Analyzing the financial condition of a large organization like the State of Illinois is a complex task, to put it mildly. Our state economy would be in the top 40 economies of the world if it were a separate nation. Governing such a large economy requires a large organization with many working parts. Trying to narrow the State's financial condition down to a few pieces of information will necessarily miss some essential aspects of the situation. But in the following few paragraphs, we will try to describe the financial condition of Illinois at the end of the last fiscal year.
It may surprise some, but we will not be talking about the state budget, except in one particular area and then only in passing. There are three reasons for this approach. First, the budget is a plan for the State's finances. It is based on several assumptions that may or may not be realized as the fiscal year progresses. Second, the most significant part of the State's budget, and the one that receives the most attention, is for what is called the General Funds. These funds are only part of the overall financial picture of the government. For example, the only thing recognized in the General Funds concerning pensions is that year's contribution. This essentially takes as given that pension systems are in good shape financially, which is hardly the case. Finally, as the budget reflects only one year of financial planning, it lacks information on the government's long-term obligations and long-term assets. An organization may have a sound financial plan for a year but be hampered by poor past decisions.
Therefore, we will first analyze the State's Comprehensive Annual Financial Report (CAFR), published by the Illinois State Comptroller. These documents show the results of operations of the state government after the fiscal year for which they are compiled. These are the government's "books" to use a colloquial business term. The first figure that will cast light on the financial position of the state government is the Net Position of the State, a measure of its financial assets above its obligations. As put by the Comptroller: "When examined over time, increases or decreases in net position measure whether the State's financial position is improving (increases) or getting worse (decreases)."[1] In other words, a negative Net Position is a bad thing; a positive one is good. Here, the evidence is clear that the State is in poor financial condition and has continued to worsen through the years. The table below shows the State's Net Position over the last 10 years. Except for fiscal years 2013 and 2014, the State has consistently had decreases in Net Position in excess of $2 billion per year, with most years since 2016 showing a decrease of more than $4 billion. One thing to note with this data is that fiscal year 2020 was adversely affected by the income tax filing deadline change from April 15 to June 15 during the COVID crisis. That shifted some income tax revenue from 2020 to 2021 (which was thus positively affected by the shift).
Table 1. Change in Net Position, State of Illinois, Fiscal Year 2012-2021.
Source: Illinois State Comptroller, Comprehensive Annual Financial Report, 2012-2020, Changes in Net Position. Illinois State Comptroller, Interim Annual Comprehensive Financial Report Highlights, 2021, Statement of Changes in Net Position.
One might reasonably ask what leads to this consistent imbalance between the state’s revenues and expenditures. This is a question that is somewhat difficult to answer. Some of the answer comes down to a philosophical question of whether expenditures are “too high” or revenues are “too low”. In other words, should any deficit be resolved by raising revenues or cutting expenditures. We are agnostic on this point. We simply identify expenditures that have been growing faster than the average expenditure growth rate, and revenues that have been growing more slowly since 2013, the last time the state’s finances were closer to balance. We use 2019 as an ending data for the analysis, as fiscal year 2020 spending and revenue was affected by the COVID pandemic and associated policy responses.
The data we use from this analysis comes from the Fiscal Futures Project housed at the Institute for Government and Public Affairs at the University of Illinois.[2] They use Comptroller's Office data to produce a unified picture of state finances over time. Because of their methodology, they produce data at a more granular level than the state’s financial reports. Table 2 shows that the expenditures that have been growing more quickly are a combination of certain agencies, along with “mandatory” expenditures such as State Employee Healthcare Costs, the State Pension Contribution, and Debt Service. The revenue sources that have been growing markedly slower than the overall revenue growth are federal grants along with sumptuary taxes on gambling, cigarettes, and liquor, and Corporate Income Taxes, which is the largest source that has been growing slowly.
Table 2. Average Annual Growth Rates for Various Revenue Sources and Expenditure Categories, 2013-2019.
Source: Fiscal Futures Data, Institute for Government and Public Affairs, University of Illinois, for the data and Author’s Calculations.
The natural question at this point is whether such poor financial performance could be caused by factors affecting all states. However, when one compares Illinois' fiscal record with other states, it is evident that Illinois is an outlier in its sustained poor financial performance. The graph below shows the change in Net Position for Illinois since 2010 compared to the median change for all states and the median change for the 10 largest most populous states. The data is scaled by dividing the change by total General Revenues for the state. In only two years since 2010 did Illinois' financial performance approach the median. From 2015 to 2020, Illinois was one of the four worst states in terms of fiscal performance. Therefore, we can conclude that there is something that has caused Illinois to consistently underperform other states in terms of financial outcomes.
Figure 1. Change in Net Position as a Percentage of General Revenues, Illinois and Other States, Fiscal Year 2010-2020.
Source: Comprehensive Annual Financial Reports for all 50 states, Years as Indicated, Statements of Changes in Net Position (in some states called Statements of Activities).
Taking a forward-looking approach to analyzing Illinois state financial condition, the graph below shows total state revenue and expenditures from 1998 to 2020 (the solid lines) from the Fiscal Futures Project, along with a forecast over the next 10 years using a simple projection calculated from the long-term trend in the data (dashed lines). In this graph, we would want to see that revenues are growing faster than expenditures over time. The deficit (the difference between expenditures and revenues) would be shrinking in that situation. Instead, what we see in the graph is that expenditures are projected to grow slightly faster over time. Therefore, if longer-term trends continue at their current rate, the State's financial condition will continue to worsen over the foreseeable future.
