Bruce Rauner's Spending Freeze
Illinois’ new governor, Republican Bruce Rauner, seems determined to waste no time in getting the state’s precarious finances in order. In his inaugural address, he announced a sweeping plan to slash expenditures and to audit agency spending. On the same day, Rauner signed an executive order freezing state discretionary spending, requiring executive branch agencies to halt all awarding or renewing of all contracts (except for contracts mandated by law, emergency spending, small purchases, and essential operations) and to identify every contract entered into on or after November 1, 2014 to the Governor’s Office of Management and Budget, and implementing other cost-saving measures such as auctioning off surplus property and reducing energy use in government buildings.
The language of the press release announcing the spending freeze highlights the dire state of Illinois’ budget. Illinois faces a $6 billion deficit for Fiscal Year 2015, which will rise to $9 billion for FY2016 and an eye-watering $14 billion by FY2024 if no changes are made to spending or revenue. Eliminating the deficit by budget cuts alone would require a 20 percent reduction in spending on crucial services such as education, Medicaid, and public safety. Illinois’ credit rating is the worst of any state the United States - in fact, Moody’s rates Illinois’ creditworthiness on par with the African nation of Botswana. Further downgrades are not out of the picture. As a result, Illinois has to offer sky-high bond yields to ensure that investors continue to purchase the state’s debt. To make matters worse, a 2011 tax increase expired as of Jan. 1, 2015, causing income tax revenue to drop by $5.16 billion in FY2016.
Governor Rauner has not yet announced what spending will be considered “essential” and what will be “nonessential.” The Gate contacted Illinois state legislators to shed some light on this question. State Representative Jeanne Ives, a Republican representing the Wheaton area, identified several potential areas for cuts, such as “all grants for work not already substantially in progress or in the construction phase for school construction, parks, community programs, training, "targeted initiatives" and the like; [a] hiring freeze for any new positions; major cuts to the Department of Commerce and Economic Opportunity; new road construction like Illiana [a proposed toll road connecting Illinois’ I-55 to I-65 in Indiana] and high speed rail upgrades; across the board department cuts; [and a] staff travel cut.” State Senator Jason Barickman, R-Bloomington, did not offer any specifics, but echoed Rauner’s note of fiscal crisis, saying through a staff member that "Illinois' financial condition is in dismal shape. I look forward to working with Governor Rauner to make the tough decisions that will help make our state better.”
A key problem with Rauner’s spending freeze is that while cutting discretionary spending (such as the school construction and job training programs that Rep. Ives mentions) would technically lower the deficit, it does not address the most important drivers of Illinois’ budget crisis. What is arguably the largest expenditure in Illinois’ budget–a $111 billion pension fund shortfall–will not be affected by Rauner’s executive order. The contracts that grant pensions to Illinois employees are guaranteed under the state constitution, the changing of which would be a herculean effort. A recent law curbing cost-of-living adjustments to pensions and requiring employees to delay retirement was struck down in a state circuit court last November on the grounds that it was repugnant to the pension clause of the state constitution, which prevents public retirement benefits from being "diminished or impaired.” While this is being challenged in the Illinois Supreme Court, with lawyers for the state arguing that the government’s emergency police powers are more powerful than the mandate of the pension clause, public sector unions are unlikely to give in without a brutal fight. Furthermore, these unions, strong allies of the Democratic Party, wield great influence in traditionally-blue Illinois.
The rhetoric of the spending freeze is not unique to Illinois. However, because discretionary spending cuts will not address the largest problems in state and federal budgets–essential spending, such as pensions, Social Security, and Medicare–the spending freezes proposed by many of this year’s freshmen GOP governors are more a method of streamlining spending and ensuring that the money already being spent is spent well than actually cutting large amounts from the budget. For example, Massachusetts Governor Charlie Baker has ordered a hiring freeze, which would save just $6.5 million out of a $100 million shortfall for the rest of FY2015. Republicans Bobby Jindal of Louisiana and Sam Brownback of Kansas–and even Democrat Daniel Malloy of Connecticut–have proposed similar freezes.
Much as the 2013 sequester yielded painful cuts while only decreasing government spending by two percent and leaving federal entitlement programs untouched and growing, by cutting discretionary spending without addressing the major, structural expenses, state governments fail to address the core issues with their budgets. However, this is not to say that spending freezes do not serve a purpose. Rep. Jeanne Ives pointed out an underappreciated benefit of a spending freeze when she stated, “You must start with a spending freeze to ensure every dollar going out the door is prioritized and until you get a thorough understanding of the budget.” As such, a spending freeze can be more of an auditing tool than a hatchet chop to a state’s budget–especially if the freeze consists of stopping spending until gubernatorial approval of that spending, as is the case with Governor Rauner’s plan.
The Gate spoke with Professor Paula R. Worthington, a senior lecturer at the Harris School specializing in state and local public finance, who offered another take on the usefulness of an across-the-board spending freeze: “They are not really desirable for long-term budgeting, because they don’t allow you to direct funds to your highest priority uses, whatever those are; instead, these cuts are “fair” because they are the “same” for all programs, but programs differ in the services provided, population served, and so on. So, a short-run spending freeze can “send a message” of seriousness of purpose and fiscal discipline, but it’s not a long-term solution to budget problems.” As Professor Worthington makes clear, the idea of a “spending freeze” is a politically charged term–its immediate appeal to a fiscally conservative constituency is obvious. Moreover, most Americans are opposed to government spending on a general level, as more spending means higher taxes; however, when politicians begin to discuss cutting certain programs, the identification of clear losses makes people less favorable to the idea.
As Governor Rauner’s plan to mitigate Illinois’ budget woes begins to take firmer shape, it will be interesting to see how the public responds. The governor has not yet identified what spending is essential and what is nonessential, and it is still unclear what services will ultimately be the ones under the axe. With increasing specificity, it is likely that support for the governor’s plan will diminish–even if less government spending sounds good in the abstract, voters will surely react poorly if the cuts actually end up affecting them adversely.