SPRINGFIELD — Gov. Bruce Rauner’s effort to “shake up Springfield” has sent shock waves from the Capitol to every corner of the state as the first-term Republican governor and the Democratic-controlled General Assembly have failed to reach a comprehensive budget agreement during his first two years in office.

While Illinois’ financial problems long predate the wealthy former venture capitalist’s foray into public office, Rauner’s clash with Democratic legislative leaders — most notably long-serving House Speaker Michael Madigan, D-Chicago — has led to unprecedented and unparalleled uncertainty.

The state went the entire last fiscal year without a complete budget, leaving the vast majority of spending to be dictated by court orders and laws that require funding for certain expenses, such as pension and debt payments, regardless of whether there’s a budget.

But for other areas, including higher education, social services and state agency operations, the flow of revenue was cut off for most or all of the year.

This resulted in the layoffs of hundreds of employees at public universities, community colleges and agencies that provide mental health treatment, care for the elderly and other social services. By one estimate, 1 million people statewide have lost services as a result of the ongoing impasse.

A six-month stopgap spending plan that was approved in late June provided a much-needed cash infusion, but it expired at the start of the new year, reviving the uncertainty of the previous year.

Since taking office, Rauner has insisted that items on his pro-business, union-weakening policy agenda be incorporated in any comprehensive budget deal if it’s also going to include the tax increases nearly everyone acknowledges are needed to begin addressing the state’s long-term deficits.

Many Democrats, meanwhile, argue that some of the governor’s policy priorities, such as stricter workers’ compensation laws and changes to collective bargaining rights for public employees, are a vigorous denunciation of the party’s core values.

And so the intractable impasse continues.

“We’re going through a process which is completely abnormal,” said Kent Redfield, an emeritus political science professor at the University of Illinois Springfield and a long-time observer of state government and politics. “And, ultimately, it’s not sustainable.”

Momentum has been building in the Senate recently for a bipartisan “grand bargain” on the budget and other issues. But whether the proposed deal, which includes tax increases, new casinos, pension reforms and a host of other changes, can pass through both legislative chambers and earn Rauner’s signature remains to be seen.

Even if it does, experts say, it will be only a small step toward a firmer fiscal footing.

Deep roots

Rauner frequently notes that Illinois’ financial problems stretch back decades.

A 2012 report from the State Budget Crisis Task Force, which examined the financial problems a handful struggling states, noted that Illinois has long used budgetary gimmicks, such as delaying payments to vendors and borrowing to cover pension payments, to make unbalanced budgets appear balanced on paper.

“Illinois did all this without any sort of long-term financial plan to restore balance, and without reserves,” the report notes. “Illinois has been doing backflips on a high wire, without a net.”

The result has been a backlog of unpaid bills that now totals nearly $11 billion and unfunded pension liabilities nearing $130 billion.

In a recent report for the Federal Reserve Bank of Chicago, business economist Thomas Walstrum notes that state and local governments in Illinois collectively have been spending more money than they bring in for nearly three decades.

“From the late 1980s on, Illinois has spent more than it has collected in revenues,” Walstrum writes. “And while the typical U.S. state has also generally spent more than it has collected, Illinois’s overspending has outpaced the national average since the mid-1990s, primarily through pension spending.”

Prior to Rauner’s tenure, the Democratic-controlled General Assembly and then-Democratic Gov. Pat Quinn took steps to try to address some of these problems.

During the lame-duck legislative session in January 2011, lawmakers pushed through temporary increases in the state’s personal and corporate income tax rates, raising the former to 5 percent from 3 percent and the latter to 7 percent from 4.8 percent.

Nearly three years later, in December 2013, the Legislature approved and Quinn signed a pension reform law that reduced retirement benefits to save the state money.

Those savings were never realized, however, because the state Supreme Court in May 2015 unanimously tossed out the law. The seven justices ruled that it violated a clause of the Illinois Constitution that says pension benefits for current and retired workers “shall not be diminished or impaired.”

By the previous fall, a debate was raging in the gubernatorial race between Quinn and Rauner about whether the temporary tax increase, which was set to begin rolling back Jan. 1, 2015, should be made permanent or allowed to expire.

While the increase was in place, the state’s backlog of unpaid bills dropped from $8.5 billion in January 2011 to slightly less than $6 billion in January 2015, the month Rauner took office. It continued dropping to a low of $3.5 billion in July 2015 before beginning to climb again.

But the new governor campaigned against extending the tax increase without also enacting other reforms he said would jump-start Illinois’ economy.

Democrats said they didn’t have the votes to do it alone, so tax rates were allowed to roll back to 3.75 percent for individuals and 5.25 percent for corporations.

Rauner and Democrats were able to come together on a plan to plug holes in that year’s budget, but they’ve been unable to reach a comprehensive budget agreement since.

Meetings among Rauner, Madigan and the three other top legislative leaders — Senate President John Cullerton, D-Chicago; Senate Minority Leader Christine Radogno, R-Lemont; and House Minority Leader Jim Durkin, R-Western Springs — have occurred in fits and starts throughout the intervening months but have failed to produce a long-term compromise.