Figure 2. Revenues & Expenditures, State of Illinois, 1998-2020 with Projections to 2030.
Source: Fiscal Futures Data, Institute for Government and Public Affairs, University of Illinois, for the data and Author’s Calculations for the projections.
There is some good news about Illinois state government finances in the short-term, but with a caveat. Recent budget sessions have produced a budget (in contrast to the "budget impasse" that gripped the State in Fiscal Years 2016, 2017, and part of 2018). Those budgets have shown improvements in the General Funds budget balance, a possible sign that the State is making progress toward a better financial future. The most recent budget included plans to pay down the State's unfunded pension liability, a significant contributor to the State's negative Net Position, and put money aside in a "rainy day fund" to offset the effects of economic downturns. These are sound investments and signs that the State may be turning a corner in its financial condition.
There are at least two caveats that go with this observation, however. The first relates to the unique way that Illinois accounts for its finances. The State uses a method of accounting that does not conform to Generally Accepted Accounting Principles (GAAP). It allows the state to use revenues from the first two months of the next fiscal year to pay bills from the current fiscal year.[3] This is in essence balancing 12 months of bills with 14 months of income. Each year the State's auditor issues an “Adverse Opinion” note in their audit report of the Traditional Budgetary Financial Report criticizing the State for this practice.[4] Still, the method remains in force. The effects of this method of accounting make the current year's budget appear more balanced than it really is. The impact is that the State constantly borrows from future revenues. For example, in fiscal year 2021, the State's General Funds finished the year with a $975 million surplus using the State's method of accounting. If the State had used GAAP accounting rules, it would have shown a $2.8 billion deficit in the General Funds for the fiscal year. The difference comes from fiscal year 2022 revenues.
The second caveat pertains to the relatively rare circumstances that all state and local governments are experiencing due to the COVID pandemic. The pandemic reduced some revenue sources significantly, especially income and sales taxes. However, it also increased others significantly, including federal aid. Also, spending on categories such as Medicaid expenditures increased due to pandemic-related demand for services.
While the Governor assured the State in his recent State of the State address that the good budget situation was not due to COVID-related federal aid, it is difficult to reconcile this with the data. Using the Fiscal Futures data, in fiscal year 2020, revenue from "own sources" like taxes, fees, and charges fell by $250 million. But federal government transfers rose by nearly $6 billion. Meanwhile, spending on functions where increases were likely to be realized during the pandemic like Medicaid, K-12 Education, Public Health, and the Department of Human Services rose by approximately $4.5 billion. Therefore, it is likely that there was a substantial amount of federal aid that flowed through to the overall budget. The question of whether the State can sustain its recent budgetary progress remains open.
One last indicator of the State's financial health is its credit rating. In 2021, Moody's and Standard and Poor's (S&P) rating agencies upgraded the State's credit rating from BBB- (S&P)/Baa3 (Moody's) to BBB/Baa2. The prior credit rating was the lowest “investment-grade” credit rating possible, just above “junk bond” status. Another large rating agency, Fitch's, did not raise the State's rating but increased its outlook. While the administration heralded the credit rating upgrade as the start of a "comeback," we note that the State is still the lowest-rated State, one (S&P) to two (Moody’s) notches below New Jersey's rating and far below other states.
In summary, the State has had a history of relatively poor financial management leading to a deteriorating fiscal condition. There are some rays of hope that a turnaround is happening, but longer-term trends show how difficult it will be for the State to achieve balance over the long run. We hope that Illinoisans will continue to monitor the State's financial condition and hold political leaders accountable for any slippage in the State's financial situation.
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[1] Illinois State Comptroller. (2022). Interim Annual Comprehensive Financial Report Highlights for the Fiscal Year Ended June 30, 2021. p. 1.
[2] https://igpa.uillinois.edu/policy-initiatives/fiscal-futures-project#:~:text=The%20Fiscal%20Futures%20Project%20is%20dedicated%20to%20informing,budget%20concerns.%20Research%20Area%3A%20Fiscal%20and%20Economic%20Policy
[3] 30 ILCS 105/25 (b).
[4] Illinois State Comptroller. (2021). Traditional Budgetary Financial Report for Fiscal Year 2021. Independent Auditor’s Report, p. 21.
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Kenneth A. Kriz, Ph.D. is the University of Illinois Distinguished Professor of Public Administration in the School of Public Management and Policy at the University of Illinois at Springfield. Dr. Kriz conducts research focusing on subnational debt policy and administration, public pension fund management, government financial risk management, economic and revenue forecasting, and behavioral public finance. A nationally recognized scholar for his work on public finance and quantitative data analysis, Dr. Kriz has published over 50 academic journal articles and book chapters along with a textbook on quantitative research methods in public administration and a co-edited book on tax increment financing, a frequently used economic development incentive. Dr. Kriz has consulted with several public and nonprofit organizations on financial and economic matters, including the cities of New York City, Minneapolis, St. Paul, Omaha, and Wichita, and the states of Nebraska and Kansas. Dr. Kriz served as Vice-Chairperson of the City of Omaha, Nebraska Civilian Employees Retirement System from 2006 to 2011 and on the Board of Trustees of the Wichita, Kansas Police & Fire Retirement System and on the Joint Investment Committee for the city’s pension funds from 2014 to 2018. Dr. Kriz was a Fulbright Scholar in the Republic of Estonia during academic year 2004-05 and a Fulbright Senior Specialist in the Czech Republic in 2008.
