Confronting Fiscal Reality Revenue Collapse Would Mean Drastic Cuts

to Education and Human Services

Larry Joseph

Governor Quinn recently submitted two very different budgets to the General Assembly for the next fiscal year (which begins on July 1). The “recommended budget” would preserve and strengthen investments in public schools, early childhood programs, higher education, public safety, and various services for vulnerable populations. By contrast, the “not rec-ommended” budget would seriously undermine these critical investments. The alternative scenarios highlight the stark choices facing Illinois lawmakers. The rec-ommended budget requires that they maintain stable revenue by extending current income tax rates. The non-recommended budget could be called the “revenue-collapse budget” be-cause it assumes that current income tax rates will expire on January 1, 2015, creating a revenue loss of $1.9 billion in fiscal year 2015.1 The revenue-collapse budget would slash spending for essential programs and services, with devastating consequences for children, families, and communities in Illinois. The full-year revenue loss in FY 2016 is estimated to be $4.8 billion, which would mean even more severe spending cuts. The two-year revenue drain would be greater than the loss of state revenue during the two worst fiscal years of the recession. The General Assembly should make the responsible choice by maintaining revenue and protecting essential services. The Governor’s recommended budget would prevent another round of deep budget cuts and would provide additional resources for some key areas of the budget, including education and human services. Maintaining stable revenue would also enable the state to resume progress in reducing its remaining backlog of unpaid bills.

Revenue-Collapse Budget: $2 Billion in Spending Cuts More than half of General Funds spending is considered “mandatory” under current law and would not be affected by the looming cuts in the revenue-collapse budget. 2 In the past several budget years, mandatory spending as designated by the General Assembly has in- 1 Under the State Budget Law, the Governor is required to submit a budget with revenue estimates

based on relevant provisions of existing statutes.

2 The General Funds, which support the major operating and program expenses of most state agen-

cies, include the General Revenue Fund, Common School Fund, and Education Assistance Fund.

POLICY REPORT

May 2014

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cluded medical assistance programs in the Department of Healthcare and Family Services, state employee group insurance, pension contributions, debt service, and statutory trans-fers into special state funds. In the FY 2015 revenue-collapse budget, mandatory spending would increase by about $470 million. As a result of the loss of revenue and the increases in mandatory spending, the rest of the budget — “discretionary spending” — would be reduced by more than $2 billion. About three-fourths of the cuts would come from early childhood and K-12 educa-tion (31%), human services (31%), and higher education (12%) (see Appendix 1).

How Large Is the Shortfall in the “Revenue-Collapse Budget”?

There has been some dispute among legislators about the size of the budget shortfall that would result from the loss of income tax revenue in FY 2015. The revenue-collapse budget submitted by the Governor would reduce “discretionary” spending from the General Funds by about $2 billion. Some critics claim that this figure exaggerates the problem and that the shortfall is much smaller. But in-dependent analysis by the Fiscal Policy Center (FPC), using somewhat different assumptions than the Governor’s Office of Management and Budget (GOMB), produces a similar estimate.

To estimate the shortfall, the FPC begins with projected FY 2015 revenue and then subtracts “man-datory” spending at projected FY 2015 levels and “discretionary” spending at FY 2014 levels. The difference is the projected budget shortfall (see Appendix 2).

The FPC uses revenue estimates from the Commission on Government Forecasting and Accountabil-ity (CGFA), a legislative support agency that has statutory responsibility for preparing revenue esti-mates for the General Assembly. CGFA’s updated projections for FY 2015 are $272 million lower than GOMB’s estimates.

The FPC revenue estimate also includes $402 million from two new special state funds — the Fund for the Advancement of Education and the Commitment to Human Services Fund. Beginning in cal-endar year 2015, each of these funds will receive 1/30 of revenue from individual income taxes. While the authorizing statute (Public Act 96-1496) stipulates that resources in each fund “shall sup-plement and not supplant” current levels of funding, there is no way of enforcing this provision.

