Illinois’ budget and pension stabilization funds would receive automatic deposits when the state hits revenue growth and bill payment triggers under legislation that cleared a House committee this week.
With a series of infusions over the last two fiscal years, the state’s once-depleted rainy-day fund remains on track to hit $1.9 billion by the end of the current fiscal year on June 30, but more is needed to reach a healthy level on par with other states, state Comptroller Susana Mendoza told the House’s State Government Administration Committee.
A budget stabilization fund of $1.9 billion equates to 11 days cash on hand while the average state holds rainy-day funds equating to 53.9 days cash on hand, according to a Pew report, which cites data from the National Association of State Budget Officers, Mendoza said.
“It’s a huge difference. Even with the infusion of money over the last two fiscal years, Illinois continues to be second-to-last in the nation in number of days of cash reserves,” Mendoza said. The proposed legislation in House Bill 2515 ”will ensure more regular deposits into both the budget stabilization fund and the pension stabilization fund.”
Under the legislation that passed unanimously, sending it on to a House floor vote, Illinois would make a deposit into its rainy-day and pension stabilization funds when its accounts payable are under $3 billion and the governor’s budget office estimates growth in general revenues of more than 4%.
The state currently has an accounts payable of $1.6 billion, which is considered a routine level that allows bills to be paid on time. The state’s backlog hit a peak of nearly $17 billion in 2017 as bills mounted from the state’s two-year budget impasse.
As the state headed into the COVID-19 pandemic, the rainy-day fund held under $60,000 — or enough to cover less than 30 seconds of operations — while more than half of the states had enough to cover 28 days cash on hand. The state turned to the Federal Reserve’s special pandemic-related borrowing program — the Municipal Liquidity Facility — for a $2 billion loan to manage. That loan has since been repaid.
A deposit of 1% of general fund revenues would be split between the budget and pension stabilization funds until the budget fund hits a targeted threshold of 7.5% of general fund revenues and then the pension account would receive the full deposit to reduce pension liabilities.
Most states set a goal for their rainy-day funds between 5% and 15% of revenues, according to the National Conference of State Legislatures.
The bill also calls for a six-month review by the Commission on Government Forecasting and Accountability that would trigger a 1% deposit — half going to the BSF and half to the pension fund — if growth exceeds 4% at that point.
The legislation allows Mendoza to tap the BSF to pay down bills when they the tab exceeds $3 billion and the legislature could vote to dip into the fund at its discretion.
“The credit rating agencies are watching closely. Codifying this type of fiscal discipline into law will send a strong message that Illinois is serious about long-term fiscal discipline,” Mendoza said, citing rating agency commentaries on factors that helped draw a round of upgrades and contributed to S&P Global Ratings last month raising the state’s general obligation rating to A-minus from BBB-plus.
The continued build-up of the rainy-day fund is a credit positive, particularly if a recession is included in the revenue estimates. In terms of the fiscal 2024 proposed budget, this BSF balance would be 3.9% of total general fund expenditures or 5.1% of operating expenditures, S&P said in its report. Illinois is rated BBB-plus and Baa1 by Fitch Ratings and Moody’s Investors Service, respectively.
The state’s use of higher-than-expected revenues to also funnel $500 million to the pension stabilization fund — that in turn went to make supplemental pension contributions — and plans to make another $200 million deposit in the fiscal 2024 budget also drew praise from rating agencies.
The state’s existing statutes call for the rainy-day fund to receive annual deposits when revenue estimates grow by more than 4% but no automatic deposits have ever been made because of a lack of clarity in the existing statutes. The existing statutes also cap the BSF at 5% of revenues.
The state first established the BSF in 2000 and funded it with a $226 million deposit from the tobacco settlement recovery fund in 2001. It received an additional $50 million infusion in 2004. It held a modest $125 million in fiscal 2016, but that was drained during the budget impasse, according to the legislature’s Commission on Government Forecasting and Accountability.
When lawmakers approved the sale of recreational cannabis in 2019, they earmarked 10% of cannabis tax revenues, after various administrative expenses, for the rainy-day fund.
Mendoza has been pressing for legislation that sets additional automatic triggers and the current legislation represents a change from the previous version that included a single trigger.
Gov. J.B. Pritzker’s proposed $49.6 billion general fund budget would send another $138 million from the anticipated $303 million fiscal 2024 ending balance to the rainy-day fund. The rainy-day account would also receive $45 million in what marks the first installment of the unemployment trust fund repayment of a $450 million 10-year state loan putting it on track to hit $2.3 billion in coming years.
Critics contend the state needs to do far more given the burdensome size of the unfunded liabilities at $139 billion, weak funded ratio of 44%, and reliance on statutory formula over an actuarial one that allows the unfunded tab to grow in down investment years.
Mendoza and other backers of the legislation sponsored by Rep. Stephanie Kifowit, D-Oswego, believe automatic deposit triggers need to be cemented in statute to ensure future state leaders abide by them. Sen. Michael Halpin, D-Rock Island, will be the chief sponsor of the bill in the Senate.