Public Finance of the States: Illinois

Illinois’s Fiscal Crisis in Context

Illinois is the cautionary tale of American state finance—a large, productive economy with a world-class city at its center that has nonetheless accumulated one of the worst fiscal positions of any state in the country. Understanding Illinois requires separating the genuine structural problems from the political dysfunction that has prevented their resolution, and being honest about how much of the crisis was a choice rather than an accident.

The Pension Crisis

The core of Illinois’s fiscal problem is its public employee pension systems. The state has five major systems—for state employees, teachers, university employees, judges, and legislators—and collectively they are among the least well-funded in the country.

The underfunding accumulated over decades through a combination of:

• Benefit enhancements passed without actuarially sound funding
• Contribution holidays in which the state chose not to make required payments during budget shortfalls
• Optimistic return assumptions that overstated how much investment returns would reduce the unfunded liability
• Constitutional protection: Illinois’s constitution prohibits reducing pension benefits for current employees and retirees, which makes the traditional tools of pension reform largely unavailable

The result is a liability that now consumes a growing share of the state’s general fund, crowding out spending on education, human services, and infrastructure.

Revenue Structure

Illinois levies a flat personal income tax (changed from 3% to 4.95% in 2011 after years of crisis), a corporate income tax, and a sales tax. A 2020 referendum to convert the flat income tax to a graduated structure was defeated, blocking what had been the primary proposed solution to the structural deficit.

The property tax is administered at the local level and is among the highest in the country in the Chicago metropolitan area—a consequence of heavy reliance on property taxes to fund schools and local government.

Key Tensions

• Chicago vs. Downstate: The political and fiscal divide between the Chicago metropolitan area and the rest of the state is one of the defining features of Illinois governance. They have very different needs, very different political preferences, and share a government that satisfies neither
• Credit ratings: Illinois has the lowest credit rating of any state, with downgrades reflecting the pension liability and persistent structural deficit
• Population loss: Illinois has been losing population to neighboring Indiana, Texas, and other states, shrinking the tax base that the pension obligations depend on

What to Watch

Whether Illinois can thread the needle of pension reform within constitutional constraints, revenue enhancement, and political viability is one of the most consequential questions in Midwestern fiscal policy.