When it comes to budget inaction, Illinois has no peer.

Pennsylvania’s Democratic governor and Republican-controlled legislature had their own standoff that also began in July 2015. But unlike Illinois, the two sides there came together in March to end the impasse.

When it comes to Illinois’ budget standoff, “there’s no comparison that we can point to,” said Arturo Perez, a fiscal analyst for the National Conference of State Legislatures.

Proposed solutions

The most recent round of talks among Illinois’ top leaders broke down in December, with Rauner and Madigan pointing the blame at each other.

Afterward, Cullerton and Radogno got together and hashed out a massive package of legislation aimed at bringing the impasse to an end.

The Democratic and Republican leaders stood at a lectern together earlier this month and vowed that senators from both sides of the aisle would support all the pieces of the package.

Among the various proposals as they stand now are permanent increases in the personal income tax rate from 3.75 percent to 4.99 percent and the corporate rate from 5.25 percent to 7 percent. Meanwhile, a proposed penny-per-ounce tax on sugar-sweetened beverages has been discarded, and a new “business opportunity tax” and taxes on some services, including dry cleaning and storage unit rentals, have been added.

The business tax would be charged based on a company’s Illinois payroll and would range from $225 annually for businesses with payrolls of less than $100,000 to $15,000 for businesses with payrolls of $1.5 million or more.

The proposal also would make permanent a tax credit for research and development and close what some describe as tax loopholes for corporations.

The package also includes several provisions that should make Republicans happy, including a two-year freeze on local property taxes, workers’ compensation reforms and greater flexibility for school districts to use third-party contractors for food, janitorial and transportation services.

Also in the mix are licenses for six new casinos, including one for the proposed Walker's Bluff resort and casino in southern Illinois' Williamson County, and new borrowing to pay down a portion of the bill backlog at a lower interest rate.

Passing the deal through both chambers of the General Assembly won’t be an easy task, but its introduction has been greeted with a sense of optimism that’s been rare in Springfield of late.

Dan Lesser, director of economic justice for the Sargent Shriver National Center on Poverty Law and a coordinator of the Responsible Budget Coalition, said the group is pleased that its message that more revenue is needed to address the state’s budget problems seems to have gotten through to lawmakers.

“We are a coalition because we have a shared interest in the state having sufficient revenue to make smart investments and to stop making cuts and to repair some of the damage that’s been done,” Lesser said. “We’re pleased that there’s substantial revenue in the Senate package.”

Even Fitch Ratings, which downgraded the state’s credit rating in October 2015 as a result of the impasse, sounded a positive, albeit cautious, tone.

“These proposals, if they proceed through the full legislature and are signed by the governor, have the potential to stabilize” the state’s credit rating, the ratings agency said in a Jan. 11 statement.

“However, Fitch notes that previous signs of progress have not always come to fruition,” the agency added, warning that it might downgrade Illinois’ debt again if a deal wasn’t reached this month.

With some lawmakers, particularly Republicans, wanting to take more time, Senate leaders decided to hold off on voting last week. But they told senators to be prepared to vote Feb. 7 when they return to Springfield.

Rauner has said he finds recent developments in the Senate encouraging, although he’s withholding judgment on the specifics of the package.

“I applaud them,” Rauner told the Quad-City Times Springfield bureau. “They’re dealing with issues. They’re talking about term limits. They’re talking about property tax relief. They’re talking about regulatory reform. This is great. This is a step in the right direction.”

Rauner said he also applauds House Democratic leaders for proposing economic reforms.

Madigan is taking a wait-and-see approach to what’s being proposed in the Senate, noting that many of the items in its proposal have been discussed and debated previously.

“They’re going to get due consideration in the House,” he told the Times Bureau.

Meanwhile, he has proposed his own policy agenda, which includes a 50 percent reduction in the corporate income tax and a tax surcharge on personal income of more than $1 million to fund education.

No quick fix

Even if the Senate package or something similar is approved, it will be only a small step toward improving the state’s long-term financial outlook, experts say.

Redfield, the University of Illinois Springfield professor, said what’s being proposed is good start.

“It would … allow us to kind of stabilize the situation, but that set of bills in no way is a fix,” he said.

In the long run, the state will need a revenue structure that better aligns with the modern economy, such as a sales tax that’s broadened to include more services, and a stronger business climate, Redfield said.

A recent study from the Fiscal Futures Project at the University of Illinois’ Institute of Government and Public Affairs helps put the task in perspective.

With a combination of higher income tax rates, a broader income and sales tax base, increased economic growth and 2 percent annual reductions in “discretionary” state spending, it would take a decade to bring Illinois’ budget into line, according to the analysis.

“We should think about this as a multiyear process,” said David Merriman, one of the report’s authors. “It’s going to require significant revenue increases and restraint on spending … over a long period of time. … If we show the political backbone to do that and show a realistic long-term plan … that will strengthen the economy immensely.”

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