In regard to “mandatory” spending, the FPC estimate reduces pension contributions from the Gen-eral Funds by $150 million, based on offsetting revenue generated from unclaimed property. Oth-erwise, the FPC uses the same estimates as GOMB. In regard to “discretionary” spending, this com-parative analysis assumes that appropriations remain at the FY 2014 level.

The GOMB spending estimate subtracts $234 million for unspent appropriations, while the FPC esti-mate omits this item. For decades, Illinois governors and legislatures have used estimates of un-spent appropriations in formulating balanced budgets. This practice is contrary to sound fiscal policy and should be discontinued. Given the state’s current financial situation, unspent appropriations should be used to pay outstanding bills. If the backlog is eliminated, any unanticipated surplus should go into a rainy day fund.

In short, the FPC analysis indicates that the shortfall in the revenue-collapse budget — and the re-

sulting cuts in “discretionary” spending — would still total about $2 billion (see Appendix 2). Any substantially smaller figure would have to involve questionable policy choices such as underfunding “mandatory” spending or ignoring the backlog of unpaid bills.

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State Board of Education: Additional Fiscal Strain for School Districts The FY 2015 revenue-collapse budget would re-duce General Funds appropriations for the State Board of Education by $633 million. Funding would be $1.3 billion below the FY 2009 level (see Exhibit 1). These cuts would come at time when a growing number of school districts are struggling financially. More than 60 percent of districts are expected to have operating deficits in FY 2014, up from 49 percent in FY 2013.3 The State Superintendent has warned that drastic cuts in state funding would force some school districts to reduce or eliminate academic course offerings and extracurricular activities, lay off personnel, and increase class sizes.4 General State Aid The largest part of the State Board of Education budget is General State Aid, which provides un-restricted funding to more than 860 public school districts across Illinois. In the revenue-collapse budget for FY 2015, General State Aid is slated for a $450 million cut and would be at its lowest level since FY 2006. School districts hit hardest would be those that rely most on state funding — districts with low levels of property wealth and large concentrations of low-income students. In the Governor’s recommended budget, the appropriation for General State Aid would in-crease by $158 million (see Appendix 3). This funding would still be prorated, however, with each school district receiving only 91 percent of its "entitlement claim," i.e., the amount it is entitled to receive under current funding formulas. General State Aid was pro-rated at 89 percent in both FY 2013 and FY 2014. Proration would be 79 percent in the FY 2015 revenue-collapse budget. Early Childhood Block Grant The Early Childhood Block Grant (ECBG) supports preschool programs for 3- and 4-year olds, as well as developmental services for infants and toddlers. ECBG funding, which has already been reduced by about $80 million since FY 2009, would be cut by another $18 mil-lion in the FY 2015 revenue-collapse budget (see Appendix 3). This year, about 70,000 Illi-

3 “2014 Financial Profile Shows Drop in State’s Overall Average Score with More School Districts

Earning Lowest Financial Ranking” (Illinois State Board of Education, March 12, 2014).

4 “Message from State Superintendent Christopher A. Koch” (State Board of Education, March 24,

2014).

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nois children are participating in state-funded preschool programs, down from 95,000 in FY 2009. The revenue-collapse budget could result in another 4,000 young children losing access to preschool. By contrast, the recommended budget would increase ECBG funding by $25 million, restoring it to the FY 2012 level. Special Education The revenue-collapse budget would reduce mandated categorical grants for special educa-tion by $186 million (12%).5 These cuts could result in the loss of federal funds under the Individuals with Disabilities Education Act, which requires that state financial support for special education and related services be no lower than the amount for the previous fiscal year. The Governor’s recommended budget would provide a small increase in special edu-cation funding (see Appendix 3). Bilingual Education The number of English language learners in Illinois public schools has increased at an aver-age annual rate of 4.7 percent since 2005, but state appropriations for bilingual education have been flat for the past four years. FY 2015 funding would increase by 18 percent in the Governor’s recommended budget but only 2 percent in the revenue-collapse budget.

