Laurence Msall

1
An Overview of the Governors Proposed FY2008
Budget

• Laurence Msall
• The Civic Federation
• March 2007

2
About the Civic Federation

• Non-profit government research organization
  founded in 1894.
• Funded by major corporate and professional
  service firms in the Chicagoland region.
• Purpose
• To serve as a technical resource, providing
  nonpartisan research and information
• To promote rational tax policies and efficient
  delivery of quality government services and
• To offer solutions which guard against excessive
  taxation, enhance financial reporting and improve
  the quality of
• public expenditures.
• For publications and information www.civicfed.org

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The Buildup to Illinois FY2008 Budget Challenges

• Governor and General Assembly face increased
  demands for State assistance
• The State is already spending more than it
  generates
• 2.3 billion deficit according to the
  Comptroller
• Pensions not fully funded

4
Expected FY2008 Spending Pressures Before
Governors Healthcare Expansions
5
What is New in the Governors Budget Proposal?

• Program Expansions
• Pensions
• Health Insurance
• Education

• New Revenue Sources
• Pension Obligation Bonds
• Gross Receipts Tax
• Lottery Privatization

6
What is the Governors Proposed Budget?

• Spending for FY2008
• Operating Budget 49.1 billion (increase of 3.6
  billion or 8 over 2007)
• Capital Budget 11.0 billion (Increase of 1.1
  billion or 10.6 over 2007)
• Total FY2008 Budget 60.1 billion
• Existing Revenue Sources
• Personal Income Taxes 9.5 billion
• Corporate Income Taxes 1.7 billion
• Sales Taxes 8.0 billion
• Other State Taxes 5.9 billion
• Subtotal State Taxes 25.1 billion
• Other Receipts 9.0 billion
• Federal Receipts 13.0 billion
• Total for Existing Revenues 47.1 billion
• Shortfall 2.6 billion

7
State Payroll is Growing in Healthcare and Human
Services
8
How Did Pensions Become Such a Big Problem in
Illinois?
9
HISTORIC REASONS FOR ILLINOIS PENSION PROBLEMS

• Contribution Shortfalls
• Investment Losses
• Failure to Increase Payments in 1990s
• 5.8 billion in Increased Benefits (1995-2003)
• Cost of FY2002 Early Retirement Initiative
• 2.3 Billion Partial Funding Holiday FY2006
  FY2007

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Illinois 5 Pension Funds
Based on the aggregate funded ratio for SERS and
TRS in 2004, Standard and Poors ranked Illinois
47th out of 50 states in pension funding levels.
A 90 funded ratio is considered healthy.
11
Governor Blagojevichs Proposal to Fix Pension
Funding

• The long-term lease of the Illinois Lottery is
  projected to raise 10 billion.
• The Governor proposes issuing 16 billion in
  pension obligation bonds.
• The Governor proposes using all proceeds to pay
  down pension liabilities.
• The 26 billion will increase the pension
  systems funded ratio to over 83.
• The adjusted annual payment schedule will reach
  90 funded ratio in 2040, five years early.

12
The Governors Projected Costs and Revenues
Associated with New Programs
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How the GRT Would Work

• Manufacturing, agriculture, retail and wholesale
  companies would pay 0.5 on any gross receipts.
• All other businesses, such as service businesses,
  would pay a 1.8 tax on any gross receipts.
• Proposed exemptions include small businesses
  (under 1M in receipts), exported products,
  non-profits, food and drugs at retail, insurance
  premiums, and gaming entities.

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Advocates of the Governors Gross Receipts Tax
Proposal

• If the tax is applied broadly and with low
  rates, it should not disturb the economy
• More predictable for government
• Because businesses will pay regardless
  of their income or the business cycle.
• Able to generate 6 billion annually

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Some of the Arguments Against the GRT

• Unfair to businesses
• Not tied to profit
• Low margin businesses at risk
• Penalizes in-state suppliers
• Pyramiding
• Every transaction compounds cost of products
• Unique tax may be a disadvantage
• Indiana abolished its GRT
• GRT mostly used in states without income tax
• Other areas of concern
• Predictability for new businesses
• Hidden tax on consumers
• No individual taxpayer counterbalance

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Thank you.