Finding the Balance: State Fiscal Sustainability and Local Government Challenges

The end of Illinois’ 2023 fiscal year marked the completion of the first year after which the state government fully allocated the State and Local Fiscal Recovery Funds (SLFRF) from the COVID pandemic. In previous reports (see Wilbur-Mujtaba et. al. 2023 and past reports at https://igpa.uillinois.edu/tag/fiscal-futures), our team at the Fiscal Futures Project has cautioned that Illinois’s fiscal situation remains challenging amidst the end of pandemic federal relief funds, and that lawmakers must continue to monitor spending closely to assure alignment with revenue. In this report, we provide an update on Illinois’s current fiscal situation by examining state governmental revenue and expenditures during FY2023. In addition, we outline the major fiscal challenges of Illinois’ local governments, from mass transit issues to changes in the commercial property market and property tax burdens. After reviewing the issues across Illinois’s local governments, we conclude with implications for state government finance in Illinois.

In summary, Illinois’ fiscal condition is surely stronger than it was prior to the pandemic and, in fact, stronger than it has been over most of the last two decades. Significant challenges remain. In our view, Illinois state finances have become the most sustainable since the project began tracking budget data. Despite this, current revenue policy may not be sufficient to sustain expected long-term expenditure growth, and we see few large categories of expenditures that will be easy to restrain. In past years, Illinois’ fiscal situation has forced lawmakers to juggle programs when they are not able to achieve long-term objectives. Prominent examples include public workers’ pension policies and education finance. For many years, Illinois’ pension payments were insufficient to pay for benefits accrued by state employees. These policies eventually resulted in the introduction of relatively meager Tier 2 pensions for new workers, in order to subsidize the retirement of long-term Tier 1 employees (see Merriman 2011; Dye, Hudspeth and Merriman, 2014).