Illinois passes $56 billion budget

Illinois lawmakers passed a $56 billion fiscal year 2027 budget as the legislative session wrapped up in the early hours of Monday morning.

The budget includes new revenue streams like a social media platform fee, a digital advertising tax, and taxes on cryptocurrency, fantasy sports and prediction markets. It also caps net operating loss deductions for corporations, and decouples from a federal stock exclusion provision of the tax code to allow taxing capital gains at the individual income tax rate.

Gov. JB Pritzker achieved passage of some of his housing proposals ? $250 million for the BUILD initiative, including $100 million for local infrastructure support for housing development; $100 million for "missing middle" and affordable home programs; and $50 million for first-time homebuyer assistance ? and increased evidence-based funding for K-12 education by $350 million.

"Responsible budgeting in Illinois is now the rule, not the exception," Pritzker said at a Monday press conference. "Illinois now finds itself in the strongest financial position in decades. Ten consecutive credit rating upgrades. Our $8 billion overdue bill backlog has been paid; $12 billion of short-term debt has been eliminated. Our pension funded ratio is the highest it's been in 17 years. And our rainy day fund has grown from near zero to over $2.4 billion."

He noted that discretionary spending in FY 2027 is "roughly flat" compared to FY 2026, and said the state budget has grown at less than the rate of inflation since he took office in 2019, "excluding required increases" in pension funding and school funding.

The final days of the session also brought the passage of HB 4537, which would bring the state into alignment with Tyler v. Hennepin County, a Supreme Court decision that found delinquent property tax sale processes in some places violated the constitutional right to fair compensation. The issue has dogged Cook County, which has been found liable by a federal judge for stripping homeowners of equity.

For Cook County, HB 4537 "would mean an eventual end to private tax-lien sales, new opportunities for payment plans for some owner-occupants, and that surplus proceeds (equity) that previously could be absorbed through the tax-sale process would instead be returned to the former homeowner after the debt and allowable costs are paid," Ashlee Gabrysch, senior director at Fitch Ratings, said by email.

"While this will require administrative changes made by the county, it should also reduce the county's legal exposure driven by the prior tax sale practice of capturing all the excess equity," she added.

The session did not bring a resolution to the question of where the NFL's Chicago Bears will build a new stadium. The so-called megaprojects bill ? which would have provided the Bears with the tax certainty they sought for an Arlington Heights stadium ? fell short, as did a last-minute Senate bill giving the Bears similar terms to those offered in Indiana, which failed to clear the Illinois House.

"We need to stop approaching major legislation as an 11th-hour, back-of-the-envelope exercise," said Joe Ferguson, president of the Civic Federation, a fiscal watchdog group. "It's not surprising that this fell short at the end of the day, and what it highlights is that our regular budget process, at least, as it's customarily practiced? is not the way such major legislation should be advanced."

The Civic Federation urges the legislature to consider a special session devoted entirely to the question of the Bears, so that "to the extent that (the) megaprojects (bill) still exists, and people are looking for a way to get to that," there can be a focused discussion, Ferguson said.

The bigger story about the budget "is that we're really drawing on both a combination of increases to existing tax streams, but also the utilization of one-time revenue sources and transfers, in order to fill a hole, which means we really didn't tighten our belt in ways that we maybe should have, in light of the overall external pressures that the state already is facing," Ferguson said.

The budget also includes a six-month pause in automatic gas tax increases. And lawmakers used $150 million in surplus gas sales tax revenue to balance the budget, which Illinois Policy, a libertarian-leaning think tank in Chicago, has criticized for "cancel(ing) out taxpayer savings."

Ferguson said "both of those are calibrated in ways that appeared to exercise some consciousness about possible adverse impacts on transit reform, because? that is really where a significant portion of money was to be rededicated."

Some Democratic lawmakers had pushed to pass more progressive tax proposals as part of the budget, but Ferguson cautioned that "the call for that usually is a call for more revenue from a system that is not sustainably structured," and is still inequitable and regressive overall.

