Capitol News Illinois

The first extensive public look at next year’s state finances contains a warning to lawmakers from the governor’s office: “The ability to fund new programs will be severely limited” next fiscal year.

That comes from the Governor’s Office of Management and Budget, which projected a potential budget shortfall of $3.2 billion for fiscal year 2026, which doesn’t begin until July 1.

The Illinois Economic and Fiscal Policy Report published each November is often seen as a table-setter for the budgeting negotiations that will ramp up in earnest when lawmakers return to the Capitol for the legislative year that begins each January.

GOMB projects that revenues will remain flat at roughly $53.4 billion for the upcoming year, while spending will grow by $3.2 billion.

While the overall numbers can change quickly in the eight months between now and the start of fiscal year 2026, the report could forebode an even more challenging budget process than the one that wrapped up in May. Lawmakers entered last year’s session staring down a roughly $891 million deficit, according to last year’s GOMB report.

After lengthy and sometimes fraught deliberations, Democrats in power narrowly approved a budget that filled the gap by extending a cap on corporate net operating losses ($526 million), capping a tax discount claimed by retailers ($101 million), increasing the state’s tax on sports betting ($200 million) and other smaller accounting measures or tax changes.

Read more: Once again working through the night, lawmakers finalize $53.1 billion budget

As for the impending $3.2 billion deficit, the report noted only it “will be addressed in the Governor’s Fiscal Year 2026 Introduced Budget.”

But, the report noted, spending reductions “cannot be implemented broadly across-the-board,” especially for the 40% of spending that is mandated either by court order, law or other obligations, such as debt service, pension payments and Medicaid. Another 24% of state spending goes to areas such as education and higher education.

https://public.flourish.studio/visualisation/20134499/

‘True-up’ drives revenue stagnation

The expected deficit is attributable in part to both rising expenditures and revenue stagnation as some one-time sources disappear.

The projected spending for FY 26 includes an additional $350 million to K-12 education, while pension costs are expected to increase by $440 million among other “moderate growth” in state spending across the board.

Health care costs are expected to grow by $1.1 billion, due in part to “the impact of medical inflation and drop off of one-time FEMA (Federal Emergency Management Agency) reimbursement revenues” for Medicaid and state health care plans. FEMA had still been reimbursing some pandemic-era costs borne by state government, according to the governor’s office, but that’s expected to drop off in the upcoming fiscal year.

Revenues are expected to stagnate in part because of a “true-up” process at the Illinois Department of Revenue that has temporarily inflated state coffers over the past two years, stemming from a complicated miscalculation by the department.

In short, IDOR overdistributed the amount of money collected in Corporate Property Replacement Taxes – which primarily go to local governments – in tax year 2021 by about $800 million. Corporate income taxes were overestimated by $200 million, while individual income taxes from pass-through entities were underestimated by $1.1 billion. The miscalculation, according to IDOR, “was caused by tax policy changes,” at the federal and state level affecting businesses.

The department began a “true-up” process in fiscal years 2024 and 2025 that is aimed at fixing the “overpayments” to local governments while boosting state general revenues in the process.

It’s had the effect of driving general revenues up by about $1 billion in each of fiscal years 2024 and 2025.

But the same won’t happen in FY26, the legislature’s Commission on Government Forecasting and Accountability noted in its September report, because IDOR adjusted its disbursement percentages in 2023.

As a result, COGFA noted, general fund receipts could be “notably weaker” in the upcoming fiscal year – and GOMB’s report indicates the same.

Revenues are also expected to slow as the Federal Reserve decreases interest rates, lowering the state’s investment income.

The state is also entering the final step of a five-year process of shifting the sales tax collected on motor fuel from the General Revenue Fund to the Road Fund. That shift was included in Pritzker’s first budget in 2019 as part of the Rebuild Illinois infrastructure plan.

Still, the report projects about $1 billion combined growth in corporate and personal income tax, while sales taxes are projected to fall by $330 million, marking a mixed bag for the state’s “big three” revenue sources.

https://public.flourish.studio/visualisation/20132335/

A history of surpluses

What comes of the projected deficit and how it is defrayed will be up to the governor and the new General Assembly that is seated in January.

Thus far in his tenure, Pritzker’s administration has shown that it can work with lawmakers to balance the books. Every year since the COVID-19 pandemic upended state finances in 2020, the state has seen significant surpluses. Those occurred for several reasons, including better-than-expected revenues as consumers spent more on goods, and government stimulus checks that boosted the economy.

Some years have been buoyed by one-time factors, such as the “true-up” process of the past two years and the state’s retroactive collection of Medicaid dollars in fiscal year 2024.

But the surpluses are also partially attributable to the Pritzker administration’s conservative estimates early in the budgeting process. In past years, that allowed lawmakers to kick extra revenues to the state’s “rainy day” fund that now has a record balance of $2.2 billion while paying down about $11 billion worth of outstanding debts.

Late payment interest expenditures have dropped from about $980 million at the height of the state’s two-year budget impasse between Republican Gov. Bruce Rauner and Democrats in the General Assembly in fiscal year 2018, to $137 million in Pritzker’s first year in office and $13 million last fiscal year.

The forecast from GOMB anticipates a surplus for the current year as well, prior to next year’s deficit. Personal income tax and interest income have been higher than expected, while corporate income taxes are coming in lower than originally projected, mirroring national trends.

All told, the state is now looking at a $262 million current-year surplus, according to the report, but $246 million of that would be reserved in the Budget Stabilization, or “rainy day” fund.

Capitol News Illinois is a nonprofit, nonpartisan news service that distributes state government coverage to hundreds of news outlets statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation. 

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