Rich Miller: Prepare for some state government belt-tightening in the months ahead

The Governor’s Office of Management and Budget released a revised state revenue and spending forecast last month for the current fiscal year and it’s pretty good. Its projections for next fiscal year, however, were not nearly as strong.

Projected Fiscal Year 2024 revenues have been revised upward by $1.4 billion, according to GOMB. However, “most of this fiscal year 2024 revenue forecast revision is assumed to be one-time in nature,” the budget office warned.

Spending also has been revised upward by $969 million, leaving a $422 million net surplus.

According to the governor’s office, that revised spending estimate includes the $160 million the governor is spending on migrants. “With the $160 million we’re spending, we still have a $422 million surplus,” Pritzker spokesperson Jordan Abudayyeh said.

Unlike most of the revenue, many of the cost increases don’t appear to be one-time. And, of course, it’s unknown how long the migrant crisis will last, but it could very well wind up being a semi-permanent budgetary pressure.

That net $422 million surplus, if the estimates hold, will come in handy because GOMB is projecting fiscal 2025′s revenues will be $480 million below its revised fiscal 2024 estimate. That, combined with increased spending, will result in a projected deficit next fiscal year of $891 million. The deficit is expected to rise to $1.4 billion in fiscal 2026 and $1.66 billion in fiscal 2027.

Pension expenditures, including for the Chicago Teachers’ Pension Fund, are projected to be $10.14 billion this fiscal year, or 19.7% of projected General Funds expenditures including the supplemental appropriations costs, which is a little below where they’ve been for the past few years. Pension payments will rise to $10.5 billion in fiscal 2025, or 20% of all projected state General Funds spending. And they’ll go up $10.8 billion in fiscal 2026, for the same 20% of all projected General Funds spending.

In other words, while the pension payments will be high, they’ll be stable and sustainable as a percentage of the budget – as long as the projections hold up.

Education costs are projected to rise by $952 million between this fiscal year and fiscal 2026, according to GOMB. The costs as a percentage of the budget will go from 25% this year to not quite 26% of the budget in fiscal 2026. Human services costs will rise $652 million by fiscal 2026, and healthcare costs will rise $614 million during the same period.

Let’s get back to that projected $891 million deficit next fiscal year, which starts in July.

Can the projection be trusted? After all, the global pandemic threw every economist off their game. Abruptly shutting down the world’s economy and then trying to turn it back on again, with gigantic bottlenecks and labor shortages emerging everywhere amid massive and sustained government stimulus, resulting inflation, rising interest rates and an economic boom just had no precedent.

In November 2020, near the height of the “second wave” of COVID-19, the governor’s budget office projected the fiscal 2024′s budget would have about a $4.7 billion deficit with a state unpaid bill backlog of $24.5 billion. Instead, we’ve had years of budget surpluses, which along with prudent budgeting have wiped out the bill backlog, allowed the state to put $2 billion into a rainy day fund and pay off much of its non-capital debt while prepaying some pension obligations. Illinois’ bond ratings, which once neared junk status, have steadily risen to the “A” level with all three ratings agencies.

But even before the pandemic, in the fall of 2019, fiscal 2024′s deficit was projected to be $3.1 billion with $16 billion in backlogs. A year earlier, in 2018, the current fiscal year’s deficit was projected to be $3.2 billion with a $20.5 billion backlog.

So, again, can the latest projection be trusted? Not completely, but it should still be heeded. After a period of being mostly careful not to drastically increase the state’s base spending, and instead using much of the unexpected revenue bonanzas for one-time items, the legislature and the governor added a ton of money to base spending last spring. If revenues do fall off next fiscal year, base spending will likely have to be cut.

The governor’s budget address is three months away, so the budget-making process is about to begin. We’ve seen countless forecast adjustments during the past few years, so maybe this one will change, too. But, in the meantime, everyone should prepare themselves for some belt-tightening in the months ahead.

• Rich Miller also publishes Capitol Fax, a daily political newsletter, and CapitolFax.com.