Peering Over Illinois Fiscal Cliff

Abstract

Are we looking at a crisis or a chronic condition? Illinois’ fiscal situation has been precarious for at least a decade – and much longer if pension liabilities are considered. From FY 2003 to 2008, which were good years for economic activity and revenue collection, the General Assembly and governor approved budgets with spending well in excess of revenue. From that shaky starting point, the Great Recession of 2008 triggered several years of fiscal crisis for the state. It is reasonable to ask whether the situation can still be defined as a crisis, “an unstable condition…involving an impending abrupt or decisive change,” but that would miss a more important point. Illinois is still mired in a chronic condition that predates the recession and constrains government’s ability to implement and administer policies. Illinois’ fiscal condition contributes to economic and policy uncertainty for citizens, businesses, nonprofit organizations, and local government. After the recession tipped the state from chronic shortfall to crisis, Illinois muddled through several years by taking on more debt, using one-time sources of revenue, paying bills late, and with substantial fiscal help from the federal government. By late 2010 it had become clear that major adjustments would be necessary to operate in a fiscally responsible manner. Faced with intense pressure to take some corrective action, the Illinois legislature and governor agreed on a package of fiscal policies in January 2011. The policies included temporary increases in the personal and corporate income tax rates and limits to General Funds spending. In terms of revenue, the most important changes were the increase in the personal and corporate income tax rates. Illinois has a chronic, structural fiscal problem and must either take action to reduce spending, increase revenue, or some combination, to avoid facing fiscal imbalances for many years to come.