Economic turmoil awaits state in post-Blagojevich era

SPRINGFIELD - With a state focused for weeks on the antics and ouster of former Gov. Rod Blagojevich, many state lawmakers fear the proceedings masked an economic disaster already engulfing the state, one likely to force higher taxes and austere cuts.

Cash coming in from sales and income taxes has plummeted alongside the national economy, leaving billions in unpaid bills stacked up in state offices. With no end to the economic malaise in sight, those shortfalls will undercut spending on everything from schools to health care, prisons and police in the next budget and possibly beyond.

At the same time, the state has greatly expanded expensive health-care programs and school officials soon will begin the annual drumbeat of threatened program cuts if they don't get more state cash.

The situation is so bad even former Gov. Jim Edgar, still admired in many circles for his fiscal stewardship during tight times in the early 1990s, said tax hikes are needed, though he cautioned they must be paired with unpopular budget cuts. The former Republican governor said the problems Gov. Pat Quinn inherits from the recently ousted Blagojevich are historically dire.

"I inherited a mess in 1991 and had a recession," he said. "Now it is a huge mess and the worst it has ever been. Pat Quinn will have to deal with what Blagojevich has ignored for six years."

Edgar came into office and made permanent a temporary income tax increase, but it was partnered with cuts to health care and welfare spending. He also called for hundreds of state layoffs and left thousands more jobs vacant.

"If you raise taxes before you get other expenditures under control, you will never get them under control," said Edgar.

Quinn hasn't ruled anything out yet, saying Blagojevich never let him see the state books and no one's certain exactly how bad things are. But he's advocated tax increases in the past, suggesting the state's flat tax should be changed to higher taxes for higher incomes.

"What I have believed in all my life is that no one likes paying taxes - nobody, but the price of being in a democracy is that we all pay taxes," Quinn said recently. "In my opinion, (taxes) should be based on ability to pay. That is what I fervently believe in. We in Illinois have to make sure we have a tax system that is fair."

However, that change would require a constitutional amendment and, if approved, it wouldn't take effect to help anytime soon.

For now, taxpayers will have to wait to see what Quinn has in store for them. Having just taken office Thursday, he asked to move his budget speech back a month to March 18.

The current state budget, which covers spending through the end of June, is predicted to be short by nearly $2 billion. But that's only the start of the problems. Continued economic sluggishness likely will drain $1 billion more in tax revenues from the next budget. At the same time, the state must spend another $2 billion to keep up with mandated pension and Medicaid payments.

Add it all up and Illinois could be nearly $5 billion in the hole before the debate even begins about increasing school funding or financing road, bridge and school construction to spur job growth, said state lawmakers who focus on budget issues.

For perspective, state spending on K-12 education alone in the current budget is $7.4 billion. The budget reality is that the bulk of the state's spending falls to education and health care - two areas lawmakers, especially the controlling Democrats, are unlikely to want to cut.

One leading budget negotiator points out that even if the entire state prison system could be abolished, the savings wouldn't be enough to balance the hole Illinois faces. Get rid of the entire legislative branch and the budget deficit barely budges, said state Rep. Gary Hannig, a downstate Democrat and state budget expert.

The account from which daily state operations for everything from schools to prisons are paid is budgeted to have roughly $27 billion to spend. Balancing through cuts alone would require wiping out nearly 22 percent of all state spending.

Exacerbating the problem are the populist programs Blagojevich launched that greatly increased eligibility for state-sponsored health care. As health-care costs rise and state revenues plummet, the programs take an increasingly bigger bite out of the budget. State financial reports show that in the 2007 budget Illinois spent $11.6 billion on Medicaid. In the 1998 budget that spending was $5.5 billion.

And it could get more expensive. The worse the economy becomes, the more people will become eligible for state assistance, further driving up state costs.

Other state agencies already are seeking more money, too. The Illinois State Board of Education recently approved requesting a 2.2 percent increase in its budget, which is "far less than usual," said spokesman Matt Vanover.

That's when talk of raising taxes enters the picture.

A 1-percentage point increase in the state's income tax would raise nearly $3 billion. There are annual calls for tax increases from some lawmakers and interest groups. But the situation this year is expected to bring more serious consideration.

Also likely to emerge are plans for expanding the state sales tax to cover services. Illinois taxes merchandise and goods but not services. So if someone gets a muffler replaced the muffler is taxed but the labor to replace it is not. Depending on how such a plan is structured, it too could add hundreds of millions to state coffers. More than 20 states already tax services in some manner, budget watchers said.

Gambling often has been an option when the budget comes up short, but the economy has similarly stifled casino revenues and the industry blames a statewide smoking ban for exacerbating the situation. Several lawmakers said relying on increased gambling is not a good short-term budget fix in this economy.

Lawmakers' choices appear to be few and likely unpopular.

"We need to revisit the revenues that were imposed because the (Blagojevich) administration has misappropriated funds," said state Rep. Kathy Ryg, a Vernon Hills Democrat. "Until accountability is built in, it is not time to look at a (tax) increase."

But without some kind of tax increase, Edgar says the cuts would be catastrophic.

Several lawmakers agree that such cuts would likely anger the public as families are kicked out of health-care programs, class sizes increase at local schools and college students see dramatically higher tuition bills.

State Rep. Eddie Washington, a Waukegan Democrat, said people need to be prepared for a tax increase. Washington said he does not believe the state can get out of its financial crisis without one.

"An increase may be necessary in order for people to have services they are used to," said Washington. "Legislators pay the same taxes as everybody else and nobody wants an increase but you can't have your cake and pie and eat it too."

State Rep. Mark Beaubien, a Barrington Hills Republican, isn't embracing taxes, but said the cuts needed to balance the situation would be politically tough to stomach.

"The only places you can cut - higher education, education and human services, that'll never happen in this General Assembly," predicted Beaubien, House Republicans' budget point man.

Beaubien said the state is about to hit the wall after years of free spending with little thought of what to do down the road.

"We've increased spending almost a billion dollars a year for the last six years," said Beaubien. "It's great to sit there and vote for more school funding and increased health care. We don't have the money.