Illinois finally has a budget plan after two years. Now, it's time for Indiana's neighbor to start paying bills.
The Democratic-controlled Legislature's vote last week to create a $36 billion framework over Republican Gov. Bruce Rauner's vetoes ended the nation's longest fiscal stalemate since at least the Great Depression. At the core of the budget was a $5 billion income tax increase.
The tax hike is retroactive to July 1, and the state could start seeing some additional money within weeks. But after unchecked "autopilot" spending that outstripped incoming revenue by $600 million a month, Illinois has a $14.7 billion jumble of overdue bills.
The tax increase also does nothing to directly address the haunting, $130 billion shortfall in pension obligations to retired and current state workers.
The debt-reduction plan also includes more debt, although slightly less costly. It allows Rauner to sell up to $6 billion in bonds, on top of the tens of billions of dollars Illinois owes from past loans. The idea is the interest owed on bonded indebtedness would be less than what is owed on overdue bills. The state must pay 1 percent per month on any bill unpaid for 90 days.
But while less, the state can expect to pay double what a more financially sound state would pay on bond-sale interest — as low as 2 percent. That's because the state's creditworthiness has been downgraded amid the budget crisis. On a $480 million sale last fall, the state is paying 4.2 percent, and that was before major credit-rating agencies knocked down the rating further. One, Moody's Investors Service, said a downgrade to "junk" status could come regardless of a budget deal.
More immediately, Democratic Comptroller Susana Mendoza predicts there will be enough money to cover basic services in August; she had warned that without a deal, she would fall $185 million short. If added income tax revenue isn't sufficient, the law allows for borrowing or otherwise taking $1.5 billion from money accumulated in state funds created for other purposes.
Mendoza said in a YouTube video that she would begin by paying bills that draw matching dollars from the federal government, such as those covered by the Medicaid health care program. Bills with high late payment interest also get priority.
"Our state's schools and universities will receive critical funds, giving them the chance to open on time in the fall," Mendoza said. "State vendors will still have to wait longer than they'd like to be caught up on payments. But there is finally a path forward."
The individual income tax rate is now 4.95 percent, up from 3.75 percent. Corporations will pay 7 percent instead of 5.25 percent.
The Illinois Department of Revenue updated its payroll withholding guide to reflect the new tax rate, spokesman Terry Horstman said. Larger employers must make semi-weekly withholding payments, so those should begin this month. Smaller employers and taxpayers not on a payroll are required to file estimated payments by mid-September, at which point money will start coming in at the higher rate.
In the budget year that ended last month, Illinois collected $17.8 billion in personal and corporate income taxes, an increase of just 1 percent from the previous year, according to the Legislature's bipartisan Commission on Government Forecasting and Accountability . Legislative sponsors of the tax hike estimated it would bring in $350 million more per month, though that likely depends on economic growth in the state.
Legislative Democrats boast that the $36 billion budget they approved is not only $1 billion less than Rauner himself proposed, but $3 billion less than the "autopilot" government spent annually. But Rauner's administration complains the budget still is $1 billion or more out of balance.
The legislation also provides some relief for nonprofits that have provided services without payment and college students who have had to make do this past school year without access to the state's needs-based Monetary Award Program. They will receive money from the more than $800 million in tax revenue that accumulated in special funds but went unspent because lawmakers hadn't appropriated the money.