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Illinois Issues: Budget Crisis Could have Been Averted

May 17, 2016

Bipartisan working groups are currently trying to find a way out of the budget impasse. But the crisis could have been prevented long before the battle between Gov. Bruce Rauner and Democratic leaders began.

Analysis — Last month, Democratic House Speaker Michael Madigan stood in his chamber and delivered a speech on his perspective of the budget impasse.

Illinois House Speaker Michael Madigan

“The fact is, the current budget crisis was completely avoidable. While this crisis was avoidable, Gov. Rauner has refused to put an end to the crisis,” Madigan said.

The speaker is correct. This was avoidable. Many, including Madigan, are pointing the finger at Republican Gov. Bruce Rauner for tying budget negations to his so-called Turnaround Agenda, which includes anti-union provisions legislative Democrats say they cannot support. But this crisis was avoidable long before he took office and the current game of political chicken began.

When lawmakers approved and then-Gov. Pat Quinn signed into law a temporary income tax increase in 2011, warnings about addressing what would happen once it started to phase out soon followed. 

Under the temporary tax increase, the state’s budget situation began to stabilize. The state started consistently making the full pension payment without borrowing.  The payment cycle for bills was shortened as Illinois began to slowly chip away at its backlog. “The reason that that tax increase was fought for by advocates and eventually passed and enacted was to prevent exactly this crisis that we’re having now,” says Emily Miller, director of policy and advocacy for Voices for Illinois Children. Miller is among those lobbying lawmakers to fund social services that haven’t received state dollars during the current impasse, which has stretched on for nearly a year.   

A few weeks after the increase was approved, credit rating agency Fitch Ratings upgraded Illinois’ credit outlook. But in the same report, the rating agency was already predicting the budget mess to come. “The tax increases are temporary and will begin to phase out in 2015. Even if the state has achieved budget balance by that point, it will once again be faced with a significant budget balancing decision to make severe expense reductions that it has been unwilling to make up to this point,” said the 2011 report from Fitch.  

In the time between the approval of the temporary tax increase and the current crisis, lawmakers didn’t go for any of the three options laid out by Fitch: deep cuts, finding other stable revenues and/or making the tax increase permanent. 

In the time between the approval of the temporary income tax increase and the current crisis, lawmakers didn’t take steps to account for the tax rates dropping in 2015.
Credit wnij

Illinois Issues was among those raising the alarm. A story from April 2013 noted: “Those who want the tax increase to go away and those who think the state cannot get by without the revenue agree on one thing: The governor and the General Assembly are doing little to prepare for the phase-out.”

In a 2013 story, Kent Redfield, emeritus professor of political science at the University of Illinois Springfield, was quoted as saying: “If we still don’t have a resolution on pensions that reduces the annual payment that we need to make, you’d essentially have to shut down state government if the tax increase went away. If there’s no pensions agreement, then nobody can make the numbers add up.”

Redfield says he wasn’t speaking literally when referencing a government shutdown. “What was probably a little bit of hyperbole at the time, in terms of having to shut down state government, turned out to be much more serious than even what I was thinking at the time — which [was] that you would have to make serious cuts. But I certainty didn’t envision this stalemate and going a whole fiscal year without a budget, which is what we may end up doing.”

Warnings grew more urgent as the date the tax increase would start to roll back, January 1, 2015, drew nearer. Karen Krop, the primary analyst on a 2012 Fitch’s report on Illinois, said the state must do something by the Fiscal Year 2014 budget year because it would be the last budget year before revenues would take a serious hit as income tax rates started to roll back. “When you get into the 2014 budget, one would hope that they would be talking about how they are going to deal with that in the coming year.” But Krop noted that Illinois officials have a history of “waiting until the last minute” to address difficult situations.

Not only did they wait until the last minute, they let it tick by. When lawmakers put together the budget for FY 2015, they faced a more-than-$1.5 billion drop in revenue, as the tax increase would begin its step-down in the second half of the fiscal year. They also faced elections in November. 

“It was pretty clear what was going to happen — given the state’s debt and given what normal spending added up to — if we let that temporary tax increase expire, then instead of making progress toward covering bills and paying off some of the debt that we were just going to go off the cliff again,” Redfield says. “But rather than bite the bullet before the general elections, the legislature essentially took a pass.” They adopted a budget that didn’t fully fund state government and left the problem for another day, after the 2014 general election.

Before he was governor, Bruce Rauner described a plan to use funding for social services as a wedge to try to get support for weakening public sector unions.
Credit brucerauner.com

Cut forward to that floor speech in April. Madigan accused Rauner of trying to use the lack of funding to social services as a wedge to pry loose Democratic votes for his so–called Turnaround Agenda. This is a theory the governor’s own statements, made before his time in office, appear to back up.

