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In 2015, the Chicago Transit Authority will remain one of the cheapest transit rides in the world.
The first step in the Illinois fiscal year 2016 budget process has begun.
Facing a $6.6 billion budget deficit and the rollback in income tax rates, newly elected Ill. Gov. Bruce Rauner recommended $3.7 billion in unpopular cuts and $2.9 billion in pension and retiree health care reforms to balance the state budget for fiscal year 2016. The year runs from July 1, 2015, to June 30, 2016.
The governor proposed a $61.8 billion FY16 budget, of which $28.4 billion is directed to General Fund appropriations that pay for most state services including education, health care, public safety, human services and pensions. To put that number into perspective, that is less than the state spent in 2011, five budgets ago, on General Fund services.
As a result of the Jan. 1, 2015, required roll back in the individual and corporate income tax rates, income tax revenues will be $5.1 billion less in FY16 than FY14, the last full year of the higher rates.
State law mandates the governor propose a budget based on existing tax laws. It prohibits the governor from proposing and including any revenue changes in his recommended budget. That means, regardless of whether or not he supports revenue enhancements, any money generated from those proposed changes could not be counted in his recommendation. He is allowed to make appropriations assumptions; for example, he can account for savings from a pension reform proposal even though it would require General Assembly approval.
Agency cuts and increases
Of the $3.7 billion in agency cuts, most come from health care, higher education, transit, local governments and human services including:
- $360 million in cuts to the Dept. of Transportation:
- Regional Transportation Authority state funds for Chicago Transit Authority, Metra and Pace: $100 million
- Pace Paratransit for the disabled and elderly: $8.5 million
- Regional Transportation Authority Reduced Fare Subsidy program for low-income and senior transit riders: $17.5 million (this program is state mandated)
- Downstate transit: $93 million
- Amtrak: $20 million
- Local government motor fuel tax transfers: $28 million
- Chicago Metropolitan Agency for Planning: $500,000 reduction, from $3 million to $2.5 million.
- Illinois Dept. of Natural Resources: Operations reduced by $8.6 million, mostly cuts to staffing
- The Environmental Protection Agency would see a 1.1 percent increase to $307 million.
- The Dept. of Commerce and Economic Opportunity would be cut by $337 million, including elimination of the Summer Jobs for Youth program and home energy assistance for low-income residents.
- Local governments:
- Illinois state law restricts local governments from enacting local income taxes, so the state has “shared” those tax revenues with locals. Prior to the 2011 income tax increase, the state shared 10 percent of income tax revenues with locals and after 2011, 6 percent. It also shares sales tax revenues.
- Rauner proposes a $600 million reduction in the share of state revenues for local governments. At the same time, he proposes freezing property taxes for two years. With local government budget and pension pressures, it’s unclear how locals could absorb this cut.
- This results in a $210 million annual reduction for the City of Chicago.
- $1.5 billion in health care cuts:
- Decrease in Medicaid reimbursements to hospitals and nursing homes and cuts to programs for the mentally ill and that provide breast and cervical cancer screenings for low-income people
- Rauner also proposes savings from reviewing eligibility of Medicaid recipients and eliminating dental or podiatry services.
- $541 million in cuts to the Dept. of Human services:
- Eliminates $167 million in services for foster care youths who are 18 and older
- $21.9 million in cuts to the Dept. of Public Health
- Eliminates the Sudden Infant Death Syndrome Program, Multiple Sclerosis Task Force and mobile health care services
- Education: The governor proposes a $290.5 million increase in General State Aid for education and a $25.3 million increase in Early Childhood Education. However he would eliminate funding for programs such as After School Matters and reduce funding for state universities by $387 million, or 31 percent.
