A missed opportunity

The Governor’s Office of Management and Budget predicted a future deficit from 2020 onwards. Higher-than-expected revenue, resources and strong economic performance led to large budget surpluses for years. Despite this lucky break, state leaders missed the critical opportunity to use it to clean up the state’s fiscal mess. What did they do instead of enacting long-term fiscal reforms? They built a significant amount of new expenses into the permanent spending base, delaying the inevitable string of future deficits by a few years and making them significantly worse. Illinois now has much larger deficits, despite more revenue than ever anticipated.

Despite the revenue boost, the state is only expecting to finish fiscal year 2025 with a $211 million surplus – even less than last year’s $262 million predicted surplus. It will be followed by enormous budget deficits. By squandering the opportunity to use those revenues effectively, state leaders have set up Illinois for a nearly $3 billion shortfall in just one year, growing to over $5 billion by 2029. During the next five years, Illinois will accumulate over $22 billion in deficits.

Illinois Forward 2026: How Illinois can spend responsibly

If the state does not pursue long-term solutions to its budgeting problems, Illinois’ financial situation will worsen. Lawmakers and the governor also cannot continue relying on tax hikes to save them from the consequences of their spending excesses. Illinois already has among the highest state and local tax rates in the nation, and some of the highest property taxes, too. High taxes are driving away residents and businesses, leaving fewer people and less wealth to tax.

With slow economic growth and the third-highest unemployment rate in the country at 5.2%, higher taxes are not practical and will make it harder for Illinoisans to invest in the economy and create jobs. By enacting strategic reforms, especially implementing responsible caps in expenditure growth, Illinois can stop the financial decline without raising taxes. It can create a more prosperous and sustainable future. The Illinois Policy Institute’s Illinois Forward 2026 plan shows how to reach those goals.

Illinois can undo its persistent structural deficit by creating savings from responsible growth linked to projected inflation, saving at least $1 billion from the 2026 budget to roll back massive spending increases, right-sizing government health care costs and reducing administrative waste from redundancies in a state with too many single-school districts. The plan can help Illinois end future fiscal years with budget surpluses. It could generate over $525 million in 2026 alone, eventually reaching nearly $1.8 billion annually by 2030. These surpluses could help substantially strengthen the state’s finances, drive economic growth and offer taxpayers relief. Finally, to further ease pressure for state and local tax increases, Illinoisans must be given a vote on a constitutional amendment to allow for government pension reform.

Compared to current projections, pursuing these reforms would save the state more than $26.7 billion during the next five years. This would eliminate the $22 billion looming cumulative deficit and provide the state with an extra $4.5 billion in revenue. These surpluses should be used to fortify the state’s Budget Stabilization Fund, also known as the rainy-day fund, or be returned to taxpayers. The Government Finance Officers Association recommends having enough in reserve to run the state for 60 days. This would mean increasing the rainy-day fund from its current $2.3 billion to $8.73 billion, nearly four times its current amount. While the savings would not be able to cover the full value, Illinois can start building a more sustainable fund to cover potential economic downturns.

Boost efficiency, create responsible growth savings

The fundamental issue with Illinois’ budget is rampant overspending. This has led to constant shortfalls, pushing the state closer to the edge of insolvency. Yet, instead of correcting its bad habits, the state consistently tries to tax its way out of financial crises. Evidence of this includes:

• Enacting the two largest income tax hikes in state history in 2011 and 2017.
• Passing 20 new tax and fee hikes totaling $4.6 billion in 2019.
• Proposing a $3.6 billion income tax hike in 2020.
• Pushing a $500 million to $1 billion tax hike on small businesses in 2021.
• Proposing a $934 million increase in taxes in 2022.
• Enacting $1.1 billion in tax hikes in 2024.

Illinois needs a balanced budget, but not one achieved through perpetual tax hikes. The state government needs to return costs to what taxpayers can sustainably support. To spend responsibly, the state’s expenditures should be in line with its economic growth.

During the past 10 years, Illinois’ economy grew at about 3.9% per year in nominal gross domestic product. The state’s spending has far outpaced that, with year-over-year growth of 4.14%. Illinois’ spending is expected to continue growing slightly, with forecasts showing 4.67% year-over-year growth during the next five years.  Illinois’ expenditure growth has exceeded projections for at least five years.

If Illinois had adopted a spending cap linked to the state’s ten-year average GDP growth rates in 2020, the state would have saved nearly $27 billion. Rather than a $211 million surplus in 2025, there would be a surplus of nearly $5.9 billion. Plus, Illinois could have used those savings to make additional contributions to underfunded pension plans, boost the rainy-day fund, improve essential services and provide relief for taxpayers.

Because Illinois bungled its finances by ramping up expenditures post-2020, slowing down spending now to match the economy’s growth would not be enough to offset the huge deficit the state is facing. During the next five years, Illinois should cap its expenditure growth – after factoring in other proposed solutions detailed later – to 2%, the projected rate of inflation. This will allow for responsible growth while revenues return to more sustainable levels and trajectories as federal funds evaporate. After five years, the state should set spending limits based on the 10-year average nominal GDP growth to ensure its expenses are manageable.

