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.