Budget Solutions 2013: Innovation for Illinois

8/2/2019 Budget Solutions 2013: Innovation for Illinois

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I N N O V A T I O N F O R I L L I N O I S

budget solutions


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Contents(click a section name to be taken directly there)

Intoduction...........................................................................................................................................................4

Aneffectivebalancedbudgetequiementandanhonestspendinglimit..................................... 7

Accountabilityall-aound.............................................................................................................................11Trr..................................................................................................................................2L..............................................................................................................................6E-rrr..............................................................................18

Sensiblespending.................................................................................................................................................3OrM..............................................................................................................................................2IrCGrF.............................................................................................................34

Realignmentwitheality...............................................................................................................................37Rrrrr..........................................................................................................................Rrr....................................................................................................................................... 2

Rz..............................................................................................................................6Rrj....................................................................................................................50

Conclusion.............................................................................................................................................................54

Appendix:Financials...........................................................................................................................................58

Endnotes..................................................................................................................................................................3

Cover photo: Illinois Policy Institute

Vision, Mission and Approach

of the Illinois Policy Institute

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www.IllinoisPolicy.og


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budget solutions

Teddabrowski,vice president of policy

amandaGriffin-Johnson, senior budget and tax policy analyst

JonaThan inGram, health care policy analyst

Special thanks toChris andriesen, Milton Friedman intern


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Introduction

budget solution

Illinois can bea destination

for economic

opportunity. But

state leadership

has taken Illinois

down a path

of poor policy

choices. Wheredoes this leave

us?

Introduction

At the Illinois Policy Institute, we have a bold vision: to make Illinois rst in economicoutlook and job creation, and to become a free enterprise leader for the rest of AmericaIllinois can be a destination for economic opportunity. The state boasts rich natural resourcesand the headquarters of many of the worlds leading companies. It is a major transportation huband has vast nancial and technological industries.

But state leadership has taken Illinois down a path of poor policy choices. Where does this leaveus?

Years of overspending havecaused the state to carry abacklog of $8.5 billion inunpaid bills. Medicaid costsare rising faster than stategovernment can pay them.

Lawmakers avoided pensionreforms, and now thesystem is underfunded by astaggering $85 billion. Andearlier this year, MoodysInvestors Service gaveIllinois the lowest ratingamong U.S. states.

For much of 2011, theunemployment rate hoverednear 10 percent. In fact,while most states saw a drop

in the jobless rate, last yearIllinois sent more people tothe unemployment line thanany other state in the nation.

And for more than a decade,taxpayers have ed Illinoisfor greener pastures. Illinoislost residents at a rate ofone every 10 minutes on anet basis between 1995 and2009. That trend continues.In December, the Bureau ofLabor Statistics reported thatIllinois lost 66,000 residentsbetween June 2010 and June2011 alone.

It doesnt have to be this way.

Illinois can regain its position as an economic leader. But to do so, lawmakers must enactsubstantive reforms that improve the way Illinois government operates.

Enter Budget Solutions 2013.


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Introduction

In the following

pages, weve

charted a path

that signicantly

reduces the

states backlog

of bills without

borrowing

and without

new taxes,

while meetingits pension

liabilities.

budget solution

This is the Institutes fourth annual alternative vision for Illinois. In the following pages, wevecharted a path that signicantly reduces the states backlog of bills without borrowing andwithout new taxes, while meeting its pension liabilities. In addition, the state returns billions ofdollars to taxpayers by repealing the January 2011 tax hikes. Our vision allows for an Illinois thatputs taxpayers rst, restrains state spending and puts the state back on the path to scal solvency.

In previous editions of Budget Solutions, the Institute has crafted viable, line-by-line alternatives

to the plans advanced by the governor and the legislature. Each year, we proposed reformsthat would have erased decits without a tax hike. Lawmakers instead chose to continue taxingand spending, and today the states backlog of bills has climbed to $8.5 billion. Now is theopportunity to end Illinois legacy of scal mismanagement and chart a new course. BudgetSolutions 2013 offers one such course:

Accountability all-around ($3.5 billion in savings)

Transform school funding. Potential savings: $1.1 billion

Amend the General State Aid formula to eliminate state subsidies for school

districts in communities with property tax caps and those in Tax IncrementFinancing districts.

Local pension accountability. Potential savings: $800 million

School districts should be responsible for the cost of their employees; the stateshould not pay for the pension costs of non-state employees.

End non-transparent state funding to local governments.

Potential savings: $1.6 billion

In conjunction with a repeal of the tax hike, Illinois should eliminate most

transfers out of the General Revenue Fund. The largest of these transfers, theLocal Government Distributive Fund, allows local governments to increasetheir budgets without directly taxing residents to pay for them. This reduces

the accountability of local ofcials and the transparency of local governmentnances.

Sensible spending ($1.9 billion in savings)

Overhaul Medicaid. Potential savings: $1.7 billion

To ensure Illinois Medicaid program provides the most vulnerable population with access to quality health care, Medicaids fee-for-services program must

transform into a sliding scale premium assistance program, paired with healthsavings accounts for nonelderly and nondisabled patients. Illinois also shouldrevisit eligibility requirements.

Introduce Competitive Grant Funding. Potential savings: $200 million

Programs could vie for the states scarce resources based on programeffectiveness and need from a pool of $150 million; therefore, every item

whose nal 2012 funding is $5 million or below will not receive any automaticfunding, but is qualied to earn its funding through a proposed program calledCompetitive Grant Funding.


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budget solution

Now is theopportunity

to end Illinois

legacy of scal

mismanagement

and chart a

new course.

Budget Solutions

2013 offersone such course.

Introduction

Realignment with reality ($1.6 billion in savings)

Reform state retiree health care. Potential savings: at least $425 million

To contain skyrocketing retiree health care costs, the state must institute thefollowing reforms: increase retiree contributions toward premiums, cap retireesubsidies and end retiree health benets for new hires.

Reform human services. Potential savings: $500 million

Illinois cannot afford the level of human services it is currently promising;

therefore, Budget Solutions 2013 reduces human services funding by $500million and increases transparency, efciency and accountability while ensuringthat those in need will have access to the core services they require.

Rightsize state employee pay. Potential savings: $520 million

State employee compensation is out of balance with the private sector; to

restore some equity to state employee compensation, salaries should be reducedby 10 percent, which could save the state approximately $520 million in scal

year 2013.

Reform pension cost of living adjustments.

Potential savings: $120 million - $150 million

Reforming COLAs will help make the pension system sustainable and protect

government retirees by having an immediate and signicant impact on Illinoisunderfunding problems. Illinois could have upwards of a $10 billion in savingsfor the state government money that could instead be spent on education orhuman services, or returned to taxpayers.

Budget Solutions 2013 - Savings in billionsAccountability all-around $3.500

Transform school funding $1.100

Local pension accountability $0.800

End non-transparent state funding to localgovernments

$1.600

Sensible spending $1.860

Overhaul Medicaid $1.660

Introduce Competitive Grant Funding $0.200

Realignment with reality $ 1.565

Reform state retiree health care $0.425

Reform human services $0.500

Rightsize state employee pay $0.520

Reform pension cost of living adjustments $0.120

Total $6.925Click here to return to

the table of contents.


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budget solution

Four major

loopholes exist

in the current

balanced

budget

requirement.

These loopholes

have enabled

excessive state

spending.

An eective balanced budget requirement and an honest spending limit

An efective balanced budget requirement and

an honest spending limit

The problem

The rst step to getting Illinois back on track is to implement spending controls that provideIllinois with long term scal sustainability. An effective balanced budget requirement and anhonest spending limit will ensure the state does not fall back into the same pattern of higherspending, irresponsible borrowing and burdensome tax increases.

For years, Illinois has spent beyond its means.

In scal year 2012, the state will have more than $8.5 billion in unpaid bills and

unaddressed obligations.1

Since 2000, total direct bond obligations have more than tripled to $30.6 billion.

