1. © Center for Tax and Budget Accountability 2009 1 CENTER FOR TAX AND BUDGET ACCOUNTABILITY 70 E. Lake Street Suite 1700 Chicago, Illinois 60601 direct: 312.332.1049 Email: rmartire@ctbaonline.orgrmartire@ctbaonline.org The Illinois Economy and the State Budget For: Tuesday, April 28, 2009; 2:00 pm Illinois Association of County Board Members and Commissioners Crown Plaza Springfield 3000 S. Dirksen Parkway, Springfield, IL Presented by: Ralph Martire Executive Director

2. © Center for Tax and Budget Accountability 2009 2 The Starting Point: Illinois State Government is in the worst fiscal crisis since the Great Depression the backlog of unpaid bills was almost $2 billion as of 12-31-08 Payment cycle is 48 days Comptroller Hynes notes both are record highs for midpoint of a fiscal year NOT SINCE FDR

3. © Center for Tax and Budget Accountability 2009 3 GRF Expenditures by Category, 1995 - 2006 Category FY 1995 Actual FY 1995 CPI Adjuste d to FY2006 FY 2006 Enacted $ Difference Betwee n 1995 Adj'd for CPI & 2006 Enacte d FY 1995 ECI Adjuste d to FY2006 $ Difference Betwee n 1995 Adj'd for ECI & 2006 Enacte d General Revenue Fund$17,302.0$22,613.7$24,406.4$1,792.7$24,776.5-$370.1 Education$3,656.0$4,778.4$6,123.0$1,344.6$5,235.4$887.6 Health Care$4,319.0$5,644.9$7,034.0$1,389.1$6,184.8$849.2 Pension$519.0$678.3$938.4$260.1$743.2$195.2 All public services except Health Care, Education and Pensions$8,808.0$11,512.1$10,311.0-$1,201.1$12,613.1-$2,302.1 **Notes: Health care includes Medicaid and state employee health insurance Sources: State of Illinois' Traditional Budgetary Financial Reports and Fiscal Focus Illinois' FY2006 Budget National Association of State Budget Officers Comptroller Fiscal Focus, January 1997 CPI and ECI based on Bureau of Labor Statistics

4. © Center for Tax and Budget Accountability 2009 4 Illinois State & Local Revenue In 2005 (the most recent national comparison available), state and local revenue came from the following sources: PROPERTY TAX38% SALES TAX17% EXCISE TAX17% INDIVIDUAL INCOME TAX16.2% OTHER 7.4% CORPORATE INCOME TAX 4.4% SOURCE: Federal Tax Administrators Data PROPERTY TAX RELIANCE A SNAPSHOT OF WHAT IS

5. © Center for Tax and Budget Accountability 2009 5 This makes Illinois the 6 th most reliant state on property tax revenue in the nation. Illinois is more reliant on property taxes than Florida, Nevada, Tennessee, Alaska, South Dakota, Washington and Wyoming – which also don’t have income taxes. PROPERTY TAX RELIANCE

6. © Center for Tax and Budget Accountability 2009 6 WHY – EDUCATION Illinois ranks 49 th out of 50 states in the portion of education funding covered by state – versus local – revenue  just 28% of the cost. Illinois is the most reliant state on property taxes to fund schools in the nation. (National Education Association Data) PROPERTY TAX RELIANCE

7. © Center for Tax and Budget Accountability 2009 7 THE BURDEN IS TOUGH All data inflation adjusted to 2008 Income Data: US Department of Census Property Tax Data: IL Department of Revenue

8. © Center for Tax and Budget Accountability 2009 8 The Context: BIG ‘N RICH In 2007, Illinois ranked fifth nationally with a Gross State Product in excess of $609 billion. That would be the 27 th largest economy of any nation in the world- greater than Egypt, Saudi Arabia, Colombia, Belgium, Sweden, Greece, Ireland, Portugal, Norway and Nigeria, to name a few. ILLINOIS’ ECONOMY IS LARGE