The need to increase—not cut—transportation investments
While cutting transit funding is short sighted, as it generates economic growth in the long-run, the governor did propose allocating an additional $120 million in funding for road infrastructure, woefully short of the necessary infrastructure investments residents demand. Illinois’ transportation starvation diet has put us in the red to the tune of $1.8 billion each year. In 2015, the Chicago Transit Authority will remain one of the cheapest transit rides in the world. Four out of five states with similar budget challenges have taken action on increasing transportation investments by increasing their motor fuel taxes more recently than Illinois to raise revenue and invest in the maintenance and improvement of their transportation networks.
MPC's new Accelerate Illinois campaign brings together citizens, organizations and businesses to share one message for Illinois lawmakers: We want transportation to be a priority in 2015. We're thrilled to have partner organizations like Transportation for Illinois Coalition and AARP, as well as many others. You can support the campaign for a better quality of life by joining us today.
Pensions
The fiscal year 2016 required payment to the state retirement systems is $6.6 billion, or a full 23 percent of all General Fund spending. That’s up from $3.6 billion, or 12 percent, of General Fund spending just five years ago. With a $111 billion total unfunded liability of the state’s five retirement systems, much depends on the Supreme Court ruling on the pension reform legislation, Senate Bill 1, passed in 2013. If that law is ruled constitutional, the fiscal year 2016 pension payment would decrease by $1.1 billion.
The State currently offers two levels of pension benefits—one plan for those hired before 2011 and another, paired down plan for recent hires. Gov. Rauner has proposed freezing all of the benefits for those employees hired before 2011 earned as of July 1, 2015 and after that day those employees would receive reduced benefits, similar to those earned by recent hires:
- Reduction in cost of living adjustment: Benefits earned after July 1, 2015 would be increased the lesser of 3 percent or half of inflation, non-compounding.
- Retirement Age: Benefits earned before July 1, 2015 could be obtained at the retirement ages now in law, payment of newly earned benefits would begin at age 67.
- Employees can enroll in an optional “buyout” plan to voluntarily reduce the cost of living adjustment on their pension benefits earned before July 1, 2015. In exchange the employee will be enrolled in a defined-contribution plan (similar to a 401 (k) plan). The employee will continue to earn their defined benefit plan for benefits received prior to July 1, 2015. These employees will receive a lump sum payment to be used as a starting balance for the defined-contribution plan, which will include a state (employer) match.
He also proposes:
- A decrease in end-of-career salary cap to the prior year’s salary plus the increase in inflation (Consumer Price Index). Any pension cost caused by salary increases above inflation must be paid by the local employer.
- Overtime pay would not be counted in final average salary.
- Effective rate of interest will be based on U.S. Treasury bank rates.
These changes will not affect current retirees or public safety professionals.
The governor expects these pension reforms to result in a reduction of the State’s pension payment by an estimated $2.2 billion in FY16. He also proposes to cut retiree health care funding and require downstate school districts to pay for retiree health care, resulting in another $700 million in state savings.
It remains unclear but likely that, similar to the pension reforms passed into law in 2013, the governor’s proposed reforms will be challenged in court. If that’s the case, the $2.2 billion in savings from this proposal would be lost.
Path forward?
Both Ill. Sen. President Cullerton and Ill. Speaker of the House Michael Madigan stated they believed Gov. Rauner’s pension proposal would be unconstitutional. Cullerton also stated the people of Illinois need to be better educated on the budget situation.
Though Gov. Rauner did not propose any revenue increases and couldn’t count any hypothetical revenue increases as part of his proposed budget, during the campaign he discussed broadening the sales tax base. By strategically broadening the tax to include personal services, Illinois could raise needed revenue. Gov. Rauner has proposed adding business services to the sales tax, which would generate an additional $2.5 to $3.5 billion annually for state and local governments and transit. This assumes the overall rate remains the same.
The General Assembly will now spend the next several months working out the details. A budget must be enacted by June 30.
MPC will be in Springfield working to ensure infrastructure, housing, land-use and natural resources remain a top priority in FY 2016. You can be a part of the effort by joining Accelerate Illinois to ensure a better quality of life for all Illinoisans.