These measures alone won’t be enough to prevent Illinois from facing large budget deficits during the next four years. The state must create additional savings. In 2026, Illinois is projected to spend an extra $6 billion annually beyond 2024 levels. For fiscal year 2025, the state enacted at least $550 million in program expenses that didn’t exist in 2024. Expenditure growth in the 2025 budget included: $440 million on migrant health care and $139.4 million on welcoming centers for migrants; $80 million on dedicated COVID-19 pandemic resources, without explanation of what those resources were or why they are still needed after the World Health Organization declared the pandemic over in 2023; and a projected increase of $1.5 billion in health care spending, which encompassed an extra $210 million for weight-loss drugs.

In 2026, to get its budget back on a sustainable track, the government must create $1 billion in expenditure savings, about one-sixth of the projected two-year spending increase. To help the state better manage its expenditures and identify which areas could be slimmed without impacting important programs or services, Illinois should leverage its Budgeting for Results Commission. Established under state budget law (15 ILCS 20/50-25) in 2024, the commission, which includes members of the governor’s office, state lawmakers, agency officers and private-sector leaders, offers oversight and guidance for comprehensive program evaluation. The commission can streamline government operations and ensure taxpayer money is spent effectively by thoroughly examining the state budget and identifying areas of waste.

Lastly, before the state decides how much money to allocate for new programs, it should think carefully about how efficient those programs will be, and whether they will use resources wisely. The Governor’s Office of Management and Budget must do a better job of justifying new program expenses. The office should create an actionable five-year plan for balancing the budget and defend why new programs need certain funding levels.

The combination of creating $1 billion in expenditure savings and then linking short-term expenditure growth to inflation can result in savings of over $3 billion in 2026, reaching over $5 billion by 2030.

Right-size employee health care costs

In 2019, Gov. J.B. Pritzker signed a contract with the American Federation of State, County and Municipal Employees Council 31, unnecessarily increasing workers’ benefits and government spending. In July 2023, he signed a new contract, adding even more benefits, such as a 19.3% increase in total base pay and unearned stipends of $1,200 for each employee, costing taxpayers an extra $625 million. Research from the Illinois Policy Institute found a more balanced contract in 2019, one aligning government spending with what private-sector taxpayers can afford, would have saved $3.6 billion over four years. Instead of bringing health care costs and benefits more in line with what taxpayers receive, the state chose to continue spending money on premium health plans.

The platinum health insurance subsidy leaves state workers paying only half of what private-sector workers pay for their health care coverage. Today, state workers in Illinois pay 16% of their combined premium and out-of-pocket health care costs, while the state covers the other 84%. In comparison, private sector workers in 2024 paid 42% of their health care costs, according to the Milliman Medical Index. This means private-sector workers are not only paying more for their health insurance, but they’re also covering a large portion of state workers’ health care costs through taxes. It is unfair to make private-sector workers shoulder the cost of benefits they couldn’t afford and would have trouble obtaining for their own wellbeing.

AFSCME Council 31’s current contract will last until mid-2027, at which point Illinois’ projected budget shortfall will be over $4 billion, likely leading to higher taxes. To reduce government spending and help Illinois achieve fiscal stability, lawmakers should enact reforms to state employee health insurance costs and institute benefits that are fairer in the next contract, aligning them with what private-sector workers pay. For example, Senate Bill 2680, introduced in the 100th General Assembly, would have removed health care coverage from union contract negotiations if average state workers’ costs stayed below 40% annually.

Creating a new contract with right-sized health insurance would save the state $897 million in 2028 alone. It would save over $2.7 billion by 2030.

Prioritize classrooms over administration

About half of Illinois’ roughly 860 school districts only serve one or two schools. This results in duplication of administrative roles and wasteful spending. Illinois spends more on school administration per student than most other large states. At about $552 per student, the state ranks 6th in the nation, according to the most recent Census Bureau data.

If Illinois reduced its administrative spending to the national average per student, it would save nearly $273 million. These savings could be reinvested to enhance student outcomes or be returned to taxpayers. To achieve this goal, state Rep. Rita Mayfield, D-Waukegan, introduced the Classrooms First Act in 2019. The act aimed to create the Efficient School District Commission to consolidate districts – not schools – and then only with approval from local voters

The commission would have also included all stakeholder representatives, such as teachers unions, school board associations, superintendent associations, education support districts and parents. Its goal was to find ways to reduce administrative costs by reducing the number of school districts by a minimum of 25%, bringing Illinois roughly in line with the national average. Although the bill unanimously passed the Illinois House of Representatives, it failed to receive a full vote in the Illinois Senate.

The bill would have also required all newly formed districts to be unit districts, meaning they’d serve both high schools and elementary schools. This reform would be especially beneficial because unit districts in Illinois are typically more cost-efficient. On average, unit districts spend $15,474 per student, compared to $21,682 for high school-only districts and $18,063 for elementary-only districts. This type of consolidation, particularly among the smallest districts, is a proven, sensible strategy to reduce costs and improve student outcomes.