9. © Center for Tax and Budget Accountability 2009 9 Illinois GDP Growth Lags THE ILLINOIS ECONOMY Source: Bureau of Economic Analysis, US Dept. of Commerce

10. © Center for Tax and Budget Accountability 2009 10 Between 1990 and January 1, 2008, Illinois lost 27% - 249,000 - of its manufacturing industry jobs. This loss was worse than both the Midwest (-23.2%) and the Nation (-23.9%). Illinois lost another 243,000 jobs overall from December 2007 - December 2008. MANUFACTURING DECLINE

11. © Center for Tax and Budget Accountability 2009 11  All job growth in Illinois came in the service sector.  For the most part, service sector jobs that pay less than manufacturing  On average, most of these service jobs pay 29% less than the manufacturing jobs they replace LOW-END SERVICE JOBS GROW For over two decades now:

12. © Center for Tax and Budget Accountability 2009 12 EMPLOYER-PROVIDED BENEFITS  Employer-provided health insurance benefits have been steadily declining in Illinois since 1980.  By 2006, over 40% of the workforce didn’t have employer provided insurance  Hispanics especially hard hit–over 57% do not have employer- provided insurance  TODAY, 27% of the Illinois population is either on Medicaid or uninsured

13. © Center for Tax and Budget Accountability 2009 13 In 1981, 55.6% of the state’s workers were covered by private sector employer-provided pension plans. By 2007, only 43.8% of the workforce had private retirement benefits. PENSION EROSION

14. © Center for Tax and Budget Accountability 2009 14 Why the Economic Problems? –NOT TAX BURDEN OR WASTEFUL SPENDING Illinois ’ total state AND local tax burden, as a percentage of personal income ranks only 45 th in the nation. The second lowest tax burden in the Midwest to Missouri (Missouri is all of one-tenth of one percent lower). Illinois also ranks only 42 nd in spending among the states ILLINOIS IS LOW TAX OVERALL

15. © Center for Tax and Budget Accountability 2009 15 Education now matters more than ever to economic prosperity:  unemployment rates are highest for those with the least education.  Wages are also tied to education levels. EXHIBIT “A” IS EDUCATION

16. © Center for Tax and Budget Accountability 2009 16 Impact of Education on Wages In real (2006) dollars, between 1980 and 2006, only those with at least a college degree experienced any gain in hourly income, with growth of 14.3%  Real median hourly wages for all other education categories declined  Less than a high school diploma fell by 28.7%  Only a high school education declined 8.7%  Some college but no degree declined 4.3%  You gotta learn to earn! WAGE DIFFERENCES

17. © Center for Tax and Budget Accountability 2009 17 Wages for Minorities lag Whites Real wages for Whites increased modestly between 1980 and 2007, but :  The White-Hispanic wage gap is larger in amount, but increased by a smaller percentage, growing from $3.82 in 1980 to $5.34 in 2007, an increase of 39.7% over 1980  Real wages for African-Americans declined. The hourly wage gap between Whites and African- Americans grew from $1.52 in 1980 to $3.44 in 2007, an increase of 126.3% over 1980 WAGE DIFFERENCES

18. © Center for Tax and Budget Accountability 2009 18 Still Separate....  Illinois is the third most segregated state in K-12 education for blacks  82% of black children attend majority/minority schools  90% of white children attend virtually all white schools (*Source: 2006 Education Trust study on segregation) SEGREGATION

19. © Center for Tax and Budget Accountability 2009 19.... Still Unequal  Minority school districts start out with $1,154 less per child to spend on education  That’s the second worst gap in the nation (*Source: 2006 Education Trust study on segregation) SEGREGATION

20. © Center for Tax and Budget Accountability 2009 20 Current Basis for Foundation Level The Illinois state “Foundation Level” is the minimum per child guaranteed expenditure for K-12 Does NOT include: poverty, special ed, transportation, etc. For FY2008: $5,734 – but not tied to any measurable standard K-12 FUNDING

