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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
Vision
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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.
An eective balanced budget requirement and an honest spending limit
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.
An eective balanced budget requirement and an honest spending limit
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 eective balanced budget requirement and an honest spending limit
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.
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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.
Accountability all-around: Transform school funding
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.
Accountability all-around: Transform school funding
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
AccountAbilityAll-Around
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
AccountAbilityAll-Around
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.
Accountability all-around: End non-transparent state funding to local governments
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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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.
Accountability all-around: End non-transparent state funding to local governments
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
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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.
Accountability all-around: End non-transparent state funding to local governments
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.
Click here to return to
the table of contents.
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budget solutions
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Overhaul Medicaid
Introduce Competitive Grant Funding
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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
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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.
Sensible spending: Overhaul Medicaid
(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
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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.
Sensible spending: Overhaul Medicaid
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.
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budget solution
Children on
Medicaid
are six times
more likely
than privately
insured patients
to be denied an
appointment to
see a specialist.
Sensible spending: Overhaul Medicaid
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
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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.
Sensible spending: Overhaul Medicaid
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.
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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.
Sensible spending: Overhaul Medicaid
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
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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%
Source: Illinois Policy Institute calculations
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.
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budget solution
Illinois should
seek greater
exibility
by asking to
receive federal
matching funds
as a block
grant.
Sensible spending: Overhaul Medicaid
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
Source: Illinois Policy Institute calculations
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.
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budget solution
2
By transformingMedicaid
to a sliding
scale premium
assistance
program,
the state
can improve
outcomes forMedicaid
patients while
spending less
taxpayer
money.
Sensible spending: Overhaul Medicaid
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.
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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.
Sensible spending: Overhaul Medicaid
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
Source: Illinois Policy Institute calculations
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
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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.
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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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Reform state retiree health care
Reform human services
Rightsize state employee pay
Reform cost of living adjustments
budget solutions
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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.
Realignment with reality: Reform state retiree health care
Graphic 24. Retiree health insurance to cost taxpayersmore than $5 billion annually within 30 years
Annual employer costs for retiree health insurance, by program
Source: Illinois Policy Institute calculations
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.
Realignment with reality: Reform state retiree health care
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.
Realignment with reality: Reform state retiree health care
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