Department of Human Services: Deep Cuts Affecting Children The revenue-collapse budget would reduce General Funds appropriations for the Depart-ment of Human Services (DHS) by almost $400 million. These cuts would include $131 mil-lion from developmental disabilities grants, $54 million from the Home Services Program for people with physical disabilities, $44 million from Temporary Assistance for Needy Families (TANF), and $28 million from addiction treatment services (see Appendix 4). The revenue-collapse budget would also exacerbate the problem of serious understaffing in processing applications for medical assistance, income assistance, and the federally funded Supplemental Nutrition Assistance Program (SNAP), which serves about 900,000 Illinois children each month. Budget cuts would require major reductions in the number of DHS caseworkers at Family Resource Centers across the state, which would further impede ac-cess to services. Programs Serving Children and Families The Child Care Assistance Program provides subsidies for low-income working families and serves more than 160,000 children each month. In the revenue-collapse budget, Gen-eral Funds resources for child care assistance would increase by $64 million, primarily to cover costs from FY 2014. Consequently, there would be another shortfall of at least $60

5 Mandated categorical grants provide partial reimbursement to school districts for the costs of

compliance with certain state mandates.

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million in FY 2015. In the recommended budget, child care would receive a funding in-crease of $166 million relative to FY 2014. This additional funding would be used to reduce required family copayments, which were increased substantially in both 2011 and 2012, and raise payment rates for service providers, as well as to cover prior year costs and avoid another shortfall in FY 2015. The Early Intervention program provides a broad array of services and supports for fami-lies with children under age 3 who have diagnosed disabilities or developmental delays. The revenue-collapse budget would reduce General Funds support for Early Intervention by 16 percent, which would require the state to restrict eligibility and offer services to about 7,300 fewer children. The revenue-collapse budget would cut many DHS programs by 24 percent. These pro-grams include TANF income assistance, individual care grants for children and adolescents with severe mental health conditions, home visiting programs for at-risk families with young children (Healthy Families Illinois and Parents Too Soon), prenatal case manage-ment for low-income expectant mothers, and afterschool programs (see Appendix 4). In some instances, FY 2015 funding would be more than 30 percent below FY 2009 levels (see Exhibit 2). For most of these programs, the Governor’s recommended budget would pro-vide the same amount of funding as in FY 2014.

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Federal Mandates and Federal Funding In some instances, the revenue-collapse budget for DHS could undermine compliance with federal mandates or jeopardize federal funding. For example, inadequate funding for de-velopmental disabilities and mental health services could put the state in violation of sev-eral federal court orders involving the transition of eligible individuals from institutional to community-based care.6 In addition, community services for people with developmental and physical disabilities are largely funded through Medicaid waivers for home and community-based services. The cuts in the revenue-collapse budget would require federal approval of amendments to the Medicaid waivers. If the changes are not approved, the state could lose a substantial amount of federal matching funds. Budget cuts for Healthy Families Illinois and Parents Too Soon could jeopardize federal funding through the Maternal, Infant, and Early Childhood Home Visiting program, which has state maintenance-of-effort requirements. The federal funds must supplement, and not supplant, state funding for early childhood home visiting programs. The state must main-tain non-federal funding at the level in effect in March 2010.

