Illinois can overcome its challenging budget realities
Illinois’ budget outlook, which went from embarrassing to respectable in less than a decade, is today best described as “challenging.”
Illinois has eliminated massive bill backlogs, earned nine credit rating upgrades since 2020, built its largest-ever Rainy Day Fund at more than $2 billion, and brought pensions to their highest funded ratios since 2008. Not bad for a state that was viewed as ungovernable not too long ago.
However, new estimates suggest that Gov. JB Pritzker and state lawmakers are facing a tough budget cycle for the first time in years.
The Office of Management and Budget (OMB) is projecting a $3.2 billion deficit for the upcoming fiscal year. While the forecast expects stable revenues, it also projects increases in spending, primarily in health care costs from rising medical inflation and in statutorily-required contributions toward pensions and public schools.
Illinois recently has outperformed these forecasts. In each of the last two years, OMB was off by more than $1 billion. Three years ago, a $3.6 billion surplus occurred despite a $400 million projected deficit — a $4 billion miss.
Indeed, the nonpartisan Commission on Government Forecasting and Accountability is expecting only a $618 million shortfall. Regardless, whether the gap is $618 million or $3.2 billion, Illinois must find a way to overcome it yet again — all while dealing with mounting pressures in other areas.
For example, public transit agencies are facing an impending “fiscal cliff,” with COVID-era federal relief funds expiring at the exact moment when ridership is rebounding. A $730 million to $1 billion hole needs to be filled.
Illinois must also address an escalating pension problem for “Tier II” teachers, first responders, nurses, and other public sector workers hired after 2011. Federal law requires state pension checks to at least equal Social Security benefits, but Tier II public employees won’t meet that threshold. In January 2025, the state learned that complying with Social Security requirements would add about $100 million in annual pension payments for the first few years and about $250 million by 2035.
Then a January 2025 Civic Federation report showed Chicago Public Schools with deficits of at least $500 million for the foreseeable future, arguing that “a state financial takeover … is not and should not be out of the question.” This is on top of the Illinois State Board of Education’s $500 million requested increase in funding.
We certainly are not alone in dealing with tight budgets. Many states are expecting deficits, from Republican-run Iowa and Nebraska to Democrat-run Washington and Maryland to purple states Arizona and Colorado. Others, from Pennsylvania to California, are addressing public transit fiscal cliffs. Lawmakers in Alabama and Massachusetts are cutting services and staffing positions at public schools as federal aid dries up.
But state and local officials in Illinois must work to address our looming fiscal challenges.
That process begins with finding efficiencies. State agencies have been directed to identify programs to wind down and staffing vacancies to eliminate. Transit systems and school districts likely will need to rightsize operations and personnel.
Revenue options will be considered. Modifying the sales tax is just one potential solution. States like Iowa, Wisconsin, and Texas each tax more than 50 more services than we do, ranging from haircuts and dry cleaning to personal security and investment counseling. Lowering the sales tax by 0.25% but broadening it to cover more services would generate $1.4 billion per year in state revenue and $400 million for Metra, the Chicago Transit Authority, and Pace.
Governing is about choices. In recent years, our elected officials have demonstrated an ability to pass balanced budgets, and to outperform expectations.
There’s no reason this cannot happen again. To overcome a challenging fiscal environment, Illinois should find operational efficiencies and continue its commitment to fiscally responsible budgeting while making necessary improvements to our transportation systems, addressing education needs, and continuing to improve pensions.
It is time to roll up our sleeves and get to work.
• Frank Manzo IV is an economist at the nonpartisan Illinois Economic Policy Institute.