Illinois pension systems have been chronically underfunded and are nowregarded as the worst-funded in the nation. The underfunded amount exceeds

$85 billion. The state has consistently run general fund decits.

These excesses have occurred despite the states constitutional requirement to balance its budget.

The requirement was meant to compel legislators to budget within a sustainable scal frameworkand to ensure the state spends within its means.

Four major loopholes exist in the current balanced budget requirement. These loopholes haveenabled excessive state spending:

1. The requirement does not specify revenue sources. This allows lawmakers to

shufe costs into funds not subject to the requirement. Additionally, they canll revenue shortfalls with borrowing, pushing todays spending costs ontotomorrows taxpayers.

2. The amendment allows lawmakers to appropriate less than the amountnecessary to cover the states annual legal obligations. In scal year 2012, thestate appropriated $1 billion less than necessary to pay its Medicaid bills.

3. It permits lawmakers to independently estimate revenues. This can lead to

unrealistic projections as legislators attempt to balance the budget.4. There is no limit to the amount of debt that can be carried over into future years.

This allows legislators meet the balanced budget requirement while burdeningtheir successors with the costs.

Graphic 1 shows how Illinois spending has grown over the 20 years. Actual annual operatingexpenditures far exceed other spending measures that serve as reasonable spending benchmarks.

The blue line below shows what spending growth would look like if spending were limited togrowth in gross domestic product, while the green line shows what spending growth would looklike if spending were limited to population growth plus ination.


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budget solution

While spendinghas skyrocketed

in the last

20 years,

population has

increased at a

slower pace.


Graphic 1. State operational spending in nominal dollars

Source: U.S. Census Bureau and Illinois Policy Institute calculations

While spending has skyrocketed in the last 20 years, population has increased at a slower pace.The population-plus-ination-growth spending cap displays this trend above, but another way

to think about this trend is through spending per capita. Graphic 2 below shows how, afteradjusting for ination, state operational spending per capita increased 85 percent between 1990and 2010.

Graphic 2. State operational spending per capita (adjusted for ination)

Source: U.S. Census Bureau and Illinois Policy Institute


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budget solution

The current

spending cap

fails to address

the root cause

of the states

ongoing

budgetary crisis

and perpetual

decit spending:

the lack of

a spendingbrake that

halts chronic

irresponsibility

on the part of

the General

Assembly and

successive

governors.


Since 2000, heavy borrowing has supported Illinois spending habits. The state tapped the long-term bond market three separate times to fund the states pension systems. Borrowing to payfor pensions allowed legislators to irresponsibly increase spending on major programs abovethe levels the state could afford. The Institute for Truth in Accounting has identied Illinois

as the third-worst state in the nation when measured by the amount of debt and bills owed pertaxpayer.2

In response to public recognition that Illinois has a spending problem, legislators in January 2011

placed a budgetary cap on spending while also approving the largest income tax hike in statehistory. The statutory spending cap is designed to curb spending by having the ability to repealthe tax hike if the cap is exceeded.

Unfortunately, this is an ineffective scal constraint because the caps are too high. The IllinoisComptrollers Ofce released revenue numbers that show the cap to be billions of dollars aboveexpected revenue (see Graphic 3). This is the equivalent of a family with an income of $50,000

agreeing to buckle down and not spend more than $54,000.

Graphic 3. Revenue forecasts compared to the

statutory spending cap (dollars in millions)

Fiscalyear

Baserevenues

Taxincrease

Totalrevenues

Statutoryspending cap

Diference betweenspending cap and total

revenue

2012 $27,000 $7,000 $34,000 $36,818 $2,818

2013 $27,810 $7,210 $35,020 $37,554 $2,534

2014 $28,644 $7,426 $36,071 $38,305 $2,234

2015 $29,504 $5,048 $34,552 $39,072 $4,520

Source: Illinois Comptrollers Ofce

The current spending cap fails to address the root cause of the states ongoing budgetary crisisand perpetual decit spending: the lack of a spending brake that halts chronic irresponsibility

on the part of the General Assembly and successive governors.

The solution proposed below is meant to stop the states annual budgetary shenanigans that leadto unbalanced budgets, underfunded pensions and a debt burden that continues to grow, despite

the record revenues owing into state coffers.

Our solution

Illinois should amend the constitutional requirement to balance the budget. The amendmentmust include:

A clear denition of what qualies as revenue. Illinois balanced budgetamendment should clearly state which types of revenue are included in estimated

funds. It will make clear that borrowing should not be counted as revenue and neither should fund sweeps or renancing debt. Further, the amendmentshould apply to all state funds so that lawmakers cannot simply push operating

decits into special funds.


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budget solution

0

It is the rapid,excessive

growth in

spending during

the good times

that lock in

spending levels

that become

unsustainablewhen inevitable

economic

slowdowns

occur.


An independent certication of revenue estimates. Requiring the statecomptroller to complete an independent certication of revenue estimatesprevents legislators from using articially inated estimates to hike spendingabove sustainable levels. Requiring the comptroller to independently verify

and endorse planned expenditures as less than or equal to estimated revenuescerties that the budget is indeed balanced. Additionally, revising planned

expenditures and revenue estimates throughout the year allows governmentthe exibility needed to respond to changes.

A spending cap of ination plus population growth. This will allow statespending to grow every year in a steady, predictable way, helping policymakers

provide services efciently and effectively.

A requirement that the state meet all of its debt, pension and other obligations

in the year they are due. The habit of carrying forward obligations into the nextbudget year is unsustainable; moreover, it is poor stewardship. As of 2008, 38states had a cannot carry over decit provision that limits the size of the

decit that can be carried over from one year to the next, forcing politicians

to deal with scal imbalances as they occur, rather than pushing problems intofuture years and onto future taxpayers.

Why this works

The fundamental problem in Illinois state government is a lack of spending discipline. For years,taxpayers provided Illinois government with record revenues. After ination, state spending hasincreased 39 percent between 2000 and 2010.3 State leaders spent every dime and borrowed

billions more, with the total general obligation and capital debt growing to $30.6 billion in scal

year 2011 from $8.4 billion in scal year 2001.4

The General Assembly and successive governors have demonstrated year after year that they

lack the discipline to set priorities and rein in spending. Each year they spend more moneyby expanding government obligations to insupportable levels. These expansions of stategovernment obligations create structural overspending, which in turn leads to the so-calledstructural decits. It is the rapid, excessive growth in spending during the good times that lock

in spending levels that become unsustainable when inevitable economic slowdowns occur.

An honest spending limit and a real balanced budget requirement solve these issues. They limitoverall spending growth to a reasonable, affordable amount through the use of the spending cap

This cap will let government grow each year to keep pace with ination and population growth,while protecting residents from tax increases and borrowing brought on by overspending. Anhonest spending limit will also change incentives for government policymakers. For the rst

time in decades, lawmakers will face the constraints of scal discipline.

Click here to return to



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Transform school funding

Local pension accountability

End non-transparent statefunding to local governments

budget solutions


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budget solution

2

The distributionof state

education

funding is

unfair to Illinois

students and

taxpayers.

Accountability all-around: Transform school funding

AccountAbilityAll-Around

Transorm school undingPotential savings: $1.1 billion

The problemThe distribution of state education funding is unfair to Illinois students and taxpayers.

One of the sources of funding for Illinois public schools is General State Aid, or GSA. The idea

behind GSA is to assure that money for education ows to school districts with low property taxrevenues per pupil. In many areas of the state, GSA money is used to make sure each district hasa base amount of money to spend per pupil, also known as the foundation level. As recently as2000, $9 out of every $10 from the $2.8 billion-plus GSA fund was used to support foundation

levels.5

However, today only $5 of every $10 from the GSA fund supports foundation levels. What

changed? In addition to granting more funds to districts with large poverty populations, theGSA formula was amended to provide specic subsides to two select groups of districts:

Group 1. School districts operating in communities with property tax capsFor districts in this rst group, GSA subsidies benet school districts whose local tax revenuegrowth is limited by laws that cap increases in annual property taxes. These laws were put intoplace specically to curb spending and to improve accountability at the local government andlocal school district levels. The targeted GSA subsidies, then, are problematic for two reasons:

First, the state subsidies allow school districts to bypass local spending limits, damaging localtaxpayers ability to hold district ofcials accountable for their spending decisions. Second, thesubsidies come at the expense of state taxpayers or students in other districts that are deniedthe use of those funds.

