This week, the Assembly passed Illinois’ first-ever sales tax holiday. TWIS readers will recall that at the IRMA Board dinner in Springfield the first week of May, Governor Pat Quinn proposed a sales tax holiday on clothing, footwear, and school supplies as a way to help stimulate the economy and give Illinois consumers a break during the recession. On May 6th, the House amended S.B. 3658 with IRMA supported language creating the Governor’s proposed sales tax holiday.
SALES TAX HOLIDAY
BUDGET
PENSIONS
PROMPT PAYMENT
SALES TAX CHANGES
VETO SESSION
SALES TAX HOLIDAY
This week, the Senate concurred with House Amendment #2 to S.B. 3658 and the legislation now goes to the Governor for his consideration.
The holiday will run 9 days from August 6, 2010 through August 15, 2010. The State’s Use Tax of 5% will be suspended on eligible items but the 1.25% rate (that portion of the 6.25% Use Tax that goes to local governments) will still be charged. Eligible items include school supplies and clothing items. School supplies do not include items such as computers and computer supplies, PDA’s, cameras, etc. The holiday applies to clothing with a retail selling price of less than $100. Discounts can push the selling price of an item below $100 but not manufacturer coupons.
In the very near future, IRMA will be working with the Illinois Department of Revenue (IDOR) to ensure the rules of the holiday are clear and widely disseminated in order to ensure compliance.
BUDGET
After many starts-and-stops, the Democratic-members of the General Assembly finally coalesced around a State budget for Fiscal Year 2011 (FY 11) as contained in H.B. 859 (Rep. Barbara Flynn Currie, D- Chicago/Sen. Donne Trotter, D- Chicago), H.B. 2270 (Rep. John Bradley, D- Marion/Sen. Gary Forby, D- Benton), and S.B. 3660 (Sen. John Cullerton, D- Chicago/Rep. Barbara Flynn Currie, D- Chicago). Confronting an overwhelming General Revenue Funds (GRF) deficit of approximately $12 billion, options were limited. The options were to increase taxes, cut spending, borrow more money, or some combination thereof. In the end, they chose to cut spending and borrow heavily.As largely contained in H.B. 859, the Assembly approved a lump sum budget of approximately $26 billion or $400 million less than FY 10. That spending level is to be supported by existing revenues, $250 million in the form of a tax amnesty program (S.B. 377), and up to $1.75 billion in securitization of tobacco monies the State receives on an annual basis pursuant to the Tobacco Master Settlement Agreement (MSA).In addition to the revenues noted above, Governor Pat Quinn was granted extraordinary emergency powers (S.B. 3660) to manage the lump sum budget. His powers will include the authority to transfer monies between funds without legislative approval, issue emergency administrative rules, ‘sweep’ up to $350 million from dedicated funds, and borrow additional monies from those same dedicated funds. The monies borrowed from dedicated funds would need to be paid back with interest within 18 months. This budget did not come about, however, without a great deal of jockeying, especially by a number of House Democrats who believed the budget should be reduced more sharply.
When the House returned late Monday, they began a process of hearing a number of amendments filed by the group of House Democrats. These amendments proposed an additional $1.7 billion in budget cuts. The proposed cuts included education ($400 million), State operations ($300 million), rebidding and renegotiation of State service contracts ($500 million), increased health insurance premiums for State retirees and dependents ($100 million), furlough days for legislators and Constitutional Officers, reduced per diem and mileage allowances for legislators, and Medicaid ($200 million). Most of these proposed cuts were rejected by the members of the House either in committee or on the floor. A few of the proposed cuts (i.e. rebidding and renegotiation of State service contracts, furlough days for legislators and Constitutional Officers, and reduced per diem and mileage allowances for legislators) were approved and included in S.B. 3660.
Central to the FY 11 budget were two bonding provisions. The first securitizes up to $1.750 billion of the Tobacco Master Settlement Agreement (MSA) monies that are paid annually to the State as a result of the national agreement with tobacco companies in 1998. This securitization will provide Illinois with a one-time infusion of $1 billion but the annual MSA Funds will be used to pay for this one-time infusion for 19 years – although the State could issue less than $1.750 in bonds and thereby reduce the number of years MSA funds are diverted to bond payments. This securitization was also contained in S.B. 3660. The second bonding provision, contained in S.B. 3514 (Sen. Jeffrey Schoenberg, D- Evanston/Rep. Barbara Flynn Currie, D- Chicago) sought to provide $3.7 billion in one-time monies by bonding the pension payment due to be made in FY 11.
The bonding of the pension payment was highly controversial as most Republican members of the House took the position that this simply ‘kicked the can down the road’ while most House Democrats saw it as the proper approach since the State does not have the money to make the required pension payment and simply skipping the payment costs the State more in the long-run. When the pension bonding provisions contained in S.B. 3514 were called for a vote in the House the first time, it fell one-vote short of the 3/5ths super-majority required to authorize additional State debt. However, a motion to reconsider was filed by a member who voted on the prevailing side the first time. This procedure allows the bill to be called again for a vote.
The bill failed the first time because while the bill needed 71 votes for passage, there are only 70 Democrats in the House and two, Rep. Jack Franks (D- Woodstock) and Rep. David Miller (D- Dolton), voted ‘no’. Only two Republican’s, Rep. Bill Black (R- Danville) and Rep. Bob Pritchard (R- Dekalb) voted ‘yes’. The initial failure of the bill set off an intense round of jockeying as Democratic leadership tried to find one more vote and the Republican’s tried to peel off at least one of their yes votes and keep everyone else from switching to a ‘yes’ vote.
