SPRINGFIELD — Gov. Bruce Rauner’s effort to “shake up Springfield” has sent shock waves to every corner of the state with the first-term Republican governor and the Democratic-controlled General Assembly failing to reach a comprehensive budget agreement during his first two years in office.

While Illinois’ financial problems predate Rauner, his clash with Democratic legislative leaders — most notably longtime Democratic House Speaker Michael Madigan — has led to unprecedented uncertainty.

The state went the entire last fiscal year without a complete budget, leaving most spending dictated by court orders and laws that require funding for certain expenses, such as pension and debt payments.

But in other areas, including higher education, social services and state agency operations, the flow of revenue was cut off for most or all of the year.

That resulted in layoffs of hundreds of employees at public universities, community colleges and agencies that provide mental health treatment, care for the elderly and other social services. By one estimate, about one million people have lost services as a result of the ongoing standoff.

A six-month stopgap spending plan approved in late June provided a cash infusion, but it expired Dec. 31, resurrecting the uncertainty of the previous year.

When it comes to Illinois’ budget stalemate, “there’s no comparison that we can point to,” said Arturo Perez, a fiscal analyst for the National Conference of State Legislatures.

Since taking office, Rauner has insisted that items on his pro-business, union-weakening agenda be included in any comprehensive budget deal if that deal includes tax increases that nearly everyone now acknowledges are needed to begin addressing the state’s long-term deficits.

Many Democrats, meanwhile, argue that some of Rauner's policy priorities, such as stricter workers’ compensation laws and changes to collective bargaining rights for public employees, are a vigorous denunciation of their party’s core values.

“We’re going through a process which is completely abnormal,” said Kent Redfield, an emeritus political science professor at the University of Illinois Springfield and a longtime observer of state government. “And, ultimately, it’s not sustainable.”

Deep roots

Rauner frequently notes that Illinois’ financial problems stretch back decades.

A 2012 report from the State Budget Crisis Task Force that examined the financial problems of several struggling states noted that Illinois has long used budgetary gimmicks, such as delaying payments to vendors and borrowing to cover pension payments, to make unbalanced budgets appear balanced on paper.

“Illinois did all this without any sort of long-term financial plan to restore balance, and without reserves,” the report notes. “Illinois has been doing backflips on a high wire, without a net.”

The result is a backlog of unpaid bills totaling almost $11 billion and unfunded pension liabilities nearing $130 billion.

In a recent report for the Federal Reserve Bank of Chicago, economist Thomas Walstrum notes that state and local governments in Illinois collectively have been spending more money than they bring in for nearly three decades.

“And while the typical U.S. state has also generally spent more than it has collected, Illinois’ overspending has outpaced the national average since the mid-1990s, primarily through pension spending,” Walstrum writes.

Prior to Rauner’s tenure, the Democratic-controlled General Assembly and then-Democratic Gov. Pat Quinn took steps to address some of the problems.

During the January 2011 lame-duck session, lawmakers pushed through temporary increases in the state’s personal and corporate income tax rates, raising the former to 5 percent (from 3 percent), and the latter to 7 percent (from 4.8 percent).

Nearly three years later, lawmakers approved and Quinn signed a pension reform law that reduced retirement benefits.

But those savings never materialized because in May 2015, the state Supreme Court tossed out the law, ruling it violated a clause of the Illinois Constitution that says pension benefits for current and retired workers “shall not be diminished or impaired.”

By the previous fall, a debate was raging in the Quinn-Rauner gubernatorial race about whether the temporary tax increase, which was set to start rolling back Jan. 1, 2015, should be made permanent or allowed to expire.

While the increase was in place, the state’s backlog of unpaid bills dropped from $8.5 billion in January 2011 to slightly less than $6 billion in January 2015, the month Rauner took office. It continued dropping to a low of just under $3.5 billion in July 2015 before beginning to climb again.

But Rauner campaigned against extending the tax increase without also enacting other reforms he contends will jump start Illinois’ economy.

Democrats didn’t have the votes to do it alone, so tax rates were allowed to roll back to 3.75 percent for individuals and 5.25 percent for corporations.

Proposed solutions

The most recent round of talks among Illinois’ top leaders broke down in December, with Rauner and Madigan pointing fingers — again — at each other.

Afterward, Senate President John Cullerton and Senate Minority Leader Christine Radogno hashed out a bipartisan "grand bargain," a massive package of legislation aimed at bringing the standoff to an end.

Among the various proposals are permanent increases in the personal income tax rate from 3.75 percent to 4.99 percent, and the corporate rate from 5.25 percent to 7 percent. New casinos and pension reforms are on the list.

A proposed penny-per-ounce tax on sugar-sweetened beverages has been scrapped, but a new “business opportunity tax” and taxes on some services, including dry cleaning and storage unit rentals, have been added.

The package also includes several provisions to satisfy Republicans, including a two-year freeze on local property taxes and workers’ compensation reforms. 

Passing the deal will be far from easy, but it has been greeted with a sense of optimism that’s been rare in Springfield of late.

Dan Lesser, a coordinator of the statewide Responsible Budget Coalition, said the group has "a shared interest in the state having sufficient revenue to make smart investments and to stop making cuts and to repair some of the damage that’s been done."  

Even Fitch Ratings, which downgraded the state’s credit rating in October 2015 as a result of the impasse, sounded a positive, albeit cautious, tone.

“These proposals, if they proceed through the full legislature and are signed by the governor, have the potential to stabilize” the state’s credit rating, the ratings agency said in a Jan. 11 statement.

With some lawmakers, particularly Republicans, wanting more time to consider the package, Senate leaders held off a vote last week, but told senators to be ready when they return to Springfield Feb. 7.

Rauner said he finds the recent Senate developments encouraging, though he’s withholding judgement on the specifics.

“I applaud them,” Rauner said in an interview with the Lee Springfield Bureau. “They’re dealing with issues. They’re talking about term limits. They’re talking about property tax relief. They’re talking about regulatory reform. This is great. This is a step in the right direction.”

Madigan is taking a wait-and-see approach, noting that many of the items in the proposal have been discussed and debated before.

“They’re going to get due consideration in the House,” he told the bureau.

Meanwhile, he’s proposed his own agenda that includes a 50 percent reduction in the corporate income tax and a tax surcharge on personal income of more than $1 million to fund education.

No quick fix

Even if the Senate package or something similar is approved, it would only be a step toward improving the state’s long-term financial outlook.

Redfield said it's a good start.

“It would … allow us to kind of stabilize the situation, but that set of bills in no way is a fix,” he said.

In the long run, the state will need a revenue structure that better aligns with the modern economy, such as a sales tax that includes more services, and a stronger business climate, he said.

A recent study from the Fiscal Futures Project at the University of Illinois helps put the daunting task in perspective.

With a combination of higher income tax rates, a broader income and sales tax base, increased economic growth and 2 percent annual reductions in “discretionary” state spending, it would take a decade to bring Illinois’ budget into line, according to the analysis.

“We should think about this as a multiyear process,” said David Merriman, one of the authors. “It’s going to require significant revenue increases and restraint on spending … over a long period of time. … If we show the political backbone to do that and show a realistic long-term plan … that will strengthen the economy immensely.”

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