In 2010, the state spent $630 million in GSA subsidies on districts impacted by property taxcaps. The funds were distributed as follows6:

$509 million, or 81 percent, was spent on 40 school districts in tax-cappedcommunities. Illinois has 867 school districts statewide.

Chicago Public Schools received more than $309 million of the $630 million

spent on districts in tax-capped communities.

More than 503 districts received nothing.

Group 2. School districts operating in Tax Increment Financing districts

For the second group, the GSA subsidies go to districts whose local tax revenues are siphonedoff partially by tax increment nancing districts, or TIFs.7 In this situation, TIFs, and thelocal governments that control them, take tax revenue that otherwise would be available for

schools and use it to fund real estate developments in blighted areas. The GSA was amendedto compensate those districts by making up the shortfall. In effect, the state is funding localgovernment-backed real estate projects through the GSA, at the expense of state taxpayers orstudents in other districts that are denied use of those funds.

In 2010, TIFs generated more than $1.15 billion in tax revenues for the local governments thatcontrol them.8 This means, by denition, that local governments held $1.15 billion in taxable

revenues that was off-limits to other taxing jurisdictions such as schools, libraries and park


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budget solution

Ending the

subsidies will

eliminate

the process

of diverting

funds to select

districts and will

return spending

accountability

to the local

school districts.


districts. Since schools districts command about 50 percent of local government tax revenues,they were unable to tap approximately half of the $1.15 billion held by local governments.

These and other changes to the GSA formula make it extremely difcult to understand how

public education in Illinois is nanced. The system is neither transparent nor intuitive.

Today the state is spending record amounts of money on K-12 education, which makes itespecially important for policymakers and the public to understand how public schools are

funded. In 2010, Illinois taxpayers spent $28.6 billion on public schools and $13,568 per child record amounts in both categories.9 Ination-adjusted spending per pupil rose 46 percentbetween 1991 and 2010.

Graphic 4. Growth in ISBE appropriations(2005 dollars) compared to growth in enrollment

Source: Illinois State Board of Education

Our solution

Amend the GSA formula to eliminate state subsidies for districts located incommunities with property tax caps. State subsidies drain money from taxpayers

and allow local school districts to bypass the local spending limits that the taxcaps were intended to impose. Ending the subsidies will eliminate the processof diverting funds to select districts and will return spending accountability to

the local school districts. This subsidy can be eliminated immediately and withvirtually no impact on the amount of the Foundation Level currently in place.

Amend the GSA formula to eliminate state subsidies for districts located within

TIF districts. TIFs are vehicles for local governments who choose to partitiontheir local tax resources to foster development or to politically divide the localtax pie. The state has no business inserting itself, via the state education formula,into the way individual municipalities decide to split local tax revenues. The

value of TIFs is debateable, and state education funding should not be mixedup with economic development projects at the local level.


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budget solution

4

The complexitiesof tax caps

and TIFs have

distorted Illinois

education

funding

formulas and

eliminated

whatevertransparency

may have

originally

existed. Money

no longer

ows to those

most in need,

but instead

to districtsgiven special

consideration.


Why this works

Illinois education funding has proven impossible for most taxpayers and policymakers to

understand. The complexities of tax caps and TIFs have distorted Illinois education fundingformulas and eliminated whatever transparency may have originally existed. Money no longerows to those most in need, but instead to districts given special consideration.

Eliminating subsidies for districts with special consideration will allow the GSA once againprovide education dollars to districts most in need. This in turn will help restore responsiblestate spending and bring back accountability to local spending and tax decisions.




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budget solution

6

The state shouldnot pay for the

pension costs of

individuals who

are not state

employees.

Accountability all-around: Local pension accountability


Local pension accountabilityPotential savings: $800 million

The problemA tenet of good budgeting is that costs should be paid where they are incurred. But in Illinoisthe state pays for teachers pensions even though teachers are school district employees, notstate employees. This creates a system without accountability or transparency.

Pension funds have three main sources of funding: investment income, employee contributionsand employer contributions. While the state pays the lions share of the employer contributionto the Teachers Retirement Fund, or TRS (see Graphic 5), it doesnt have to be that way.

Teachers in Chicago participate in a separate pension fund, and their employer, the Chicagoschool district, is responsible for the employer contribution.

Graphic 5. 2011 Teachers Retirement System funding by source

Source: TRS Comprehensive Annual Financial Report 201110

To make matters more complex, many school districts are picking up the employeeportion of thepension contribution. Teachers are supposed to contribute 9.4 percent of their paycheck towardtheir own retirement fund. But in the 2009-2010 school year, 48 percent of school districts paidthe entire employee pension contribution.11 An additional 16 percent of districts paid for at least

part of the employee contribution.12 The teacher pension system is set up like a restaurant where

everyone picks up the tab for the person to his or her left. Rather than having musical chairsof responsibilities, teachers should pay the employee portion of the contribution and schoo

districts should pay the employer contribution. (For more information, see the Institutes paperTeachers pensions: Whos really paying? at www.illinoispolicy.org/TRS.)

The current pension system obscures nancial responsibilities and creates unintende

consequences. Illinois goes to great lengths to provide additional funding to poor school districtsand districts with high poverty rates. While the states poverty grant policy attempts to giveproportionally more funding to less wealthy school districts, the way the TRS is funded operatesin the opposite direction. Pension support from the state gives wealthier districts more funding

per student than less afuent districts. A large factor in this is the fact that wealthier districts are


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budget solution

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Accountability all-around: Local pension accountability

inclined to have higher teacher salaries. This means that the state is subsidizing wealthy districts

through the pension system.

Our solution

The state should not pay for the pension costs of individuals who are not state employees.Instead, pension costs should be paid by the entity in which they are incurred, and school districts

should pay for the pension costs related to their employees. Going forward, school districtsshould be responsible for the normal cost of their employees, which is the value of the benetsthat active employees accrue each year.

Additionally, school districts should stop picking up the employee portion of pensioncontributions. This is in the best interests of districts from both a nancial and a transparencystandpoint.

Why it works

When pension costs are borne by the state but salaries are set by the school district, there aremixed incentives. School districts want to reward their teachers now, but the state is the one that

will be paying for this reward for years to come. In fact, many school districts give bonuses oroffer 6 percent annual raises to teachers in their last years of work to boost pension payouts.13While this is an added cost to the school district for those few years, it signicantly adds to thecost of the pension for decades into retirement. Under the current system, school districts have

little incentive to curb those types of perks, because the majority of the cost will be paid forby the state. Instead, the school district should be responsible for the new benets accrued byemployees each year. This way, the district will be fully on the hook for any sweeteners offeredand will make more scally responsible decisions.

Making school districts responsible for these costs will also prevent the state from subsidizingwealthy school districts. If individual districts would like to pay their teachers higher salaries,

that is their choice but taxpayers statewide should not have to pick up the tab for those higherpensions. Recently, State Senate President John Cullerton recognized the regressive nature of thepension subsidy when discussing local districts paying more toward their pension costs. He toldthe State Journal-Registers editorial board14:

You guys arent paying a lot to your teachers down here. The people that benettremendously are the wealthier suburban school districts. Theyre paying gym teachers$150,000. They never have to worry about paying the normal cost into a pensionfund.

Additionally, this practice could curb the pension underfunding that has plagued the system foryears. When local governments are responsible for pension costs, they are much less likely to

skip payments than the state government. This is because they must ask the state governmentfor permission to skip a payment. But while the state has skipped its share of pension payments,

it wouldnt have any incentive to allow local governments to do so since this wouldnt bringany relief to the state budget. In this way, having local pension responsibility can help ensureunderfunding does not continue in the future.