21. © Center for Tax and Budget Accountability 2009 21 Education Funding Advisory Board (“EFAB”) Change basis to a measurable outcome standard, predicated on costs and test results Foundation Level should be at least $7,330 (after adjusting for inflation) Total cost: $1.8 billion EFAB

22. © Center for Tax and Budget Accountability 2009 22 Equalized Assessed Valuation (EAV) is a proxy for a school district’s local property wealth available to be taxed. The average EAV of flat grant districts is more than 5 times greater than foundation-formula districts. SCHOOL DISTRICT TYPE http://www.isbe.nethttp://www.isbe.net “2007 Illinois Report Card”

23. © Center for Tax and Budget Accountability 2009 23 MONEY MATTERS http://www.isbe.nethttp://www.isbe.net “2007 Illinois Report Card”

24. © Center for Tax and Budget Accountability 2009 24 Total and Instructional Spending Differentials  On average, Flat Grant districts spend $4186 more in total per pupil spending than Foundation Formula school districts.  When it comes to instructional expenses, Flat Grant districts spend $2324 more per student on average than do Foundation Formula districts. MONEY MATTERS http://www.isbe.net http://www.isbe.net “2007 Illinois Report Card”

25. © Center for Tax and Budget Accountability 2009 25 YEAH, $ DOES APPEAR TO MATTER *Linear regression is a statistical analysis that shows the correlation of two or more variables, in this case, how per-pupil expenditures correspond to ISAT test scores. The regression line (heavy red) represents the predicted test score results a school district should obtain, given a specific level of instructional expenditure.

26. © Center for Tax and Budget Accountability 2009 26 http://www.isbe.nethttp://www.isbe.net “IL State Report Cards” LOW INCOME

27. © Center for Tax and Budget Accountability 2009 27 The percentage of students meeting or exceeding ISAT standards in the districts with the lowest levels of poverty is markedly different from those districts with the highest levels of poverty. MONEY MATTERS http://www.isbe.nethttp://www.isbe.net “2007 Illinois Report Card”

28. © Center for Tax and Budget Accountability 2009 28 RACE MATTERS

29. © Center for Tax and Budget Accountability 2009 29 RACE MATTERS

30. © Center for Tax and Budget Accountability 2009 30 HIGHER ED INVESTMENTS

31. © Center for Tax and Budget Accountability 2009 31 Governor Quinn faces: the Great Recession; a hugely inequitable education funding system, and a big deficit:

32. © Center for Tax and Budget Accountability 2009 32 Federal Bailout is No Panacea One time revenue – not replaceable after being spent Provides temporary budget relief of about $7B over 2 years, as follows: K-12 education; $1.66 B Medicaid - $2.9 B (over 2 years) Other Education - $1.9 B (over 2 years, spec. ed, poverty, modernization, higher ed) The rest for job training, food stamps, emergency shelter, etc. FEDERAL BAILOUT

33. © Center for Tax and Budget Accountability 2009 33 One-time help ― And a Cliff ARRA

34. © Center for Tax and Budget Accountability 2009 34 If the bailout gets spent and the revenue is not replaced by state tax reform, the deficit comes back – worse – in two short years HEY, BIG SPENDER

35. © Center for Tax and Budget Accountability 2009 35 Governor Quinn Proposes: Raising the personal income tax from 3% to 4.5%; Increasing the personal/dependent exemption to $6,000; Raising the corporate income tax rate from 4.8% to 7.2%; Cutting public employee pension funding by $2.846B (over two years); Other spending cuts of $1.459B

36. © Center for Tax and Budget Accountability 2009 36 What’s Missing??? Sustainability Education Funding Reform More Targeted Relief

37. © Center for Tax and Budget Accountability 2009 37 STATE BUDGET

38. © Center for Tax and Budget Accountability 2009 38 THE RAMP

39. © Center for Tax and Budget Accountability 2009 39 REAL PROBLEM: What About Revenue Growth $$$$$$$$ NEW $$$ ?