Local governments notched a win at the last minute with a continuation of the local government distributive fund share at 6.47%, after the governor's executive budget proposal called for cutting that by several tenths of a percent, Ferguson noted.

The budget also reinstated a property tax relief grant for local K-12 schools. It had previously been cut out to save about $50 million, but lawmakers reintroduced it in the 2027 budget, allowing school districts levying property taxes to pass some savings along to taxpayers, said Bryce Hill, director of fiscal and economic research at Illinois Policy.

Regarding the new revenue streams, "it is a trend we're seeing in a number of states, to try to gather these additional revenues, digital ads and fantasy games, and? social media stuff," said Geoff Buswick, managing director and sector lead in U.S. public finance at S&P Global Ratings. "Where we've seen it so far ? like both Maryland and Washington state have done similar packages ? they have been challenged and held up in the courts.

"We're watching how it plays out," he said. "We assume there's going to be some normalization, and something will succeed, but to what extent? we're not sure."

Illinois' general obligation bonds are rated A2 by Moody's Ratings and A-minus by Fitch and S&P. The outlooks from all three are stable. They remain the lowest ratings among U.S. states.

Chicago is already embroiled in a legal challenge to its social media tax, said Illinois Policy's Hill. And unlike some of the other new revenue streams likely to face court challenges, "the revenues for that tax were included in the balancing of the state budget, so that one's something to watch, in particular, what happens with that," he said.

The projected revenues from Illinois' social media fee total about $200 million out of a $56 billion budget, "so that is comfortably within the margin of error of revenue variance that you'd have in any given year," said Scott Nees, director and lead analyst at S&P. "It's not going to be a material budget impact, even if they don't get any of that money."

All of the new revenue proposals "would increase revenue $589 million, modest relative to the state's $52 billion in revenues," said Karen Krop, senior director at Fitch Ratings, in an email interview.

"The proposed budget assumes modest state tax revenue growth and similarly modest spending growth," Krop said. "It provides some additional funding to address requirements stemming from federal changes to SNAP and Medicaid, but most other spending would be kept relatively flat to fiscal 2026 levels."

Krop also noted the budget makes a deposit to the Budget Stabilization Fund, "continuing a steady trend of improvement from pre-pandemic levels but still relatively modest compared to most other states at just over 5% of projected general fund revenues."

Hill sounded a note of worry about the $300 million corporate tax hike from capping net operating loss deductions, noting that Illinois is one of only a few states to limit that in any way. "It was disappointing to see that tax change, and that's going to be a pretty big deal for companies who are operating in the state," he said.

And he criticized the budget's reliance on fund sweeps, like taking the $150 million in revenue that was meant for the road fund and directing it to the general revenue fund.

"The state has continually skirted the requirement to send all of the money to the road fund," he said. "So continuing to rely on a fund sweep from the road fund to the general revenue fund is just a budget gimmick."

The state has "done a nice job of managing expenses," S&P's Nees said. But "what we've consistently stated is it just needs to put more money into the pension funds and basically accelerate the funding of its pension obligations. ? And so, in order to get to a higher credit rating, they would certainly need to make more progress on that front."

While balanced, Illinois' FY2027 budget is ultimately a "maintenance budget" that does little to address structural issues compared to the strides the state made during the pandemic era, Ferguson said.

"There was a lot of creativity that was applied during the COVID years to address those structural issues, and to begin to turn them around," as well as getting back to paying bills on time, he said.

Ferguson credited Pritzker with making "an affirmative decision" to tackle structural issues using the federal funding flowing to states during that time. But he said that early progress has tapered off.

"The narrative around those (improvements) has carried on a little bit too long," Ferguson said. "We're in a different world now, and we really need to get serious about those legacy issues rather than taking the year-by-year, at-the-margins transactional approach, which appears to be what we've done. Which is not surprising in an election year, but the question is: When are we going to get to that work?"