Local pension responsibility is not an unusual practice. School districts in New York pay theentire employer pension cost,15 and in California, the school districts pay a majority of theemployer cost.16 Illinois sorely needs the increased transparency and accountability these reforms

would produce, and taxpayers deserve a clear and understandable pension system, which alignsincentives with cost savings.

Normal costsin the future

For the next 10 years, the

states normal cost fo

TRS will be approximately

$800 million annually

Then the normal cost de

creases gradually. This i

because of the new Tie

2 pension system for em

ployees hired after Jan

1, 2011. Those employ

ees contribute the same

amount as Tier 1 employ

ees, but the benets are

much smaller. Therefore

the employee contribu

tion will eventually more

than cover the normal cos

as active Tier 2 employee

become more prevalen

than active Tier 1 employ

ees in the system. Fund

ing the retirements o

former employees on the

backs of current employ

ees may cause regulatory

problems regarding the

structure of the pension

system.




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budget solution

8

The LocalGovernment

Distributive Fund

has sent local

governments

billions of

dollars. This

program

continues evenas the state

runs up higher

budget decits

and increases

its backlog of

unpaid bills.

Accountability all-around: End non-transparent state funding to local governments


End non-transparent state unding to

local governmentsPotential savings: $1.6 billion

The problem

A signicant portion of state income tax receipts in Illinois is distributed to local governmentsvia the Local Government Distributive Fund, or LGDF. This fund was established in 1969 inconjunction with the states rst income tax and annually receives approximately $1.1 billion ofstate income tax revenues. The LGDF redistributes the tax revenue to county and municipal

governments on a per capita basis.

As shown in Graphic 6, the LGDF has sent local governments billions of dollars. This programcontinues even as the state runs up higher budget decits and increases its backlog of unpaid

bills. Illinois cannot afford to keep sharing tax revenue.

Graphic 6. Income tax disbursements to local governments,actual and ination-adjusted 2010 dollars

Source: Illinois Department of Revenue, Bureau of Labor Statistics, Illinois Policy Institute calculations

This tax sharing program is one of the many top-down spending programs that reduce spendingtransparency and accountability at both the state and local levels. The Taxpayers Federation ofIllinois, or TFI, studied this issue and the 230 different state and local tax sharing programs thatexist in Illinois. 17


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budget solution

This tax sharing

program is

one of the

many top-

down spending

programs

that reduce

spending

transparency

and

accountabilityat both the

state and local

levels.


TFI calculated that in 2009, the states 11 largest revenue sharing programs had $13.2 billionin total tax revenues, which were subsequently shared with local governments via multiple and,in some cases, complex redistribution formulas. (See Transform school funding and Localpension accountability chapters for more details.) As seen in Graphic 7, the LGDF accounted

for only 20 percent of the value of these revenue sharing programs in 2009.

Graphic 7. Local government revenue sharing programs in 2009

Source: Taxpayers Federation of Illinois

The LGDF is one of many funds, such as the Public Transportation Fund and the TourismPromotion Fund, that receive transfers of cash from the General Revenue Fund, or GRF. Theselegislatively-required transfers out of the GRF siphon off signicant amounts of state funding.

In 2011, Illinois transferred more than $2 billion out of the GRF (see Graphic 8). The LGDFreceived slightly more than $1 billion of those transfers.18


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budget solution

0

Ultimately, theLGDF and all

the other funds

that collect

money from the

state income

tax is little

more than a

state subsidyto localities

that dont want

to stay within

the tax rates

demanded by

local voters.


Graphic 8. Illinois transfers out of general funds (in millions)

Fund FY2011 Revised FY2012 Rec.

Local Government Distributive $1,042.1 $1,087.2

Public Transportation $409.0 $429.4

Downstate Public Transportation $170.2 $175.0

School Infrastructure $68.3 $62.9

Workers Compensation $55.0 $55.0

U of I Hospital Services $45.0 $60.0

Metropolitan Exp., Aud. & Oce Bldg. $37.9 $37.9

Tourism Promotion $30.3 $30.8

Agriculture Premium $23.8 $23.8

Live and Learn $20.9 $20.9

Audit Expense $17.1 $17.9

DCFS Children Services $17.0 -

U of I Income Fund $15.8 $15.8

Capital Litigation Trust $15.4 $15.4

Partners for Conservation $14.0 $14.0

Coal Technology Development $12.3 $14.5

Estate Tax Collection Distributive $9.4 $10.1

State Treasurers Bank Service Trust $8.1 $8.1

Lincoln Presidential Library $6.7 $9.0

Communication Revolving $5.0 $5.0

Comprehensive Regional Planning $5.0 $5.0

Digital Divide Elimination $5.0 $5.0

Illinois Veterans Rehabilitation $4.8 $4.9

Professional Services $4.6 $4.6

IL Capital Revolving Loan $3.0 -

Illinois Thoroughbred Breeders $2.4 $2.4

Tax Check O Funds $1.7 $1.7

Illinois Standardbred Breeders $1.7 $1.7

Build Illinois $1.7 $1.7

Fair and Exposition $1.7 $1.7

Corporate HQ Relocation Assistance $1.5 $3.0

Violence Prevention $1.4 $1.4

Youth Alcoholism & Substance Abuse Prevention $1.1 $1.1

DHS Private Resources $1.0 -

Intermodal Facilities Promotion $0.5 $0.5

Amtrak Intercity Rail $0.4 $0.6

Municipal Economic Development $0.3 $0.3

Heartsaver AED $0.1 $0.1

Federal Financing Cost Reimbursement - $0.2

Healthcare Provider Relief - $160.0

State Garage Revolving - $17.1

Metropolitan Pier and Exposition Authority Incentive - $5.2

Public Utility - $5.0

IL Veterans Assistance - $1.0

Senior Citizen Real Estate Deferred Tax Revolving - $0.5

Total Legislatively Required Transfers $2,061.2 $2,317.4

Source: Taxpayers Federation of Illinois


21/68

budget solution

LGDF is an

outdated

sweetener that

allows local

government to

provide services

without directly

taxing residents

to pay for them.

This reduces the

accountabilityof local ofcials

and the

transparency

of local

government

nances.


This large amount of top-down spending separates jurisdictions that collect tax revenues fromthose that spend them. Ultimately, the LGDF and all the other funds that collect money fromthe state income tax is little more than a state subsidy to localities that dont want to stay withinthe tax rates demanded by local voters.

Our solution

The state cannot afford to continue funding all of these special funds. At a time when the stateneeds to make every penny count, these transfers out of the GRF are often done without

transparency or accountability. Illinois should eliminate most or all of the transfers out of theGRF, including state income tax receipts to localities. These funds would be better used by thestate to pay down bills and reduce the burden on taxpayers.

This change ts together well with the proposed repeal of the state income tax hike as:

Billions in annual tax dollars are returned from the state government to localresidents and businesses.

Accountability for spending and investing those funds is returned to the

productive forces in the economy and kept away from the state bureaucracy. The state no longer is a collector and distributor of the above tax dollars,

returning accountability for taxing and spending to the local governments. Local governments will have to then prioritize spending or prove the necessity

and effectiveness of programs that require additional funding.

Along with the elimination of the transfers, the state government should also reduce and eliminatemany unfunded or partially funded mandates that increase costs to local governments. A reviewby the Taxpayers Action Board found that mandates are a major contributor to inefcienciesin government spending. A solution is to ensure that all mandates, current and future, contain a

sunset provision. This would guarantee that mandates no longer meeting their original objectiveswould face extinction, while those that need to be maintained would require a renewal process.

Why this works

LGDF is an outdated sweetener that allows local government to provide services withoutdirectly taxing residents to pay for them. This reduces the accountability of local ofcials and thetransparency of local government nances. Eliminating this top-down subsidy allows the state tobetter meet its obligations. Equally important, it helps ensure that the services provided by local

government reect the willingness of residents to pay for those services through direct taxes.




