To:

From:
Date:
Re:

Governor-elect Bruce Rauner

Tim Nuding, Budget Director for the Transition
December 30, 2014
Sins of the Past and Dishonest State Budgets

As you know, the State of Illinois Fiscal Year 2016 budget as well as the current Fiscal
Years budget contain massive holes that can ultimately only be solved by implementing
major, structural changes to the way state government operates.
Before detailing solutions, it is important to continue outlining to the public how Illinois
arrived at the worst financial crisis in the nation a crisis caused not by the income tax
rolling back, but by the sins of the past.
Illinois massive budget hole is the direct result of previous Governors and General
Assemblies giving away benefits they knew the state couldnt afford, deploying
fundamentally dishonest budget practices and kicking the can down the road.
Our challenges are not simply a revenue problem. We have a structural problem decades
in the making. Illinois government must undergo major structural reforms and
implement honest budget practices that together address the long-term challenges of
the state.
The following practices and obstacles deserve special mention:
Borrowing to Replace Revenue
This years budget, as well as many in the past, borrows money and calls it revenue.
That behavior is clearly irresponsible and, frankly, usurps the balanced budget language
in the Illinois Constitution, which says, [t]he General Assembly by law shall make
appropriations for all expenditures of public funds by the State. Appropriations for a
fiscal year shall not exceed funds estimated by the General Assembly to be available
during that year."
In other words, the balanced budget provision in the Constitution technically applies
only to appropriated funds and "estimated" revenues, and past Governors and General
Assemblies have driven a freight train right through that loophole. They have been all
too willing to skirt any notion of a structurally balanced budget with clever accounting
gimmicks that get around any balanced budget requirements.

Potential Repayment of Interfund Borrowing - $650 million

As referenced in previous memos, the current FY15 budget was built on dishonest
budgeting because it included $650 million from interfund borrowing.
If this interfund borrowing needs to be repaid, it would show up as an expense in
the FY16 state budget, reducing resources that could be available for other
purposes.
Eliminating interfund borrowing in the current FY15 budget would require
closing an additional $650 million hole in a broken budget that according to state
agencies is already $760 million in the red.

Pension Obligation Bond Debt Service Payments - $1.4 billion

Past Governors and General Assemblies have chosen to borrow funds through the
sale of bonds in order to make the annual pension payments.
This happened because the General Revenue Funds that should have been used
to make the pension payments were allocated to other areas of the budget.
Instead, the decision was made to sell bonds and deposit the proceeds into the
pension systems in order to make the required state contribution.
Taxpayers are on the hook for pension bond debt service payments for 18 more
years.

Ignoring Additional Balanced Budget Requirements

Adding to the states budget problems, past General Assemblies appear to have ignored
the Balanced Budget Note Act, which was enacted on January 1, 1992.
The Act says each supplemental appropriation bill shall include a discussion of the
proposed reduction in other appropriations or increases in State revenue that would
allow the measure to be adopted without adversely affecting the State budget for that
fiscal year.
A review of past supplemental appropriation bills finds that previous General
Assemblies skirted this law, which was put in place to prevent precisely the type of shell
games that have occurred in the past and led to mountains of unpaid bills.
The current fiscal years budget, which according to state agencies is $760 million in the
red even if you count the interfund borrowing as revenue, seeks to use the same
dishonest policies of the past.

Giving Away Unaffordable Benefits and Kicking the Can Down the Road
For years the state made a bad habit of increasing pension benefits while refusing to pay
for them. Now, with the worst credit rating and the worst unfunded pension liabilities of
any state in the nation, taxpayers are being asked to foot the bill for sweetheart deals
given away in past years.
Payments on Unfunded Pension Liabilities - $4.6 billion

The scheduled state General Revenue Fund contribution to the pension systems
in FY16 totals $6.6 billion.
Of that amount, about $2.0 billion accounts for normal costs, which represents
the cost of benefits newly earned each year by active members of the pension
systems. Said another way, if the pension systems were 100% funded, the
payment that would have to be made to the systems to maintain 100% funding
would be $2.0 billion.
Unfortunately, the state pension contribution also includes an amount to pay on
the outstanding unfunded liabilities of the systems. These unfunded liabilities
have been incurred over a period of time in part because of poor decisions to
expand pension benefits and underfund the pension systems.
o A total of $4.6 billion of the pension payment is to pay for the sins of the
past, or to pay the unfunded liabilities incurred in past years.

Conclusion
When tough decisions are put off for another day, when the can is kicked down the road
to be dealt with by a future generation, this is what happens. Illinois taxpayers,
schoolchildren and those citizens who need critical state services are being strangled by
these additional costs that were incurred because of their governments failure to make
responsible financial decisions.