Department of Children and Family Services: More Erosion of Funding The revenue-collapse budget would pose serious risks for the state’s most vulnerable chil-dren by cutting $87 million from the Department of Children and Family Services (DCFS). General Funds reductions would include $12 million from child protection, $15 million from foster care, $17 million from institutions and group homes, and $17 million from adoption and guardianship services (see Appendix 5). These cuts would come on top of the steady erosion of DCFS funding since FY 2009 (see Exhibit 3). DCFS funding cuts could also violate various consent decrees arising from federal class ac-tion lawsuits that require the state to maintain acceptable levels of child protection and fos-ter care services. Most notably, provisions in the B.H. v. McDonald decree establish stand-ards for protective services, initial assessment of children, placement of children in substi-tute care, permanency planning, physical and mental health, caseload ratios, quality assur-ance, management information systems, and training programs for caseworkers, supervi-sors, and foster parents. In the Governor’s recommended budget, General Funds resources for DCFS would increase by $12.5 million (less than 2%), largely for child protection services, foster care, and child welfare operations (see Appendix 5). The agency’s overall support from the General Funds would still be 20 percent below the FY 2009 level.

6 These court orders involve consent decrees resulting from federal class-action lawsuits: Ligas v.

Hamos, Colbert v. Quinn, and Williams v. Quinn.

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The Bottom Line: Choose Fiscal and Social Responsibility The stark contrast between the two budgets for FY 2015 highlights the dire consequences of the looming fiscal cliff for children, families, and communities in Illinois. Former Gover-nor Jim Edgar agrees that keeping new revenue from the individual income tax is good pol-icy: “. . . from a governmental point of view, I think it’s the right thing to do.” The alterna-tive, he warns, is to “make massive cuts.”7 The General Assembly must confront fiscal reality and adopt a responsible budget. They must also look beyond the coming fiscal year. Unless revenue from current income tax rates is maintained, there will be even more devastating cuts in FY 2016 to education and human services, as well as public safety, economic development, and other policy areas. Moreover, the new income tax revenue has enabled the state to reduce its backlog of out-standing bills by more than $3 billion since the end of FY 2012. The pending revenue col-lapse will stall and most likely reverse this progress. Stable and sustainable revenue is es-sential to ensuring the state’s long-term fiscal health, as well as preserving and strengthen-ing investments in children, families, and communities in Illinois.

7 “Bernard Schoenburg: Edgar Says Quinn Right to Make Tax Permanent, State Journal-Register,

April 3, 2014.

Appendix 1: General Funds Budgets Submitted by Governor (in $ millions) Revenue-collapse budget Gov. recommended budget ______________________ _______________________ Change Change FY 2015 from Pct. FY 2015 from Pct. funding FY14 change funding FY14 change "Mandatory" spending

Department of Healthcare & Family Services 7,135 97 1.4% 7,135 97 1.4%

State employee group insurance 1,475 129 9.6% 1,475 129 9.6%

Pension contributions 6,243 255 4.3% 6,093 105 1.8%

Debt service: pension obligation bonds 1,503 -154 -9.3% 1,503 -154 -9.3% Debt service: capital bonds 711 86 13.8% 711 86 13.8%

Statutory transfers to other state funds 2,991 58 2.0% 2,991 58 2.0%

Subtotal 20,058 471 2.4% 19,908 321 1.6%

"Discretionary" spending

State Board of Education 6,054 -633 -9.5% 6,978 291 4.4% Higher education agencies 1,743 -248 -12.4% 2,044 53 2.6%

Department of Human Services 2,782 -397 -12.5% 3,681 502 15.8% Department on Aging 902 -129 -12.5% 1,170 139 13.5% Department of Children & Family Services 609 -87 -12.5% 709 13 1.8% Department of Public Health 116 -17 -12.4% 136 3 2.1%

All other 2,546 -536 -17.4% 3,247 164 5.3%

Subtotal 14,753 -2,047 -12.2% 17,964 1,165 6.9%

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Appendix 2: Estimates of FY 2015 General Funds Shortfall (in $ millions) Governor’s Office Fiscal of Management Policy and Budget Center* Revenues

State taxes, fees, etc. 28,745 28,547

Transfers in State lottery and riverboat casinos 1,016 992 Other 879 850

Federal sources 4,294 4,273

General Funds total 34,934 34,662

Special state funds Fund for the Advancement of Education 0 201 Commitment to Human Services Fund 0 201