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23/68

budget solutions

S rrr r . Ur, jrrr,M,

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Overhaul Medicaid

Introduce Competitive Grant Funding


24/68

budget solution

4

In Illinois,Medicaid is

failing the

states most

vulnerable

populations.

Sensible spending: Overhaul Medicaid

SenSibleSpending

Overhaul MedicaidPotential savings: $1.7 billion

The problemIn Illinois, Medicaid is failing the states most vulnerable populations. Medicaid is a joint stateand federal program that aims to provide health care to the poor and disadvantaged. It is fundedby federal, state and local taxes and is administered by state governments. Each state receives

federal reimbursement of actual expenditures according to their Federal Medical AssistancePercentage, or FMAP rate. This rate can range from 50 percent to 83 percent of expendituresdepending upon the states per capita personal income. Historically, half of all Medicaid spendingin Illinois is paid for with federal funds.19

In Illinois, Medicaid serves both the nondisabled low-income population and the elderly,blind and disabled populations. While there may be some overlap between these two groups,

each group may require different policies tailored to their specic needs. As Graphic 9 shows,children and nondisabled adults currently make up 83 percent of enrollees, but only account for48 percent of Medicaid spending.20

Graphic 9. Children and nondisabled adults make up majority of Medicaid patients

Share of Medicaid and Childrens Health Insurance Program

(AllKids) enrollment by age and disability status in scal year 2012

Source: Illinois Policy Institute calculations

The number of people in Illinois Medicaid program has increased signicantly in recent yearsIn 2000, approximately 1.5 million people were enrolled in Illinois Medicaid program. By2010, that number had increased by more than 80 percent to 2.8 million Medicaid patients


25/68

budget solution

12.2 percent

of Illinoisans

were enrolled

in Medicaid in

2000, but just

ten years later

that proportion

grew to 21.5

of the states

population.


(see Graphic 10).21 As a comparison, over that same time period, Illinois population only grew3.3 percent.22 This means that 12.2 percent of Illinoisans were enrolled in Medicaid in 2000, butjust ten years later that proportion grew to 21.5 of the states population.

Graphic 10. Number of Medicaid enrollees in Illinois

Source: Medicaid Statistical Information System

Additionally, as Medicaid grew, the composition of Medicaid enrollees changed. Medicaidhistorically has focused on individuals and families under the Federal Poverty Level, or FPL.In 2003, a majority of Medicaid patients in Illinois had incomes below 100 percent of the FPL.

After expansions of eligibility in the following years, only 37 percent of Medicaid patients werebelow 100 percent of the FPL (see Graphic 11).23

Graphic 11. Proportion of Illinois Medicaid patients aboveand below 100 percent of the Federal Poverty Level

2003 2011

Source: U.S. Census Bureau


26/68

budget solution

6

Unfortunately,the states low

reimbursement

rates and

long delays

in paying

providers have

forced many

doctors tomake Medicaid

patients wait

longer for care,

if they agree

to see them at

all. The states

reimbursement

fees are

substantiallybelow the

national

average.


Even with these Medicaid expansions, the number of uninsured people in Illinois continued toclimb over this time period (see Graphic12). This suggests that rather than covering previouslyuninsured individuals, Medicaid expansions have crowded out private sector insurance coveragewhile leaving the uninsured population largely unaffected.

Graphic 12. Number of uninsured people in Illinois

Source: U.S. Census Bureau

Currently, the Medicaid program in Illinois operates on a fee-for-service basis, reimbursingdoctors and hospitals for services they provide at a specied rate. Unfortunately, the states low

reimbursement rates and long delays in paying providers have forced many doctors to makeMedicaid patients wait longer for care, if they agree to see them at all. The states reimbursementfees are substantially below the national average (see Graphic 13). In fact, only six states havelower fees than Illinois.24 Worse yet, the Medicaid fees for primary care physicians are only 57

percent of the already-low Medicare fees.25 These fees generally do not even cover the actual

cost of providing services.26 It is no surprise, then, that doctors simply cant afford to keep theirdoors open if they take more Medicaid patients. In spite of this, Gov. Quinn has proposed

cutting these low fees by another 6 percent.27

Graphic 13. Illinois reimbursement rates are lowest in region

Medicaid reimbursement rates indexed to U.S. average

Source: Zuckerman et al.


27/68

budget solution

Children on

Medicaid

are six times

more likely

than privately

insured patients

to be denied an

appointment to

see a specialist.


As if the low fees werent challenging enough, Illinois payment delays make the problem evenworse. A study of 21 state Medicaid programs found that Illinois had the third-longest Medicaidpayment cycle.28 Since then, the state has increased the payment cycle to a record 162 days, morethan twice as long as the previous record delays.29-30

These factors have created an environment in which Medicaid enrollees theoretically have

medical coverage, but limited access to care. Children on Medicaid, for example, are six timesmore likely than privately insured patients to be denied an appointment to see a specialist.31 For

some specialists, the barriers are even worse. Medicaid patients have only a one in ve chance ofseeing an orthopedic specialist, while privately insured patients are denied appointments only 2percent of the time.32 These same barriers exist when seeking new primary care physicians and

urgent follow-up care.33 A majority of doctors are now taking few or no new Medicaid patients.34Medicaid patients are even less likely to see a physician than uninsured patients, even in safetynet clinics.35-36

Graphic 14. Medicaid patients are far less likely to see a specialist

Likelihood of scheduling appointment, by insurance status and specialist type

Source: Bisgaier and Rhodes, New England Journal of Medicine

Even when doctors agree to see them, Medicaid patients often wait longer for services.37 Tosee an endocrinologist, for example, children on Medicaid must wait on average 103 days, morethan twice as long as privately insured patients.38 For all specialties, the average wait for Medicaidpatients is 22 days longer than privately insured patients.39


28/68

budget solution

8

The accessbarriers

Medicaid

patients often

face have

forced many

to seek non-

urgent care

from emergencyrooms. Medicaid

patients seek

emergency

room care

about twice

as often as

both privately

insured and

uninsuredpatients.


Graphic 15. Medicaid patients wait longer to receive care

Length of wait times, by insurance status and specialty type (days)

Source: Bisgaier and Rhodes, New England Journal of Medicine

The access barriers Medicaid patients often face have forced many to seek non-urgent carefrom emergency rooms. Medicaid patients seek emergency room care about twice as often asboth privately insured and uninsured patients.40-41 This disparity is even larger for preventable

conditions: Medicaid patients with preventable conditions seek hospital care seven times asoften as privately insured patients, and three times as often as the uninsured.42-44

Graphic 16. Access barriers force Medicaid patients to useemergency rooms for preventable conditions

Number of emergency visits for preventable conditions per 1,000 people in 2007, by insurance status

Source: Tang et al.


29/68

budget solution

If and when

Medicaid

patients receive

care, they

frequently

suffer worse

outcomes than

both privately

insured and

uninsured

patients. Theyhave the

greatest risk

of mortality

during common

surgeries and

this greater risk

remains even

after discharge.


While this type of use of emergency rooms has steadily declined for uninsured and privatelyinsured patients, it has grown by 38 percent for Medicaid patients. Indeed, four out of vepatients who seek emergency room care on a frequent basis are enrolled in either Medicare orMedicaid.45 By segregating Medicaid patients into inferior care, the system ensures that when

theyre actually able to get care usually from hospitals it is at a much greater cost to thetaxpayer.

If and when Medicaid patients receive care, they frequently suffer worse outcomes than both

privately insured and uninsured patients. They have the greatest risk of mortality during commonsurgeries and this greater risk remains even after discharge.46-47 Medicaid patients experience thelongest hospital stays and are more likely to have surgical complications.48-49

Graphic 17. Medicaid patients are more likely to die after heart surgery

Likelihood of in-hospital death following percutaneous coronary intervention, by insurance type

Source: Gaglia et al.

Much of this disparity stems from poor access to care. Because access to the very best providers

is severely limited, Medicaid patients are often forced to use lower quality doctors, hospitalsand specialists. High-volume surgical centers, for example, generally provide the best care.50Unfortunately, Medicaid patients are the least likely group to use these high-volume hospitals,ultimately leading to lower quality care.51

Limited access to early screening and treatment also contributes heavily to their poorer outcomes.

