(Editor's Note: This article was published first at Illinois Policy Institute).
The U.S. Treasury Department on May 10 issued guidance derailing Illinois Gov. J.B. Pritzker’s plan to use federal financial help to pay down debt issued to cover budget deficits during the pandemic. Pritzker and state Comptroller Susana Mendoza now say they plan to use higher than expected state revenues to pay off the debt.
But money is fluid, so he is essentially taking money from one pot rather than another. The practical effect is exactly the same as if the state had used federal aid to pay down the debt.
Treasury will send Illinois a total of $8.1 billion for state government, $2.7 billion for metropolitan cities including $1.9 billion for Chicago, $2.5 billion for counties, and $742 million for smaller cities.
The interim final rule released by Treasury “precludes the use of [Fiscal Recovery Funds] to cover the cost of debt incurred prior to March 3, 2021.” Initially, Pritzker and Mendoza indicated they would seek changes to the rule to allow their original plans to move forward, saying it was the most fiscally responsible use of the funds.
Balanced budgets were achievable through pension reform and spending restraint
If Illinois had adopted a fiscally responsible budget at the beginning of the pandemic, it would be able to use all $8.1 billion in federal funds for services rather than debt. Pritzker and Mendoza are right that eliminating short-term debt is the most fiscally responsible use of Illinois’ share of the $350 billion state and local aid in the American Rescue Plan. But that short-term debt was created by the Pritzker administration’s decisions, the result of a reckless budget adopted shortly after the pandemic began and the governor’s consistent opposition to structural fiscal reforms.
Pritzker’s fiscal year 2021 budget, which spans July 1, 2020, to June 30, 2021, had a nearly $6 billion structural deficit as enacted. Despite projecting a $4.6 billion drop in revenues from the pandemic’s economic impact, the budget actually increased spending by $2.4 billion or about 6%. To cover the gap on paper, the budget counted on up to $5 billion of borrowing and $1.4 billion from a progressive income tax proposal that had not received ballot approval from voters and was soundly rejected in November.
If Pritzker had instead pushed for spending to be held flat and for structural pension reform worth $2.4 billion in savings, he could have eliminated the deficit without tax hikes or borrowing.
Drastic revenue losses did not materialize in Illinois. Across the nation, state and local revenue losses have ranged from far less than expected to virtually non-existent. In fact, Governing magazine recently reported 29 states, including Illinois, have taken in as much or more revenue in the 12 months since the pandemic began as they did in the 12 months prior.
In May, the forecasting arm of the Illinois General Assembly raised its projections for the current fiscal year 2021 budget by a staggering $7.2 billion compared to one year earlier. And while at first glance revenues appear to have dropped by $1.1 billion in fiscal year 2020, this reflects about $1.3 billion in funds that were shifted to fiscal year 2021 when the income tax filing deadline was extended last year to July 15.
If those revenues are assigned to their original fiscal year 2020, state revenues have so far grown every year Pritzker has been governor.
The expected drop for fiscal year 2022 largely reflects $2.4 billion less in federal funds. The enhanced Medicaid matching rate Congress passed during the pandemic is expected to expire in September 2021, but higher state Medicaid costs should end along with it as the public health crisis subsides.
Federal borrowing should not have been necessary
Illinois was the only state to rely on emergency borrowing from the Federal Reserve to shore up its budget during the pandemic. Pritzker borrowed $1.2 billion in June 2020 with a 3.83% interest rate and a one-year repayment term. After voters rejected Pritzker’s proposed progressive income tax hike in November, he secured another $2 billion loan with a 3.42% interest rate to be repaid over three years.
After Biden signed the American Rescue Plan in March, Illinois indicated it would use a portion of its federal funds to pay off what it owes to the Federal Reserve along with other short-term borrowing from state funds. The Treasury rule as currently written prevents that, but Illinois still has time to try and change their minds.
“The guidance is interim and not yet final, and we will continue to evaluate the allowable uses of ARP funds in conjunction with state needs,” said Melinda Caliendo, a spokesperson for the state treasury. Governments and interested members of the public can submit comments and request changes for up to 60 days after the interim rule is adopted. But Illinois has just days to pass a budget, with a May 31 deadline.
In her response, Mendoza told Treasury that Illinois’ borrowing “was essential for the continued performance of government services” during the pandemic. Because the state could have balanced the budget with just two fiscally responsible policy changes, pension reform and flat funding, this clearly is not the case. Additionally, 49 other states were able to manage their budgets without borrowing from the Federal Reserve. But Mendoza is right to say using the funds for repaying the debt is “entirely consistent with the spirit of the American Rescue Plan.”
Mitigating economic harm from the pandemic, replacing lost government revenues, and supporting the funding of essential services are core purposes of the fiscal recovery funds. Directly or indirectly, repaying short-term borrowing incurred during the pandemic fits each of these purposes.
Remaining federal funds should be used to bolster economic recovery
Bond Buyer reports Illinois still owes $2.175 billion to the Federal Reserve and $600 million to other state accounts. That would still leave about $5.4 billion in federal funds for other uses.
State Rep. Tom Demmer, R-Dixon, has suggested using the aid for economic relief to spur the state’s job recovery. “We really need to ask: Who needs those relief funds the most? Many, many communities in the state have businesses, especially in the food, restaurant, bar, hospitality industries, that have been dramatically impacted by the COVID restrictions and closures. And I think that we should better design programs to deliver aid to those businesses,” he said.
Pritzker in his February budget address endorsed the principle of reserving a share of federal aid for business relief. He has yet to propose specifics and is currently pushing nine tax increases, mostly on businesses, worth at least $932 million. In fact, the most recent update from the governor’s budget office shows he is counting only nearly $1.5 billion in “revenue enhancements,” indicating additional tax hikes could still be on the table. The governor had previously backed a plan to withdraw pandemic tax relief from around 440,000 small businesses.
Before considering what type of economic relief Illinois can provide to businesses, a logical first step would be to avoid imposing additional harm. Federal aid and higher revenue projections mean lawmakers should reject all of Pritzker’s proposed tax increases to ensure businesses are in a position to create jobs and grow wages in the post-pandemic recovery. Illinois’ 7.1% unemployment rate remains higher than the nation and the Midwest.
Additionally, the state should use federal funds to replenish the unemployment trust fund emptied during the pandemic. If it doesn’t, it will have additional federal loans to repay with interest. It also risks automatic unemployment insurance tax hikes on businesses that current law mandates until the trust fund is refilled.
Fiscally responsible states will be able to use a much larger share of their federal funds for economic relief. For example, Wisconsin Gov. Tony Evers announced he will spend $2.5 billion out of a $3.2 billion total to help businesses. In Florida, Gov. Ron DeSantis recommended using federal funds for various forms of economic stimulus and infrastructure spending, including $1,000 bonuses to first responders. The budget passed after negotiations with the legislature included many of those suggestions, including the bonuses.
Illinois will need to use much of the aid for debt service, directly or indirectly. Failing to pay off that debt would harm Illinoisans. But that debt only exists because of a fiscally irresponsible budget adopted during the pandemic.
Illinois needs significant fiscal reforms to be able to continue providing essential services in the long run at a tax burden that doesn’t ruin its economy. Most important among these is a constitutional amendment to allow true pension reform. A five-year fiscal plan from the Illinois Policy Institute, Illinois Forward, provides lawmakers with a road map to success.