Adjusted total 34,934 35,064

Expenditures

“Mandatory” spending

Department of Healthcare and Family Services 7,135 7,135

State employee group insurance 1,475 1,475

Pension contributions 6,243 6,243 Offset from State Pension Fund** 0 -150

Debt service 2,214 2,214

Statutory transfers to special state funds 2,991 2,991

Subtotal 20,058 19,908

“Discretionary” spending at FY14 levels 16,799 16,799

Estimated unspent appropriations -234 0

Set-aside to reduce backlog of outstanding bills 355 355

Total expenditures 36,978 37,062

Estimated shortfall -2,044 -1,998 * Revenue estimates from Commission on Government Forecasting and Accountability (updated May 2014). ** Proceeds from unclaimed property.

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Appendix 3: State Board of Education, General Funds Budget, Selected Programs (in $ millions) Revenue-collapse budget Gov. recommended budget _____________________ _______________________ Change Change FY 2015 from Pct. FY 2015 from Pct. funding FY14 change funding FY14 change General State Aid 3,991.0 -451.2 -10% 4,600.3 158.1 4% Mandated categorical grants

Special education* 1,332.0 -185.8 -12% 1,535.4 17.5 1% Transportation (regular/vocational) 178.5 -27.3 -13% 205.8 0.0 0% Reimbursement for free breakfast/lunch 12.4 -1.9 -13% 14.3 0.0 0% Payments for children in substitute care 10.4 -1.6 -13% 12.0 0.0 0% Other selected programs

Early Childhood Education 282.1 -18.1 -6% 325.1 24.9 8% Bilingual education 64.8 1.4 2% 74.7 11.3 18% Career and technical education 33.0 -5.0 -13% 38.1 0.0 0% * Multiple line-items.

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Appendix 4: Department Human Services, Selected Programs (in $1,000s) Revenue-collapse budget Gov. recommended budget ______________________ _______________________ Change Change FY 2015 from Pct. FY 2015 from Pct. funding FY14 change funding FY14 change Developmental disability grants (GRF)* 629,050 -131,239 -17.3% 832,296 72,007 9.5%

Community mental health services* General Revenue Fund** 251,225 -10,057 -3.8% 332,395 71,113 27.2% Community MH Medicaid Trust Fund 122,902 -8,150 -6.2% 122,902 -8,150 -6.2% DHS Community Services Fund 20,000 0 0.0% 20,000 0 0.0%

Addiction treatment services (GRF)* 90,350 -28,477 -24.0% 119,542 715 0.6%

Home Services Program General Revenue Fund* 291,428 -54,882 -15.8% 385,587 39,277 11.3% Home Services Medicaid Trust Fund 246,000 0 0.0% 246,000 0 0.0%

Family and community health (GRF) Early Intervention 63,261 -12,431 -16.4% 83,700 8,008 10.6% Prenatal case management 27,808 -8,985 -24.4% 36,793 0 0.0% Domestic violence shelters 14,085 -4,550 -24.4% 18,636 1 0.0% Healthy Families 7,599 -2,441 -24.3% 10,055 15 0.1% Parents Too Soon 5,193 -1,678 -24.4% 6,870 0 0.0% Sexual assault victims 4,656 -1,504 -24.4% 6,160 0 0.0%

Youth services (GRF) Delinquency prevention programs* 16,308 -5,269 -24.4% 21,577 0 0.0% Afterschool programs*** 14,209 -4,591 -24.4% 18,800 0 0.0% Homeless Youth Services 2,720 -879 -24.4% 3,598 0 0.0% Teen Parent Services 1,114 -313 -22.0% 1,473 46 3.3%

Child care assistance General Revenue Fund 256,481 3,990 1.6% 358,736 106,245 42.1% Estimated prior-year costs (GRF) 60,000 60,000 ----- 60,000 60,000 ----- DHS Special Purposes Trust Fund 197,535 319 0.2% 197,535 319 0.2% Employment & Training Fund (est.) 450,000 0 0.0% 450,000 0 0.0%