It is no surprise, then, that Medicaid patients are more likely to be diagnosed with diseases at later,less treatable stages. The odds of being diagnosed with a late-stage melanoma, for example, arenearly twice as high for Medicaid patients than for the uninsured, and nearly ve times greaterthan for those who are privately insured.52 There are similar disparities in late-stage diagnosis forother types of cancer.53-54

The problems Illinois Medicaid program faces today are alarming, but they will only grow worse in the coming years. Illinois currently faces a shortage of doctors, nurses and otherhealth care providers, particularly in rural areas. There are primary care provider shortages


30/68

budget solution

0 Sensible spending: Overhaul Medicaid

in all but ve of Illinois 102 counties.55 The fact that half of recent graduates from Illinoismedical schools are eeing the state exacerbates the already grim situation.56

While the supply of physicians continues to shrink, ObamaCares massive expansion of

Medicaid will cause demand to explode. ObamaCare is expected to add another 1.5 millionpeople to Illinois Medicaid program in 2014 alone.57 What was created as a temporary safety

net for Americas most vulnerable population will serve more than a third of the population injust the rst few years of ObamaCare, with that number growing over time. These additiona

enrollees are expected to cost Illinois $20 billion in just the rst 10 years of implementation.58

In response to the states current scal crisis, Illinois has already delayed payments to doctors

and hospitals far longer than ever before. If the state cannot provide the most vulnerablepopulations with adequate access to medical care today, how can it be expected to providequality care to one-third of Illinoisans by slashing reimbursement rates and delaying payments?

Our solution

If Illinois Medicaid program is ever going to provide the most vulnerable population with access

to quality health care, serious reform is necessary. This reform should begin with transformingMedicaids fee-for-services program into a sliding scale premium assistance program, paired

with health savings accounts for nonelderly and nondisabled patients. Illinois should also revisiteligibility requirements to ensure that the most vulnerable residents arent crowded out of thesafety net by middle class families.

Premium assistance models provide recipients with a dened contribution toward the purchaseof private health insurance.59 This contribution would be placed in a Medicaid Savings Accountor MSA, similar to a Health Savings Account (see sidebar for more information on HealthSavings Accounts). Using the funds in this personal MSA, individuals can select the insurance

that best ts their needs and preferences. After paying for the insurance premium, Medicaidpatients could use remaining funds in the account for health care expenses such as doctor visit

co-pays, prescription drugs and hospital stays. Premium assistance models have traditionallyfound wide, bipartisan support and are already used for certain low-income children, elderlydrug benets and the middle class.60

Graphic 18. Budget Solutions proposal to provide Medicaidassistance to nondisabled and nonelderly on a sliding scale

Suggested subsidy levels by federal poverty level

Federal poverty level Subsidy level

Below 50% 100%

50% to below 75% 90%

75% to below 100% 75%

100% to below 125% 50%

125% to below 150% 30%

150% or more 10%


Health SavingsAccounts

Health Savings Accounts,

or HSAs, are an alternative

to traditional health insur-

ance that has been grow-

ing in popularity, espe-

cially among low-income

groups. When tied with

a high-deductible health

insurance plan, HSAs al-

low individuals to save

money in a tax-free ac-count, which they use to

pay for health care-related

expenses. Funds in HSAs

accumulate over time,

earn interest tax-free and

can be willed to surviving

beneciaries. Because the

money is in an individual

account, HSAs provide

incentives for consum-

ers to ask questions anduse their funds more

cautiously, which leads

to cost containment. A

similar program can be

developed specically for

Medicaid participants.


31/68

budget solution

Illinois should

seek greater

exibility

by asking to

receive federal

matching funds

as a block

grant.


To protect the most vulnerable and avoid trapping the poor into government dependency, thestate should determine premium assistance and MSA deposits on a sliding scale (see Graphic 18).The poorest enrollees would receive full subsidies based on the average insurance premium anddeductible cost by age in Illinois, but the subsidies would gradually phase out for those who can

afford to pay a portion of their health care cost (see Graphic 19).

Graphic 19. Budget Solutions proposal for individual premiumand MSA subsidies by age (nondisabled and nonelderly)

Federal poverty levelAge0-18

Age19-24

Age25-34

Age35-44

Age45-54

Age55-64

Average

Below 50% $3,770 $4,403 $4,433 $5,170 $6,134 $7,344 $4,110

50% to below 75% $3,393 $3,963 $3,990 $4,653 $5,521 $6,610 $3,876

75% to below 100% $2,828 $3,302 $3,325 $3,878 $4,601 $5,508 $3,241

100% to below 125% $1,885 $2,202 $2,217 $2,585 $3,067 $3,672 $2,067

125% to below 150% $1,131 $1,321 $1,330 $1,551 $1,840 $2,203 $1,303

150% or more $377 $440 $443 $517 $613 $734 $426


Unfortunately, the nature of todays Medicaid program ensures that the state cannot enactthese reforms alone. Federal rules and regulations give states little exibility in designing andimplementing their Medicaid programs. In order to implement these reforms, Illinois would needto seek a Medicaid waiver from the Centers for Medicare and Medicaid or amend its state plan.

Illinois should seek greater exibility by asking to receive federal matching funds as a blockgrant. This block grant should be accompanied by a global waiver, freeing the state from much

of the federal micromanagement the current program faces. In exchange for giving the statemore freedom, the federal government would receive budget certainty and, ultimately, long-termsavings. The 2011 House Budget, or the Ryan Plan, contained exactly this kind of trade-off.

Rhode Islands recent experience with similar freedom and funding has produced very promisingresults. After only 18 months, the state had reduced its Medicaid spending by 30 percent anddrastically improved quality of care, with only modest reforms to wellness programs, co-

payments, provider audits, fraud prevention, competitive bidding and long-term care services. Itis a testament to the idea that it is possibleto provide better services at lower costs, and that moremoney does not always mean better outcomes.

Like Rhode Island, Illinois should seek a block grant equal to what it could be expected to receive

under the current state plan. The state Department of Healthcare and Family Services reportsthat federal matching funds on scal year 2013 liabilities will reach $5.73 billion, of which $4.85billion will pass through the states General Revenue Fund.

After implementing these reforms, the state would be responsible for $3.51 billion of matchingfunds, with $2.63 billion coming from the General Revenue Fund.


32/68

budget solution

2

By transformingMedicaid

to a sliding

scale premium

assistance

program,

the state

can improve

outcomes forMedicaid

patients while

spending less

taxpayer

money.


Graphic 20. General Revenue Funds Medicaidliabilities by funding source (in billions)

GeneralRevenue Fund

Fiscal year2012

BudgetSolutions 2013

Fiscal year 2013without reorm

Change rom FY2012to Budget Solutions 2013

State funds $4.29 $2.63 $4.85 -$1.66

Federal funds $4.29 $4.85 $4.85 $0.56

Total GeneralRevenue Funds

$8.58 $7.48 $9.69 -$1.10

Source: Illinois Department of Healthcare and Family Services and Illinois Policy Institute calculations

To put these federal gures into sharper perspective, Illinois receives relatively low federafunding compared to the level of poverty in Illinois. For example, if the federal governmentwere to give each state a portion of a total sum of federal Medicaid dollars as a block grant

allocated by the share of people in poverty each state has, Illinois would receive more than $11billion in federal funds for scal year 2013.61

If the federal government refuses to give a block grant in either of these manners, the statewould need to implement sliding scale assistance for the disabled and elderly, as well.

Why this works

Illinois current Medicaid system does not provide enrollees with true access to care despite its

enormous price tag for taxpayers. Instead of continuing to pour money into a failing systemMedicaid needs to be fundamentally reformed.