40. © Center for Tax and Budget Accountability 2009 40  NOT SO MUCH

41. © Center for Tax and Budget Accountability 2009 41 FAIR  PROGRESSIVE RESPONSIVE  TO MODERN ECONOMY STABLE  DURING POOR ECONOMIES EFFICIENT  DOESN ’ T DISTORT PRIVATE MARKETS ELEMENTS OF A SOUND AND FAIR FISCAL SYSTEM WHAT SHOULD BE: BUT ISN’T

42. © Center for Tax and Budget Accountability 2009 42 STRUCTURAL DEFICIT *Adjusts solely for historic rates of inflation and population growth, and assumes normal economic growth. WHICH CREATES:

43. © Center for Tax and Budget Accountability 2009 43 SB750 is designed to:  Be sound tax policy for the modern, capitalist economy  Make tax burden fairer, by making it more progressive―the bottom 60% of income earners won’t pay more in taxes after SB750 passes  Improve school funding by  Raising the foundation level  Enhancing special education funding  Targeting $300M in additional funds to struggling schools  Investing $300M more per year in higher education  Eliminate the Unfunded Pension Liability  Provide progressive property tax relief statewide, that effectively helps struggling communities while reducing fixed costs for business  Keep Illinois’ status as a low tax state SB750

44. © Center for Tax and Budget Accountability 2009 44 THIS HELPS STATE & LOCAL Revenue Source $ in Millions Quinn At 4.5% and 7.2% SB750 At 5% and 8% Individual Income Tax (net of refund fund) $4,713$6,739 LGDF$0$673 Personal Exemption Cost$1,789$0 Total Personal Income$2,453$6,066 Corporate Income Tax (net of refund fund) $756$1,100 LGDF$0$110 Total Corporate Income$756$990 Total Personal and Corporate Income to State (minus refund fund and Personal Exemption) $3,209$7,056 Source: Center for Tax and Budget Accountability calculation based on final FY2009 revenue assumptions by the Illinois Commission on Government Forecasting and Accountability.

45. © Center for Tax and Budget Accountability 2009 45 -6% 5% 33.20 % 50.20% 93.4% -20% 0% 20% 40% 60% 80% 100 % Bottom 60% Next 20% Top 20% Top 15% Top 1% Income Growth in the United States 1979-1999 (Real 1999 Dollars) *Source U.S. Census Data Percent Change INCOME INEQUALITY Fair? Responsive?

46. © Center for Tax and Budget Accountability 2009 46 State & Local Tax Burden as a Percentage of Income REGRESSIVE Fair? Responsive?

47. © Center for Tax and Budget Accountability 2009 47 INCOME TAX INCREASE 3%  5% 3%  2%=5% 2/3=67% *Note, corporate rate goes up from 4.8% to 8%, but ― overall corporate tax burden goes down! SB750

48. © Center for Tax and Budget Accountability 2009 48 SALES TAX BASE

49. © Center for Tax and Budget Accountability 2009 49

50. © Center for Tax and Budget Accountability 2009 50 This will also generate about $590 million* annually for local governments! (*COGFA Estimate) ALL BENEFIT

51. © Center for Tax and Budget Accountability 2009 51 For More Information: Center for Tax and Budget Accountability www.ctbaonline.org Ralph M. Martire Executive Director (312) 332-1049 rmartire@ctbaonline.org rmartire@ctbaonline.org Chrissy A. Mancini Director of Budget and Policy Analysis (312) 332-1481 cmancini@ctbaonline.org cmancini@ctbaonline.org Yerik Kaslow Research Associate (312) 332-2151 ykaslow@ctbaonline.org ykaslow@ctbaonline.org Further Information