Taxpayers’ Federation of Illinois
2012 Statement of Principles

 The State Operating Budget

Illinois state government is primarily a “funder” of government services rather than a “provider” through direct service delivery. The vast majority of services are provided by local governments, higher education institutions, and by non-profit and for profit healthcare and human service providers.

Until the recent tax increases enacted in January 2011, the state had been facing a critically unbalanced budget with spending far exceeding existing revenues.  Due to the recession own source revenues had fallen dramatically with no corresponding reduction in program costs or eligibility. The state was financing the operating deficit through multi-year borrowings, deferral of vendor payments, and the non-recurring “federal stimulus” program.

In  January 2011, this situation was addressed but not in the way that we had urged.  We had advocated that the first step should be to identify cost savings through program elimination, eligibility curtailment, or service cost reduction.  The state’s response however, was to enact a mammoth tax increase with little achieved on the cost containment front.  The plan needed to include cost savings associated with the unfunded pension and employee/retiree healthcare programs.  Employer/employee cost sharing, benefit accrual rates, age eligibility, and cost of living adjustments need to be revised to more current “private” sector standards.  Our leaders had taken initial steps to modernize our pension structure, but the changes are only for new employees hired after January 2011.  We have urged changes for existing employees as well.  The Federation believes only benefits accrued to date for current employees are protected by the “non-diminishment” clause of the state constitution.    There were also changes enacted to the state’s Medicaid program which we supported, but those savings will not be achieved until sometime in the future.  More needs to be done on the spending side before we rely on the revenue side to be the primary response to the state’s fiscal problems.

 Further, the plan adopted by the state is designed to address the operating budget for the next four years.  Most of the tax increase that is used to “balance” the budget will fall back close to previous levels opening up a budget chasm that will dwarf the previous one.  This period of time must be used to re-engineer state and local government programs to assure our citizens that we will go forward with an efficient government that can live within its means.

Illinois’ Tax Structure

Illinois’ state and local tax burden has been changed dramatically with the recent tax changes, increasing our tax burden ranking from 27th in the nation to approximately 7th , as measured by a percentage of gross state product.  The burden ranking will return to more moderate levels if the tax rates are permitted to revert to the level set forth in the current plan.

The long term fiscal health of the state is dependent upon our citizens having opportunities for good jobs and their resulting consumption of goods and services. A tax structure that encourages investment in Illinois, that produces those opportunities, is a prerequisite to the state’s fiscal well being.  We must prepare now for regaining our competitive position.

A state and local tax structure that is balanced between the three main sources of revenue (property, income, and sales/excise taxes) that are commonly used by our country’s state and local governments should be our goal. Significant reliance on a unique source of revenue that is generally not employed in other states causes concern by investors about our job creation and investment environment.

Illinois is highly dependent upon gaming revenues, including lottery, riverboat gaming, horseracing, and potentially video gaming, to support government operations and capital programs.  Dependency on gaming, which  has been criticized as regressive and undependable due to economic conditions, should be carefully scrutinized before we become further reliant on this revenue source.

In addition, significant reliance on revenue streams that have little natural growth potential to finance governmental programs that have regular inflation pressures and increased demand due to demographic changes is not sustainable. The state should be careful not to over rely on “no growth” revenue sources.

The Capital Budget and State Assets

The state should have a “rolling” five year capital investment plan that will assure the state’s assets are maintained and that there is investment in new assets that are required to keep Illinois competitive with other states for private investment and job creation.   The plan should not include spending for “special projects” that are generally considered outside the scope of maintaining the state’s infrastructure.

The capital investment plan can be funded with bonds to be serviced and retired over the expected life of the assets for which the proceeds were invested.  The capital budget and debt service should be supported by a dedicated portion of the state’s recurring own source revenue streams.  The current plan for funding the capital plan is dependent upon an untried revenue source, video gaming that has yet to be implemented.  This funding source for retirement of the bonds, contemplated in the capital plan, needs to be re-visited in order to determine its viability and policy justification.

It is appropriate for the state to evaluate its capital assets from time to time to determine whether the sale or other form of privatization is in the public interest.  The proceeds from the disposition should be dedicated to the retirement of debt (including unfunded pension and post-retirement healthcare obligations).  Use of proceeds from the sale of assets to finance the state’s capital needs is not sustainable and the asset disposition proceeds will not be available for future capital programs.  Proceeds from the disposition of an asset should not be used for operations of existing government programs. 

Illinois Accumulated Debt

The state has historically incurred debt to finance its capital program, but more recently has used debt financing and delayed payments to vendors to finance operating deficits including required pension payments.  The unfunded liability associated with pensions and other post employment benefit (retiree healthcare) along with capital debt has accumulated to a projected $180 billion.  Illinois’ unfunded pension debt is the largest in the country.  This debt burden has resulted in downgraded Illinois credit ratings resulting in higher interest costs on capital and other debt issues.  Servicing this debt will require a significant portion of future state resources, crowding out the ability to provide and fund current government services.  Pension reform will address some but not the entire challenge Illinois faces.  Investors and job creators need assurance that the state’s fiscal plan, including debt service will not take away from the ability of the state to compete as to its tax burden and the ability to fund current services.

Government Structure

Illinois has more units of local government than any other state in the nation.  It is difficult for our citizens to know who they should hold accountable for their local services and the associated tax burden when the functions of government are so widely dispersed. It is not uncommon that a taxpayer’s property is within the governmental boundaries of 8-12 separate units of government.   In some cases they may have similar or the same government functions, i.e. roads and bridges.

Government economy and spending prioritization is hard to achieve with so many governmental units.  The re-engineering effort should focus on the proper alignment of local government functions, not necessarily where those functions have been assigned in the past but where they could be done more efficiently in the future. 

The state should continue to find ways to encourage governmental consolidation and intergovernmental cooperation and efficiency. At a minimum, the state should not allow the creation of new special purpose forms of local government. If a new function of government is deemed advisable, it should be incorporated into the function of existing general purpose governments. We will support initiatives to streamline our governmental structures to produce greater accountability, efficiency, and transparency of operation and purpose.