Rauner’s Budget Dilemma

In less than three months, Gov.-elect Bruce Rauner has to present a budget that is  balanced—and do so with $4 billion less available revenue than is in the present $35 billion  general funds budget, because of the automatic January 1 rollback of much of the 2011 income  tax increases. 

It will be a difficult task. Indeed, I think it will be nigh impossible. I wish it were  otherwise, as a lower tax burden would make our state more competitive. Some background: State government has already been trimming operating expenses. For  example, state government employment fell from 87,000 in 2002 to about 64,000 this past year,  more than a quarter of the workforce. 

According to the Civic Federation of Chicago, major Illinois people services agencies all  had significantly less money in 2015 than in 2011: human services, down 5 percent; education,  12 percent; higher education, 7 percent, and children’s services, 7 percent. 

The major culprits of increased spending are Medicaid, the federal-state program of  health care for low-income persons, pensions, and employee healthcare. 

Nobody has figured out how to tame the Medicaid beast, which now costs Illinois more  than $20 billion a year, about half of which is state money, the other half from the federal  government. 

While other major agencies were being cut between 2011 and 2015, Medicaid spending  was up 22 percent. 

Pension costs increased from about $2 billion a year in the 2000s to $7 billion this year.  The increases were to begin fulfilling a plan to make the five pensions systems eventually  solvent for the long-term. The higher costs will persist for decades. 

Where to cut? Pensions? The Illinois Supreme Court has signaled that it will probably not  allow a modest reduction in payments enacted by the legislature in 2013. 

Rauner could propose to put new employees on 401-k plans instead of defined benefit  pensions, but that won’t have any impact on pension costs for years. 

Indeed, state pension costs may have to go up in Rauner’s first budget to offset the fact  the systems have lowered their forecasts for investment income. 

Medicaid? The state can continue its program of scrubbing the rolls of people who are no  longer eligible for Medicaid because of now having higher incomes or because they live out of  state and were free-loading.  

But offsetting this is an increase in the number of persons who have previously been  eligible for Medicaid and were spurred to sign up by the publicity surrounding Obamacare. Medicaid services could be cut somewhat, as Illinois provides more services than  required by the federal government. Yet Rauner has said he wants to be compassionate, and he  faces a veto-proof Democratic legislature that would oppose him on further cuts in services. Cut out “waste and corruption”? Only 14 percent of the total state budget goes for  “general government,” which pays for operating the day-to-day services of our government and  which budgeteers would scour for waste, much of which has already been cut. What I am saying is it will be tough to cut the budget big-time. Instead, Rauner’s budget  people will instead be fending off increases in Medicaid and pensions and efforts to replenish  funding for agencies such as education.

Rauner has said that he might support taxing sales on services, as Iowa does. Illinois has a narrow tax base. That is, the rates are high but the yield is low. Over the  years, we have taken groceries and retirement income out of the tax base. There are also scores  of exemptions from the sales tax. 

If we put all the exemptions and credits back in the tax base and taxed a wide array of  services, the state could generate almost $12 billion more in revenue and thus reduce the  individual income tax from 5 percent to 2 percent. 

But such actions would run afoul of Nowlan’s Iron Law of Politics, to wit: you cannot  take back something once it has been given. For example, who in the legislature would you get  to sponsor a bill to tax retirement income, even though it was taxed originally? 

Rauner will have to get the state to think long term. Our fiscal problems have been  percolating for decades. They won’t be solved in a year or two. 

I recommend the incoming governor establish a high-powered task force to take the  budget apart, piece by piece. The task force would report back that the budget situation is even  worse than suspected, which it is.  

The task force could then recommend a 10-year plan to set things straight. Even then, it  won’t be easy.