Strings Attached: Congress Files Legislation Outlining Taxpayer Protections For COVID-19 Federal Aid To States

CHICAGO (Sept. 24, 2020) – Five months after Illinois Senate President Don Harmon asked Congress for a more than $40 billion COVID-19 bailout, with $10 billion, or nearly a quarter of the total requested intended for the state’s infamously underfunded pensions, new legislation filed in the U.S. House today would protect taxpayers from this kind of fiscal mismanagement if the federal government does offer additional aid beyond the $200 billion already provided in financial relief to state and local governments.

U.S. Rep. Darin LaHood, R-IL, filed legislation modeled after the Illinois Policy Institute’s Taxpayer Protection Program, which places conditions on states receiving federal funds to ensure aid money is used for its intended purpose: To support critical government services and bolster a strong economic recovery.

LaHood’s legislation would structure federal aid as forgivable loans, similar to the Paycheck Protection Program, with forgiveness only available to states that either meet, or enact reforms to meet, the program’s conditions for sound finances. It allows for up to $186 billion in federal and state aid, with $100 billion for states, $75 billion for local governments, $8 billion for tribal governments and $3 billion for territories. Aid must not be allocated to debt or pension spending, and is also limited to each state’s actual, experienced revenue losses.

States such as Illinois, New Jersey and Connecticut have mismanaged finances for decades, causing them to accumulate immense debt burdens, namely due to unfunded pension liabilities. Harmon’s initial bailout request makes it clear that federal aid would bail out legacy debt burdens unless the federal government stipulates strong taxpayer protections be attached to any aid money.

Under the Taxpayer Protection Act of 2020, federal aid to states would be contingent upon:

Sound pension funds

  • Pension funding plans must be based on generally accepted actuarial principles, targeting 100% funding ratios over no more than 25 years. States would not be allowed to increase employer contributions (taxpayer costs) to meet this funding level within the given time frame.
  • For all systems going forward, automatic annual benefit increases or cost of living adjustments (COLAs) must vary either with measured inflation or through a formula tied to investment returns.

Truly balanced budgets

  • States must have a constitutional or statutory requirement that operating budgets achieve end-of-year balance, prohibiting deficits from being carried year to year, as 39 states currently do.
  • Revenues counted toward the balancing requirement cannot include transfers from other state funds or borrowing proceeds.

Rainy-day fund protections

  • Withdrawals from a state’s rainy-day fund should be subject to safeguards to prevent use of the funds for non-emergency purposes.
  • States must maintain a target to hold 5 to 10% of annual general revenues in reserve and, when the economy is expanding, make automatic deposits to achieve this target.
  • States could also meet this requirement by demonstrating they have rainy-day fund protections at least as effective as these standards and held more than 5% of their budget in reserve as of Jan. 1, 2020.

Full text of the legislation can be read HERE.

Quote from U.S. Rep. Darin LaHood, representing Illinois’ 18th District:

“Through no fault of their own, state and local governments face significant challenges because of the COVID-19 pandemic and Congress has an obligation to support those in need. This pandemic did not create Illinois’ financial mess; however, it emphasized the long-term challenges that Illinois and other states face for failing to implement sound budget policy. For decades, politicians in Springfield have kicked the can down the road on addressing Illinois’ fiscal crisis, exploding the state’s $140 billion in unfunded pension liability and piling up these problems on the backs of hardworking taxpayers. Illinois shouldn’t get a blank check to bail out decades of failing to do what most responsible adults can: spend less than you earn and save for a rainy day. The Taxpayer Protection Act will ensure American taxpayers aren’t on the hook for financial problems they did not create, help those in need, and can help chart a path for a better future in Illinois.”

Quote from Adam Schuster, senior director of budget and tax research at the Illinois Policy Institute:

“Illinois’ decades of disregard for basic fiscal responsibility stands as the best single argument against state bailouts without strings attached. The Taxpayer Protection Act responsibly offers states some relief, making federal aid contingent upon best budgeting practices and the promise that lawmakers cannot rack up more debt at the expense of taxpayers who are already struggling to recover from the COVID-19 downturn. With Illinois’ pension spending growing 500% in the past two decades while social services spending suffers, it’s time we support a system that prioritizes people over irresponsible spending.”

For more information about the Illinois Policy Institute’s Taxpayer Protection Act filed in the U.S. Congress, visit: illin.is/strings.

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