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Illinois reverses decade-long fiscal tide in interim 2022 audit

Illinois chipped away at its long-term obligations in fiscal 2022 with healthy tax revenue growth and federal funds allowing the state to halt a decade long dive deep into negative territory, according to a recently published interim audit.

The state’s net position of governmental activities, which covers government services and tax collections and provides a deeper view of the state’s assets measured against debts and other obligations remained deep in the red at a negative $185.4 billion but it was improved from fiscal 2021’s $199.2 billion deficit.

When factoring into the overall equation business-type activities — the Unemployment Compensation Trust Fund, Water Revolving Fund, and Prepaid Tuition Fund — the net deficit of $181.6 billion improved 9% from $198.9 billion a year earlier.

“There was a pause in the deterioration after a decade of worsening liabilities so you have to acknowledge that,” said Richard Ciccarone, president of Merritt Research Services. “The state got a breather here between the federal monies and an economic recovery. Hopefully it’s enough of a breather so that they can use this platform to make additional improvements they need to make.”

Income and sales taxes along with federal funds and a drop in pension and retiree health liabilities and other debts all helped bolster the numbers reported in a brief, interim audit of the financial results for the fiscal year that ended June 30 that was published by state Comptroller Susana Mendoza at the end of 2022.

While the interim report provides just a snapshot of fiscal 2022 results without the explanations offered by the full report, they underscore the state’s fiscal upswing that drove a series of bond rating upgrades that lifted the state to the Baa1/BBB-plus level. The state entered the pandemic with its ratings one cut away from junk at Baa3/BBB-minus.  

“They had the wind at their back in fiscal year 2022. Hopefully, they positioned themselves for to keep the momentum going forward,” Ciccarone said. “The verdict on whether the state can sustain it and maintain a stable footing it still out.”

The improvement reversed an at least a 10-year downward slide in the net position for governmental activities,according to an analysis Auditor General Frank Mautino’s office published in June.

The $47.9 billion 2013 deficit swelled to $121.2 billion in 2014 and then ballooned again in 2017 to $182.6 billion from $131.6 billion amid a political battle that left the state without a budget but with a mountain of unpaid bills. It steadily worsened hitting $197.8 billion in 2020 and then $199.2 billion in fiscal 2021.

Illinois’ fiscal 2021 deficit stood out as the worst among nine states that were in the red with five states excluded because they had not yet published their results, according to the auditor general’s analysis.

The results provide a look backward and broader picture of the state’s fiscal condition that benefited from economic and legislative actions as the gaps from early in the COVID-19 pandemic eased with the help of federal relief including $8 billion in American Relief Plan Act funds and an economic recovery sent tax revenues surging.

Gov. J.B. Pritzker and lawmakers tapped federal relief to pay down a portion of its $4.5 billion federal unemployment trust loan, make $500 million in supplemental pension contributions, pay down a backlog of bills, and rebuild a depleted budget stabilization fund bringing its rainy day fund to $1.85 billion with recent budget surpluses.

The latest series of one-time spending measures followed the state’s revised fiscal 2023 revenue forecast released in the Economic and Fiscal Policy Report which raised general fund projected revenues by $3.69 billion to $45.26 billion. When adding in federal dollars the state expects to total revenues of $50.1 billion in the current fiscal year.

Those actions will also benefit the future fiscal 2023 results but inflation, an economic downturn that damages revenue collections, and pension investment losses all threaten further progress and pensions remain a burdensome strain.

Revenues rose to $112.9 billion from $95.1 billion with operating grants up $7 billion and income taxes skyrocketing to $36.6 billion from $28.3 billion while sales taxes rose by $1.6 billion. Expenses fell to $185.4 billion from $199.2 billion.

The state’s total assets in fiscal 2022 rose by $14.3 billion to $75.8 billion. Total liabilities decreased by $22.3 billion to $248 billion. The state’s largest liability balances are its net pension liability of $139.8 billion and the other post-employment benefits liability of $46.6 billion.

Long-term liabilities dropped to $218.3 billion from $241.5 billion as the net pension liability declined from $151.6 billion and OPEBs declined from $56.5 billion. General obligation debt of $27.1 billion mostly held steady.

“The state needs to find a way pay down the pension liabilities. Reform doesn’t come easy for the state and the longer they wait the worse the problem will get,” Ciccarone said.

The state faces a tough path to any pension or retiree healthcare reforms with limited options beyond pouring more funding into the system because the state constitution bans benefit cuts. Pritzker opposes asking voters to amend the constitution.

With the system just 44% funded, if there is a significant market downturn, the unfunded actuarial liability and the required state contribution rate could both increase significantly, putting the sustainability of the systems further into question, actuarial reports warn.

Pritzker will unveil his proposed fiscal 2024 budget Feb. 15.

Mendoza will press in the upcoming regular legislative session for passage of House Bill 5851 that puts in place additional triggers for future automatic deposits in both the pension and budget stabilization funds.

The state has long received a black mark from fiscal watchdogs for being at the back of the line, sometimes the last, to file its audited financial results which are completed by Mautino and published by the comptroller.

The fiscal 2021 audit was released a year after the fiscal close but that beat the timing of the previous year. A 120-day time frame is the Government Finance Officers Association’s recommended practice.

The comptroller says the office must wait on the auditor general’s office to complete its work while the auditor general says delays in state reporting are to blame. Officials have also blamed system updates and say that should shrink the delay.

With some data in hand Mendoza in 2019 and again in 2021 published interim audits as the auditor general completes its review.

“In order to provide the public with the financial information that has been currently reported to the IOC by state agencies, the IOC is exercising its statutory authority to issue an interim ACFR report,” the report says.

Ciccarone said having the interim report out now is a step in the right direction but it doesn’t replace the need for timely reporting of the full numbers.

Revenues midway through fiscal 2023 are slowing but remain in positive territory, according to the latest monthly report from the legislature’s Commission on Government Forecasting and Accountability. Warnings of a recession that could cut deeply into state tax collections and other economic activity cloud how the remainder of the year will pan out.

General fund revenues grew $90 million in December compared to December 2021, primarily on the strength of $311 million in federal sources. Personal income taxes grew by $9 million and sales tax fell for the first time in fiscal 2023 by $56 million from the previous December. Corporate income taxes rose $182 million.

“After months of robust levels of growth for much of the fiscal year…personal income tax and sales tax receipts, experienced a noticeable slowdown in December,” COGFA Revenue Manage Eric Noggle wrote. “While this weaker performance is noteworthy, it will take a couple more months of data to see whether this is the start of a significant downward trend in these receipts, or if the slowdown is simply due to a timing element related to the reporting of receipts over the last month.”

Through the first half of the fiscal year, general fund revenues are up $1.7 billion at $23.2 billion. When including the one-time federal ARPA reimbursements received earlier in the year, the year-over-year increase improves to $2 billion.

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