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April 9, 2020

Contact: Robin Fretwell Wilson

               (217) 244-1227

               Jamey Dunn-Thomason
               (217) 300-8409


IGPA task force reports on potential impact of COVID-19 pandemic on state finances
Hit to revenues expected to be worse than the Great Recession

URBANA — The University of Illinois System’s Institute of Government and Public Affairs (IGPA) today released a report focused on the potential impact of the COVID-19 pandemic on the state’s budget.

At the request of U of I System President Tim Killeen, IGPA assembled more than four dozen interdisciplinary faculty experts from the three system universities to serve on IGPA’s Task Force on the Impact of the COVID-19 pandemic.

“We know that public servants throughout the state are spending every waking moment responding to the immediate crisis,” IGPA Director Robin Fretwell Wilson said. “One way IGPA can help is by convening expertise from across the entire of U of I System to arm policymakers with evidence-based, objective information as they face the difficult choices ahead.”

The task force includes three working groups, examining Economic and Fiscal Impact, Community and Family Resilience, and the Healthcare Workforce. Each group is collaborating on a series of economic modeling activities, data analyses and syntheses of impact.

This first report, from the Economic and Fiscal Impact Group, draws comparisons to the 2007 to 2009 recession. The authors also used new, national models of the possible economic outcomes from the COVID-19 pandemic to project the potential impact on the three biggest sources of state revenues: individual income tax, corporate income tax and sales tax.

In all but the best-case scenario, the negative impact on state revenue is projected to be worse than during the Great Recession, from 2007 to 2009. Under the most severe model of a protracted downturn followed by a weak recovery after a severe pandemic, Illinois could lose more than $28 billion between calendar years 2020 and 2023.

State revenue projections table

The COVID-19 crisis will also likely harm the finances of all local governments: counties, municipalities, school districts, transit agencies and special districts.

Declines in state revenues, which are shared with local governments, are especially concerning because municipalities in Illinois are more reliant on state revenues than municipalities in most other states.

As state revenues drop, spending on public health and human services is expected to increase. The biggest impact on spending is expected to be a several-billion-dollar increase in Medicaid expenditures.

Market volatility could have a negative impact on pension funds, causing state and local governments to see increases in required annual contributions. But these increases will be somewhat delayed.

 “It is too early to precisely quantify the fiscal gap that is likely to be created by reductions in state revenue and increases in the cost of delivering state services, but we believe that it will almost certainly cost billions of dollars and possibly cost tens of billions of dollars,” the report says.

The authors note that the recently approved federal stimulus package will likely fall short in some key ways. For instance, the increase in federal matching funds for Medicaid is much smaller than the enhanced match Congress approved as part of the response to the 2007 recession.

The report emphasizes there will be no easy answers, but suggests that policymakers focus on five basic principles: transparency, protection of the vulnerable, economic efficiency, minimizing borrowing for operating purposes and flexibility.

“Illinois is not well-positioned to cope with these pressures,” Wilson said. “The tools that states typically use to get through a crisis are already stretched thin, as Illinois has used them time and again to weather fiscal storms going back more than a decade. But because Illinois isn’t new to fiscal crisis, there are key lessons we can take from our past to mitigate the fallout of the COVID-19 pandemic.”

The report leverages institutional knowledge and research on state and local finances from IGPA faculty and affiliates who are faculty and staff at the Institute for Illinois Public Finance at the University of Illinois at Springfield and the Government Finance Research Center at the University of Illinois at Chicago.

The Economic and Fiscal Impact Group plans to release a series of reports that suggest potential policy approaches for state and local governments. The group will look at what states, including Illinois, did during the last recession to cope, and how those actions affected state finances and economic conditions.

Other reports from the IGPA Task Force on the Impact of the COVID-19 Pandemic are expected in the coming weeks. As each report is released, it will be available on the task force’s webpage.

About the Institute of Government and Public Affairs
IGPA seeks to improve public policy discussion through non-partisan, evidence-based research and public engagement in Illinois. Learn more at igpa.uillinois.edu and follow @IllinoisIGPA for the latest updates.