The top-down price controls and government micromanagement of the current Medicaid systemhave not worked. By transforming Medicaid to a sliding scale premium assistance program, the

state can improve outcomes for Medicaid patients while spending less taxpayer money. Thesereforms will stabilize spending through strong competition and market forces. They would give

the most vulnerable residents the freedom to choose health plans that meet their needs, ratherthan the requirements imposed by bureaucrats in Springeld or Washington, D.C. The freedomto select plans based on price, range of options and quality would foster a competitive marketthat creates more value for less money. Transforming Medicaid into a premium assistance

program would give Medicaid enrollees a vested interest in making sure that their health caredollars are spent efciently by empowering them to nd the best value in plans and providers.

This program would also ensure that the most vulnerable members of society have access toquality doctors and portable coverage. Doctors will no longer need to limit the number ofMedicaid patients they see due to low and late reimbursements from the state. Instead, Medicaid

patients will look like any other patients with private insurance. This would ensure continuityof care, as Medicaid patients would no longer need to change doctors as they fall in or out ofMedicaid eligibility. With these changes, Medicaid can be a program that offers actual accesstohealth care, not just meaningless coverage.


33/68

budget solution

Transforming

Medicaid into

a premium

assistance

program would

give Medicaid

enrollees a

vested interest

in making sure

that their health

care dollars arespent efciently

by empowering

them to nd

the best value

in plans and

providers.


Additional Medicaid tables

Graphic 21. Average premium and deductible in individual market by age

Age0-18

Age19-24

Age25-34

Age35-44

Age45-54

Age55-64

Average

Premium $1,224 $1,320 $1,668 $2,304 $3,012 $3,996 $2,196

MSA deposit $2,546 $3,083 $2,765 $2,866 $3,122 $3,348 $2,935

Total cost $3,770 $4,403 $4,433 $5,170 $6,134 $7,344 $5,131


Graphic 22. Illinois Medicaid enrollment for nondisabled, nonelderly

Federal poverty

level

Age

0-18

Age

19-24

Age

25-34

Age

35-44

Age

45-54

Age

55-64Total

Below 50% 326,815 31,335 15,460 29,318 10,426 13,790 427,144

50% to below 75% 148,842 7,258 24,342 12,651 14,838 12,556 220,488

75% to below 100% 152,817 9,131 16,098 13,910 3,090 21,306 216,351

100% to below 125% 220,656 7,431 23,718 17,909 12,356 8,646 290,716

125% to below 150% 142,422 8,302 22,536 14,333 13,841 14,142 215,576

150% to below 175% 123,774 16,835 21,619 15,921 5,206 12,755 196,111

175% or more 490,086 44,868 66,769 60,303 53,946 18,644 734,615

Total 1,605,412 125,160 190,543 164,345 113,703 101,839 2,301,001

Source: U.S. Census Bureau, Illinois Department of Healthcare and Family Services and Illinois Policy Institute calculations




34/68

budget solution

4

ThroughCompetitive

Grant Funding,

programs

will have to

vie for the

states scarce

resources based

on programeffectiveness

and need from

a pool of $150

million.

Sensible spending: Introduce Competitive Grant Funding

SenSibleSpending

Introduce Competitive Grant FundingPotential savings: $200 million

The problemEvery year the state budget has several hundred grants of less than $5 million each spread overvarious departments. Most of these are relatively small initiatives that receive relatively littleattention and even less scrutiny. Added together, these small line items cost approximately

$350 million per year, a sum larger than the total operating budget of several state agenciesIllinois taxpayers cannot continue to fund all these programs, but that also doesnt mean theyall must go.

Graphic 23. Examples of programs eligible for Competitive Grant Funding

Department Program

Fiscal year 2012

appropriation

Oce of the GovernorExpenses related to ethnic celebrations, special

receptions and other events$50,000

Department of Agriculture Awards and premiums at the Illinois State Fair $202,100

Illinois Violence PreventionAuthority

Bullying prevention $300,000

Board of Higher Education Diversifying Higher Education Faculty in I ll inois grants $1,640,000

Oce of the Lieutenant GovernorFor operational expenses of the Oce of the Lieutenant

Governor$2,001,300

Illinois Arts CouncilGrants to public radio and television stations and related

administrative expenses$2,147,000

Board of Higher Education Grow Your Own Teachers $2,500,000

Ill inois Community Colleges Community Colleges Workforce Development grants $3,311,300

Central Management Services For expenses of the Upward Mobility Program $4,037,500

Illinois Ar ts Council Grants and nancial assistance for ar ts organizations $4,214,400

Source: Illinois appropriation bills: HB3717, HB2168, HB3700 and HB0124

Our solution

Every item whose nal 2012 funding is $5 million or below will not receive any automatic

funding, but is qualied to earn its funding through a proposed program called CompetitiveGrant Funding. Through Competitive Grant Funding, programs will have to vie for the states

scarce resources based on program effectiveness and need from a pool of $150 million. Thesize of the pool of money available for small projects would grow at a steady rate of populationplus ination in future years.

If a small program is vital to an agencys mission, then that agency can submit a detailed proposalto an independent review panel that will publish clear assessment guidelines. Similar programs atthe federal level, such as the federal Government Accountability Ofces Program Assessment

Rating Tool (PART), and the federal Department of Educations Invest in Innovation Grantawards, could serve as models for Competitive Grant Funding.


35/68

budget solution

While many

of these small

programs may

be worthwhile,

there is not a

lot of scrutiny

or transparency

as to how

money for these

smaller state

budget itemsis spent. But

taken together,

these programs

add up to

a signicant

amount.

Sensible spending: Introduce Competitive Grant Funding

Unfortunately, some may attempt to undermine the purpose of the program, which is to bringtransparency and accountability to small, often overlooked programs. It would be possible forlegislators to bundle programs together to have them move them beyond the $5 million barrier. Ifthat were to happen, those programs would no longer need to compete for funding. For example,

in the scal year 2012 budget, there is a $5 million line item in the Department on Aging thatreads For Expenses of the Discretionary Government Projects.62 This gives no information as

to what the funding will go toward and leaves taxpayers in the dark as to how their money is beingspent. This is not good governance. If legislators try to bundle items to avoid the Competitive

Grant Funding process, they will reveal themselves as mere politicians, not true reformers.

Why this works

While many of these small programs may be worthwhile, there is not a lot of scrutiny or

transparency as to how money for these smaller state budget items is spent. But taken together,these programs add up to a signicant amount. Competitive Grant Funding will increasetransparency and produce a wealth of standardized information. Based on the publicly availableinformation with each proposal, policymakers will have to prioritize what is eligible for funding

and what is not. If successful, this program could serve as an accountable funding model for

larger programs in the future.

Competitive Grant Funding would save the state an estimated $200 million in scal year 2013and the competition for dollars will ensure that state money goes to the most necessary andeffective programs. Also, by requiring that every program provide vital information during thecompetition process, taxpayers will gain information and transparency about these programs and

the governments decision-making process. This will help valuable programs get the funding theyneed while ensuring that taxpayer dollars are protected and responsibly stewarded.




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37/68

S

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Ik.

Reform state retiree health care

Reform human services

Rightsize state employee pay

Reform cost of living adjustments

budget solutions


38/68

budget solution

8

The state haspromised more

than $100

billion in state

retiree health

benets over

the next 30

years, yet it

has set asidenothing to pay

for them.

Realignment with reality: Reform state retiree health care

reAlignmentwithreAlity

Reorm state retiree health carePotential savings: at least $425 million

The problemIllinois underfunded pension funds have garnered a lot of attention, and rightly so; the statesve pension systems are short approximately $85 billion. But the state has another grosslyunfunded liability has been largely ignored: retiree health care.

The state has promised more than $100 billion in state retiree health benets over the next 30years, yet it has set aside nothing to pay for them. 63 These unfunded promises are growing 2.5times faster than state revenues and, if left unreformed, will work in tandem with rising pension

costs to dramatically crowd out resources for core government services. One such service thatwould be crowded out is health care for the poor and disadvantaged.

In Illinois, three general groups of people receive free or subsidized health care: the poor, bothchildren and adults; the disabled and the elderly; and retired state employees, many of whom willreceive more than $1 million in pension payments over the course of their retirement.