But if the governor was able to take hostages — in the form of social services and some institutions of higher education — close to Democrats’ hearts, it’s because they played a lead role in putting these entities in peril. After all, Democrats had controlled both chambers of the legislature and the governor’s office. But they had done nothing substantial to protect social services, either by extending the tax increase or cutting funding elsewhere to free up money for them. Heck, they were the ones that made the income tax increase temporary in the first place.

Redfield says that Democrats could have voted for new revenues in 2014 — the most likely option at the time to keep the income tax rates from going down — and still hung on to control in both legislative chambers. “I will fault the Democrats. There was just no way that they were going to lose control of the General Assembly — in terms of the House or the Senate — in a 2014 election,” he says. A tax vote might have put at risk Democrats’ veto-proof majority in one or both chambers. But that majority is not all that useful, particularly in the House, given that it’s nearly impossible to get very Democratic member to support any given piece of legislation.

The Illinois Capitol
Credit Brian Mackey

During that same legislative session, a bipartisan group of lawmakers was also assessing the state’s business climate. A tax increase could have been coupled with some business friendly moves based on the work that committee had done. New revenues could have been paired with measures geared toward improving the business climate without provisions to weaken collective bargaining — such anti-labor concepts are at the core of disagreement over Rauner’s proposals. 

There were Democrats who advocated for new revenues and some who called for an extension of the tax rates. But, as Madigan noted at the time, there weren’t enough votes for it in his caucus.  Nor were there enough votes to make the spending reductions needed to balance the budget, he said. Bills with deep cuts were put up for floor votes in the chamber, and none of them got the support needed to pass.

Democrats weren’t eager to do all the heavy lifting on a tax increase — again.  No Republicans voted in favor of the 2011 increase. Yet, many of their districts and favored areas of state spending benefited from the revenue. They got all the reward with none of the political risk. 

If Quinn, the Democrat, won the 2014 governor’s race, Democrats could take the vote after the election. If Rauner won, why bail him out? He would see that an increase was needed to get the budget math to work, negotiations would ensue and Republican votes would be a condition of passage.

Once Rauner won, he called on Democratic legislative leaders not to take a tax vote before he took office. After he took office he worked with Democrats to patch the budget holes that had been left in the FY 2015 budget. But he soon made it clear that addressing the serious mismatch in revenues and spending in the state was nowhere near his top priority. 

“It was clearly a miscalculation in terms of how this might play out,” Redfield says. He says that in terms of trying to predict how Rauner would handle the situation, “There wasn’t a lot of hard evidence there. People were kind of more projecting: What would politics as normal look like? And obviously ever since the governor got elected we haven’t had a lot of normal politics.”

Miller says she is disappointed with the finger pointing that has gone on for the last 10 months but in some ways, it’s fitting. “Both sides blame the other side, and maybe they’re right to do that because they’re both to blame,” she says. “One of the most devastating things about this crisis is that it was absolutely preventable, and everyone knew it was coming. And now that we’re here, nobody seems to want to take responsibility for it.”

Republican and Democratic lawmakers seem to have put that blame game aside, at least enough to start looking for a way out of the impasse. Bipartisan groups are working on a compromise plan that they hope will result in a budget for next fiscal year.

Rauner has recently softened his rhetoric, saying early this week that he was “cautiously optimistic” about the progress the working groups have made. He also didn't draw a line in the sand on what items from his agenda would have to be approved for him to support a budget deal — and presumably new revenue. “I’ve said that there is no one thing, or two things, or three things that has to happen. … I’m willing to compromise across the board.” He said his only demand that is not negotiable is increased funding for K-12 and early childhood education.

But even if an agreement can be reached on the governor’s wish list, the task of crafting a balanced budget won’t be easy. Since the tax rates stepped down in 2015, nothing had been done to align state spending with this new reality. Court orders and an education funding bill — the only piece of the FY 2016 budget Rauner signed — have left the state spending at levels similar to what they were when the higher rates where in place. According to the comptroller’s website, the bill backlog is now an estimated $10.8 billion.

Redfield says that while it might have been impossible to predict the level of gridlock, lawmakers and the governor shouldn’t be surprised at how dire the state’s budget situation is. “No one assumed that [they] would go up to the edge of the cliff and then jump over. In a sense, join hands and then jump over. This obviously is a situation that there is not precedent for, but the idea that you couldn’t have seen what was building is just totally wrong. People have been talking about structural deficits for years.”

Illinois Issues is in-depth reporting and analysis that takes you beyond the headlines to provide a deeper understanding of our state. Illinois Issues is produced by NPR Illinois in Springfield.