TANF income assistance & related services General Revenue Fund 136,845 -44,214 -24.4% 181,060 0 0.0% Employment & Training Fund (est.) 35,000 0 0.0% 35,000 0 0.0%

Employment and training programs (GRF)* 10,833 -3,464 -24.2% 14,333 37 0.3%

Immigrant and refugee services* 7,015 -1,528 -17.9% 9,281 739 8.6% GRF = General Revenue Fund * Multiple line items. ** FY15 includes funding for supportive housing transferred to Division of Family and Community Services. *** FY14 includes $10 million in budget for Illinois Criminal Justice Information Authority.

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Appendix 5: Department of Children and Family Services, Selected Programs (in $1,000s) Revenue-collapse budget Gov. recommended budget ______________________ ______________________ Change Change FY 2015 from Pct. FY 2015 from Pct. funding FY14 change funding FY14 change Child protection services

Child protection operations (GRF) 76,060 -8,618 -10% 88,493 3,816 5%

Protective/family maintenance day care (GRF) 20,916 -3,419 -14% 24,334 0 0%

Children's advocacy centers General Revenue Fund 1,669 -273 -14% 1,942 0 0% DCFS Children's Services Fund 1,398 -273 -14% 1,398 0 0%

Cash assistance and housing services General Revenue Fund 1,155 -189 -14% 1,344 0 0% DCFS Children's Services Fund 2,071 0 0% 2,071 0 0%

Substitute care

Child welfare operations (GRF) 54,798 -5,863 -10% 63,756 3,095 5%

Targeted case management (GRF) 8,516 -1,392 -14% 9,908 0 0%

Foster homes and specialized foster care General Revenue Fund 117,361 -14,385 -11% 136,546 4,800 4% DCFS Children's Services Fund 170,924 -1,700 -1% 170,924 -1,700 -1%

Foster care initiative General Revenue Fund 5,141 -1,140 -18% 5,981 -300 -5% DCFS Children's Services Fund 1,477 0 0% 1,477 0 0%

Institutions and group homes General Revenue Fund 120,704 -17,231 -12% 140,435 2,500 2% DCFS Children's Services Fund 98,711 2,000 2% 98,711 2,000 2%

Adoption and guardianship services General Revenue Fund 76,487 -16,793 -18% 88,990 -4,290 -5% DCFS Children's Services Fund* 92,829 -1,810 -2% 92,829 -1,810 -2%

Child well-being

Counseling and auxiliary services General Revenue Fund 7,479 -1,322 -15% 8,701 -100 -1% DCFS Children's Services Fund 10,547 -1,500 -12% 10,547 -1,500 -12%

Psychiatric screening 2,152 -852 -28% 2,504 -500 -17%

GRF = General Revenue Fund

* FY14 includes $1,314,600 for Purchase of Children's Services.

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B U I L D I N G B E T T E R L I V E S

ABOUT THE FISCAL POLICY CENTER The Fiscal Policy Center at Voices for Illinois Children provides timely, credible, and accessible information and analysis on fiscal issues that affect children, families, and communities in Illi-nois. The FPC is a member of the State Fiscal Analysis Initiative (SFAI), a network of nonprofit organizations in more than 40 states. SFAI is coordinated by the Center on Budget and Policy Priorities, a Washington, D.C.-based research organization and strategic policy institute that works on a range of federal and state issues. The Fiscal Policy Center is funded by the Annie E. Casey Foundation, the Center on Budget and Policy Priorities, the Chicago Community Trust, and the Ford Foundation. We thank our funders for their support but acknowledge that the findings and conclusions presented in this report do not necessarily reflect the views of these organizations. For additional information, please contact David Lloyd, Director of the Fiscal Policy Center, at dlloyd@voices4kids.org or 312-516-5557.