Here’s a new way to think about Illinois’s financial situation: The state has, in fact, had budgets for the last two years. They have just been budgets so bad that no elected official wants to own them.
What does that mean? First, let’s look at the composition of the General Fund budget from Fiscal Year 2015, the last “normal” year.
In 2015, the state spent approximately $35.4 billion in General Funds, aka the part of the state’s overall budget that is financed by income and sales taxes. One thing that should immediately stand out is that over 70 percent of the state’s budget are for three things: hard costs (pension payments, statutory transfers, and debt service on bonds), education, and healthcare (which is mostly Medicaid).
But in June 2015, lawmakers were unable to agree on spending and revenue bills for Financial Year 2016. That brings us to our budget-without-a-budget, or what some people call an “autopilot” budget. A number of items in the state’s budget—like pensions, debt payments, statutory transfers, the state court system, and state lawmakers’ pay—are legally required whether or not lawmakers pass an official budget. Other items, like state employees’ health insurance, continue racking up bills that will need to be paid eventually, even if lawmakers don’t authorize spending for that program. The problem is similar to making purchases on a credit card and then throwing out all payment notices; the debt doesn’t go away, it just increases over time.
So, what aspects of the budget could, theoretically, get cut? The answer is human services, healthcare, higher education, K-12 education, and some smaller areas, which add up to somewhere between $22 and $24 billion. But spending for most of these items is still occurring. First, for both 2016 and 2017, lawmakers passed a spending bill for PreK-12 education. Second, various court orders and consent decrees require the state to continue spending on certain items even without an official budget. Perhaps the most significant court order is the one that requires the state to continue paying state employees, which is why there’s been no total state government shutdown.
Based on data from the Comptroller’s office, Governor’s Office of Management and Budget, and Commission on Government Forecasting and Accountability, I’ve estimated that the state spent nearly $32.8 billion in Financial Year 2016. Here’s how that compares to FY2015.
The main aspects of the budget that were cut are higher education and funding for social services. The harm of these cuts has been well documented over the past two years, but no lawmaker had had to own those cuts because no official budget was passed into law. Due to the expiration of income tax increases in January 2015, which shrank revenues by about $5 billion a year, even with the cuts, the state is spending more than it’s taking in.
While the state spent $32.8 billion in 2016 it only took in $30.4 billion in revenue, according to CGFA data. That $2.4 billion shortfall just adds to the state’s already large backlog of bills.
The temporary income tax increases, which were in effect from 2011 to 2015, allowed the state to start digging out of the hole it was in, shrinking the state’s bill backlog to $4.6 billion. Once those tax increases expired, the backlog ballooned to nearly $8 billion in mid-FY2015. And by May 22 this year to nearly $14.5 billion. In other words, it has nearly doubled in less than two years.
And this brings us to an acute issue: cash flow. Since the state owes far more in outstanding bills than it has money to pay, Illinois State Comptroller Susana Mendoza has to make decisions about who gets a check when—almost like a financially stressed family deciding whether to pay the electric or gas bill this month.
How is the comptroller making decisions about what to pay first and what to put on the bottom of the stack? While she has some discretion, it's worth noting that Mendoza does not have complete autonomy. For example, shortly after taking office Mendoza announced that the Comptroller’s office would prioritize paying social service providers and delay state lawmakers’ pay. A Cook County Court judge subsequently ruled that the Comptroller’s office could not delay paying state lawmakers.
In cases when the comptroller has more discretion, the prioritization is detailed in this recent testimony from the comptroller’s office. A continuing issue, though, is that the comptroller's office may not know about every single unpaid bill, since state agencies can hold onto bills before sending them to the comptroller for payment. (A pending piece of legislation, House Bill 3649, would require state agencies to report unpaid bills and estimated interest costs on a monthly basis to the Comptroller.)
This is troubling because every time one bill gets prioritized, another is being delayed. For social service providers, healthcare providers, school districts, and local governments, delayed payment from the state can create a host of financial problems, resulting in social service providers shutting down and healthcare providers asking state employees for upfront payments.
There is also a cost to the state for delaying bill payments, which brings us to the second pressing issue: interest costs. When the state pays its bills late it has to pay interest on those bills as a penalty, with interest rates of 9 percent and 12 percent per year (the interest rate depends on the type of bill). Importantly, the interest penalties are not tallied until the original bill is paid, making it hard to determine just how much the state will end up paying in interest penalties.
But, unpaid grants the state gives to local governments do not rack up interest, meaning that if the state delays giving the River Forest School District money, the state is not financially penalized but River Forest does have to figure out how to deal with the cash flow problem that delay can cause.
Most of the backlogged bills are for the state’s Medicaid program and liabilities for the State Employees’ Group Health Insurance Program, aka Group Health. This means that the majority of the state’s backlogged bills are subject to delayed payment penalties with 9 percent and 12 percent annual interest rates.
|Category||Amount as of April 2017 (millions)||Interest Penalty?|
|State Employees Group Health Insurance Program||$4,600||Yes|
|Other Bills (transfers to Other State Funds, Local Governments, Pension Contributions and Other Outstanding Bills)||$4,090||Mostly No, but Varies|
Group Health accounts for roughly 32 percent of all outstanding bills—a significant issue because state lawmakers have not allocated any money to these liabilities for the past two years, and as a result these bills (as well as the interest penalties) continue to pile up. And remember the interest penalties don't stop racking up until the bill is actually paid. Backlogged Group Health liabilities have skyrocketed from $3.1 billion in April 2016 to $4.6 billion in April 2017, and there’s no end to their growth in sight. Some bills are being paid 734 days (or 2 years) late, and that number is only going up.
The Comptroller’s office has estimated that if the state was able to pay its entire bill backlog right now (which it can’t) it would have to also pay $800 million in interest penalties. Compare that to the total amount of interest penalties the state paid between 2003 and 2015: approximately $1 billion. But the state isn’t going to be able to pay all of its bills at once, and the impasse has yet to be resolved, meaning the backlog of bills and penalty payments are both likely to increase further.
This means that whenever lawmakers do decide to end the impasse, the scope of the problem is going to be much larger than it was in 2015. And in the time between, with our non-budget budgets, we’ll have put ourselves in an even worse position to start paying them off.