By reducing administrative costs and redirecting those savings to local public schools, the state’s education spending could better match what taxpayers can afford – about a 2% increase per year to align growth with the proposed spending cap. This change would save $226 million in the state budget for fiscal year 2026 and nearly $2.8 during the next five years.

Pension reform remains critical for Illinois’ fiscal health

The Illinois Policy Institute’s Illinois Forward 2026 budget proposal provides a five-year plan for a balanced state budget, which includes dramatically reducing government spending, reprioritizing expenses and alleviating taxpayer burdens, all while ensuring the state makes its statutorily required annual pension contributions.

Years of overpromising on government worker pensions has created an unsustainable cycle of rising taxes and diverting resources from other essential services. Despite the large chunk of tax dollars going to state pension plans, the statutorily required contributions are not enough to reduce Illinois’ $143.7 billion in unfunded pension liabilities. For example, the projected pension contribution for fiscal year 2025 alone is about $5.1 billion less than the contribution actuaries calculated is needed to start paying off this debt. This is a serious problem for taxpayers, retirees and future state budgets.

One of the major reasons the state’s pension debt keeps ballooning is because Illinois’ annual pension contributions have consistently remained lower than what actuaries have said was necessary. These unfunded liabilities are also expected to keep growing in coming years, threatening Illinois’ future fiscal stability. A projected slowdown in economic growth from 2025 onwards will further hinder Illinois’ ability to pay down its pension debt, as this will likely mean lower investment returns – one of the most important factors in Illinois’ mushrooming pension debt.

As pension debt rises, pension funding ratios remain dangerously low across Illinois’ five state systems, currently averaging 46%. Illinois now has the worst-funded pension system in the nation. According to experts, pensions with funding ratios below 60% are considered “deeply troubled,” and plans with funding ratios below 40% may be beyond recovery. Illinois is getting to that point.

Compounding the issues are new calls from lawmakers to drastically increase “Tier 2” pension benefits. The “Tier 2” system, established in 2010 to save money on new government workers’ retirement costs, may also fall out of compliance with federal Safe Harbor laws, which mandate retirement benefits to be at least equal to Social Security. If determined non-compliant, Illinois could have to pay Social Security taxes for government workers, costing taxpayers $856 million. If an independent analysis concludes Tier 2 pensions violate these regulations on an individual basis, the state must find a way to fix the system without losing its significant cost-savings.

To provide greater retirement security to state employees and protect taxpayers from a future marred by continuous hikes, lawmakers in Springfield must pursue responsible pension reform. This may include reforming the “Tier 2” system by adjusting the pay cap to be equal to the Social Security wage base, as well as expanding the State Universities Retirement System’s Self-Managed Plan, a 401(k)-style option, to all government employees. These changes could help to reduce the state’s unfunded pension liability and give pensioners more say in how their retirement funds are invested. While solving Illinois’ overall pension crisis requires a constitutional amendment to be placed before voters, adjustments to the “Tier 2” pay cap and a reduction of its benefit accumulation rate from 2.2% to 1.75% for future workers to match Social Security Administration requirements can be achieved now.

Implementing other changes, such as capping pensionable salary, replacing cost-of-living adjustments with true cost-of-living increases and adjusting benefits to align with inflation would provide even more savings for the state and improve retirement security for pensioners.  A previous analysis found similar reforms would have saved the state $2.4 billion in the first year, and more than $50 billion by 2045. These reforms would also ensure Illinois’ pension plans are fully funded, which would better safeguard retirees’ benefits than simply accepting the state’s goal of 90% funding by 2045.

Absent reform, Illinois’ pension debt will continue growing, driving down the state’s credit rating, straining the state’s pension systems, putting public servants’ retirements at risk and forcing taxpayers to pay more in exchange for fewer services.

Illinois must commit to paying down its debt and improving its public pension system without resorting to more taxes. By adhering to responsible financial practices and pushing for a constitutional amendment to remove barriers hindering reasonable adjustments to the future growth of pension benefits, the state can maintain a more sustainable system, protect government workers’ retirement security and steer Illinois toward fiscal stability.

Conclusion

With an influx of federal funds since the start of the COVID-19 pandemic, Illinois managed to pay down some of its debts, build up its emergency savings and improve its credit ratings. Despite this, the state missed its opportunity to use the windfall to make long-term changes, fixing its constant budget deficits and avoiding tax hikes. Illinois politicians continued to overspend and misallocate the last of the state’s $35 billion in federal aid and unexpected revenue. With federal relief funds going away, the state is back to a familiar predicament: billions in structural deficits and an economic collapse on the horizon.

With one of the highest unemployment rates in the nation and economic growth relatively slower than the national average, the state cannot continue its longstanding budget blunders, stifling growth and driving away residents and businesses. It also cannot tax its way out of financial trouble on that shrinking pool of Illinoisans. Lawmakers should learn from past mistakes and the successes of other states.

Illinois Forward 2026 offers common-sense strategies to limit tax burdens, close deficits, reduce debt and spur economic growth. None of the ideas are drastic, but they do call for state leaders to become responsible stewards of taxpayers’ money.