The state cannot afford the health care costs of all these groups, particularly with the costs ofObamaCare looming on the horizon. (For more details, see the Medicaid reform section.)

Illinois administers three major health insurance programs for retired state employees: the State

Employee Group Insurance Program, or SEGIP; the Teachers Retirement Insurance Programor TRIP; and the College Insurance Program, or CIP. Together, these three programs providehealth insurance to more than 180,000 retirees, dependents and surviving spouses.64

Each year the state pays for these health care plans with current revenues rather than assets builtup over time. This is problematic because the cost for these programs is expected to increasean average of 4.5 percent per year.65-66 This future growth may be understated, as it is far below

the historical average. Even so, it is nearly two times faster than the states expected tax revenuegrowth. Even assuming a modest 4.5 percent growth, the total cost to taxpayers of providingthis insurance will exceed $100 billion over the next 30 years.67-68 The latest actuarial valuationfor these programs estimates it has an unfunded liability of nearly $45 billion the amount the

state should set aside today in order to meet these obligations in the future.69-70


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budget solution

Generous

coverage for

retired state

employees is

competing with

resources for

the steadily

eroding services

that Illinois

poor receive

under Medicaid.


Graphic 24. Retiree health insurance to cost taxpayersmore than $5 billion annually within 30 years

Annual employer costs for retiree health insurance, by program


Generous coverage for retired state employees is competing with resources for the steadily

eroding services that Illinois poor receive under Medicaid. The states low reimbursement ratesand long payment delays to doctors and hospitals have already left the states most vulnerablepopulation with few options.71-76 They must wait much longer to receive care, if they can get

that care at all.77-78 With nowhere to turn, Medicaid patients seek non-urgent care from hospital

emergency rooms.79-80The programs mismanagement has created huge access barriers that willonly grow more impenetrable over the coming years, as unpaid bills pile up and ObamaCare putsadditional pressure on the system.81-82

Meanwhile, many state retirees contribute little or nothing to their health insurance premiums. Inthe states largest retiree health program, the State Employee Group Insurance Program, retireesonly contribute an average of 9 percent toward their premiums. Thats signicantly less than

in other states, which require state retirees to pay six times that amount.83 In the private sector,the vast majority of retirees are not offered coverage at all,84 and the few that are must pay themajority of their insurance costs.85


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budget solution

0

There is asolution. Illinois

can properly

align state

retiree benets

with those in

other states

by taking into

account aretirees years

of service, age

at retirement

and ability to

pay.


Graphic 25. Taxpayers shoulder larger burden in Illinois than in other states

State (employer) share of retiree health insurance costs, by program

Source: Illinois Policy Institute calculations.

Finally, to make matters worse, the states health coverage policies provide incentives for state

workers to retire early, signicantly driving up costs and length of retiree health insurance.

By not acting on reforms, state politicians will make a clear choice. They will favor providingCadillac coverage for little or no charge to well-off state retirees, while the poorest and most

vulnerable residents must search desperately for a doctor willing to see them.86-87 The statesprioritization of retired government workers over the poor and disadvantaged has already hurtmany. As the cost of providing these generous benets continues to climb, even more needy

people will be pushed aside.

Fortunately, there is a solution. Illinois can properly align state retiree benets with those inother states by taking into account a retirees years of service, age at retirement and ability to pay

Illinois can also discourage early retirement by capping subsidies for future retirees, ensuringthat those who choose to retire several years early are not given special rewards.

Our solution

There is no single magic bullet for containing skyrocketing retiree health care costs. Instead,

the state will need multiple reforms that, together, ensure that the cost of providing thesebenets does not crowd out other state spending. These reforms include:

Increasing retiree contributions toward premiums. Other states require

retirees to pay a much higher portion of their premiums than Illinois does.By aligning retiree contributions to the average contributions retirees make inother states, Illinois could save more than $40 billion over the course of the

next 30 years.88 These savings also would reduce the states current unfundedliability of $45 billion by approximately $18 billion, or 40 percent. Beginningin scal year 2013, the state should determine premium subsidies on a slidingscale according to a combination of a retirees ability to pay, years of service and

retirement age. This would reward employees for lifelong service, discourageearly retirement and protect low-income retirees. This would reduce the statescontribution to 51 percent, down from 91 percent.89 If adopted in all three


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budget solution

If lawmakers

care about

ensuring that

they can

provide health

care for the

most vulnerable

Illinoisans, they

must commit to

reforming this

system now.


insurance programs, this strategy would save the state nearly $425 million inscal year 2013 alone.90

Graphic 26. Reform savings in scal year 2013

State government retiree health care costs with and without reform (dollars in millions)

Health care system Fiscal year 2012 Budget Solutions 2013 Savings

SEGIP $766.93 $417.33 $349.60

TRIP $110.03 $40.19 $69.84

CIP $13.99 $8.07 $5.92

Total $890.95 $465.60 $425.35

Source: COGFA and Illinois Policy Institute calculations

Capping retiree subsidies. Many government workers retire before reaching

retirement age. The state should not reward them for choosing to retire early.Beginning in scal year 2013, the state should cap subsidies for all new retireesat the same level the state pays for Medicare-eligible retirees in the same benetpoints and income brackets. Because early retirees are the most expensive to

cover, this proposal would save the state several billion dollars over the nextfew decades.

Ending retiree subsidies. Private sector employees are rarely offered retiree

health insurance. When they are offered coverage at all, many have to paythe full cost of their premiums. Because the state has already increased thefull benet retirement age to 67 for newly hired employees, it should also

end retiree subsidies for new hires. These new employees will be Medicare-eligible by the time they are able to collect their full benets, making the states

supplemental coverage largely unnecessary and even further out of sync withthe private sector.

Why this works

Without reform, Illinois taxpayers will spend more than $100 billion over the next 30 years, largelyfrom general revenues, to provide health insurance to state retirees who are already receivinggenerous pensions. Lawmakers will sink billions of dollars into providing Cadillac coverage for

well-off retirees instead of protecting the most vulnerable.

Even with these reforms, retired state workers will have benets that are virtually unheard-of

in the private sector. The vast majority of private sector retirees are not offered retiree health

insurance at all. When they are offered coverage, they generally pay all or most of the cost oftheir premiums.

There is a consensus that retiree health benets are not protected by the state constitution.91-93

Lawmakers can change these benets to ensure the state can provide assistance to residents whoreally need help. If lawmakers care about ensuring that they can provide health care for the most

vulnerable Illinoisans, they must commit to reforming this system now.




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budget solution

2

The stategives grants

to numerous

nonprot

organizations.

Unfortunately,

signicant

performance

metrics are notavailable for

the public to

gauge how well

money is being

allocated or

spent.

Realignment with reality: Reform human services

reAlignmentwithreAlity

Reorm human servicesPotential savings: $500 million

The problemIllinois offers human services programs through a number of government agencies, includingthe Department on Aging, Department of Children and Family Services, Department ofHealthcare and Family Services and the Department of Human Services. As Illinois takes the

difcult, but necessary, path out of its current scal crisis, all departments will need to share inbudget sacrices. But theres an opportunity to improve services with a smaller budget throughprioritization, efciency and technologybased solutions.

In scal year 2012, Illinois appropriated $6.9 billion toward human services departments.But Illinois current model for delivering human services is broken. One problem is a lack ofaccountability and transparency. The state gives grants to numerous nonprot organizations.

Unfortunately, signicant performance metrics are not available for the public to gauge howwell money is being allocated or spent. While performance measures may be more difcult toapply to human services compared to other areas, they are no less important. Without a senseof how effective programs or vendors are, it is impossible to make responsible decisions, and

opportunities for waste abound.

Another problem is Illinois backlog of unpaid bills. When the state overpromises to thesenonprots and then fails to pay them on time or in a predictable fashion, it can signicantly

disrupt their operations. Over the last few years, state payments to vendors such as humanservices providers have been both untimely a

Documents

Budget Solutions 2013: Innovation for Illinois