake Barrington), has announced he will not participate in the General Assembly Retirement System and will turn down his legislative pension.

“I support comprehensive pension reform that will reduce Illinois’ unfunded pension liability and ensure the solvency of our retirement systems,” Gaffney said. “I urge the governor and General Assembly to work together to pass a sustainable public-employee pension plan. House Republican Leader Tom Cross has proposed a three-tiered pension plan [Senate Bill 512], which would reduce pension benefits not yet earned and offer state workers three options for earning future benefits.”