Late Tuesday night, the bill was called again. This time, the bill received the required 71 votes because Rep. Miller switched his ‘no’ vote to a ‘yes’ vote and, while Rep. Pritchard voted ‘present’ the second time, Rep. Black was joined by Rep. Bob Biggins (R-Elmhurst) who switched his ‘no’ vote to a ‘yes’. The bill was then sent to the Senate for concurrence. However, the Senate Democrats were unable to muster the super-majority of 36 votes needed for passage.
The failure of the pension bonding, at least for now, blows a huge hole in the FY ’11 budget as the State must make a $3.7 billion pension payment this year. Non-payment has substantial negative implications for entities not related to the pensions (e.g. Medicaid providers) and to the State for years to come (see ‘Pensions’ below). There is the real possibility that failure of pension bonding would cause the already horrendous payment cycle (approximately 150 days) for Medicaid providers to worsen by months. However, there is still the potential this could pass. The legislation temporarily suspends pension appropriations until September 30th. Therefore, the Senate could come back and still approve the bonding if they do so long enough before September 30th to give the State time to prepare and sell the bonds. As of this writing, the Senate intends to return sometime in the not too distant future when they believe they will have the 36 votes required for passage of S.B. 3514.
While the State now has something of an FY ’11 budget in place, the Governor will have difficult and unpopular decisions to make if he is to have a chance at successfully managing the budget. It is nearly assured that when the Assembly returns in November for the Fall Veto Session, the budget will once again top the list of issues that need to be addressed.
PENSIONS
As noted above, the State must make a $3.7 billion pension payment this year. The payments are paid either bi-monthly, monthly, or quarterly, depending upon the pension system. Technically, in years when the State is not having revenue problems, the Comptroller’s Office makes the pension payments daily as a percentage of payroll that they issue each day. Illinois is hardly flush with revenue.For FY ’11, on average, the State must make approximately $300 million in pension payments every month. Given the State’s current fiscal crisis, the cash-flow to meet these payments does not exist. While the pension systems have a continuing appropriation dating back to 1995, the continuing appropriation simply puts them in line for payment at the Comptroller’s Office with every other State agency which also has an appropriation. The only difference is the pension systems don’t need to obtain a specific appropriation every year from the Assembly. The continuing appropriation does not give them payment preference.Without the money to make the pension payments, the five pension systems must begin selling assets in order to cover the State’s missing payment. The income from these assets (i.e. investment income) has historically met approximately 75% of the pension obligations. Obviously, the more assets they sell, the more dependent the pension systems become upon the State providing funding thereby putting even more pressure on State revenue sources. Without the pension bonding, the State, via the Comptroller, has to make a financial judgment presumably based on the best of the worst financial impact to the State. That judgment would include whether or not to pay everyone a small percentage of what they are authorized to receive, pay providers and ignore pensions, or pay pensions and not pay providers and significantly expand their payment cycle. If payments to providers were further slowed, the payment cycle would increase by months. One more item of note: TWIS readers will recall that the recently enacted pension reforms were estimated to save at least $100 billion over the next 35 years. If the State does not make the $3.7 billion pension payment this year, it is estimated that this one year of non-payment will cost at least $30 billion over 35 years or nearly 1/3rd of the savings generated by the reforms. Either way, if the pension bonding is not approved before September 30th there will be significant financial ramifications for the State for years to come.
PROMPT PAYMENT
The Illinois Prompt Payment Act was amended via House Amendment #3 to S.B. 3662 (Sen. Donne Trotter, D- Chicago/Rep. Barbara Flynn Currie, D- Chicago). TWIS readers may recall that last year, effective September 24, 2009, IRMA successfully obtained reform of the Act to address a sleight-of-hand some agencies were using to avoid paying Medicaid pharmacy providers the interest they were owed on monies the State failed to pay on a timely basis for services or products rendered. The reforms were interpreted differently by other agencies who began issuing checks in ridiculously small amounts (e.g. twenty-cents) to pay interest on lease payments for State offices the State had not paid within sixty-days. Since it costs the State far more than twenty-cents to issue a check, some legislators felt this needed to be addressed. The initial reaction was to take the Prompt Payment Act back to the way it was prior to IRMA’s suggested reforms. Working with IRMA, the Assembly settled on a compromise that will address this small check issue while still preserving the intent of the Act which is to incentivize the State not to treat vendors as interest-free banks. The compromise will require State agencies to automatically remit any interest owed that is over $50. Interest on individual warrants that does not exceed $50 will not have to be paid until the interest does exceed $50 with the exception that any interest owed at the end of the fiscal year shall be paid even if it does not exceed $50.IRMA would like to thank the members of the Assembly for the consideration and support of IRMA’s alternative proposal which addresses their concerns while preserving the intent of the Act.
SALES TAX CHANGES
The Illinois Department of Revenue has posted on their website an Informational Bulletin detailing which local jurisdictions (municipalities and counties) have changes to their sales taxes which take effect July 1st. Most are increases but Cook County, for example, is declining as a result of a partial repeal of their highly controversial sales tax increase.
VETO SESSION
While the House and Senate are expected back at some point this summer, primarily for the purpose of dealing with the pension bonding, they have announced the Veto Session schedule. Veto Session will convene November 16-18th and November 29- December 1st.
Rob Karr
Senior Vice President Government & Member Relations
217-544-1003rkarr@irma.org
