Federal cuts and changes exacerbate tightening fiscal landscape
With Gov. JB Pritzker’s annual budget address less than two weeks away, a new report from his office is setting the table for a speech that’s likely to be bleak in tone.
And it’s likely to serve as a warning to lawmakers and advocates that the state doesn’t have room for new spending programs in the upcoming 2027 fiscal year.
The report’s message: Enacted or threatened federal funding cuts are creating tremendous uncertainty, even in the current fiscal year.
“Unlike the federal government, all states, including Illinois, are required to annually balance their budgets and have limited, if any, options to fill gaps left by these federal reductions,” the report from the Governor’s Office of Management and Budget stated.
The governor’s office also put direct dollar amounts on some of the impending federal policy changes or cuts:
- $100 million over two years to implement administrative changes related to new Supplemental Nutrition Assistance Program and Medicaid requirements.
- $80 million annually as a result of the federal government shifting a greater share of SNAP administrative costs.
- $705 million in new benefits spending on SNAP if Illinois exceeds newly created error rate caps.
- $6.1 billion in cumulative lost revenue for Medicaid ($3.8 billion of which is lost federal support) by fiscal year 2033, due to caps on provider taxes. Impacts would be first felt in fiscal year 2028 and would ramp up over the following years.
- $1 billion in child care-related funding in fiscal year 2027 if the courts allow the administration’s funding “freeze” to take effect.
Decoupling, child care
The culprit for the known variables is largely H.R. 1, widely publicized as the “One Big Beautiful Bill Act.” In October, the governor’s office warned it could erase $830 million in tax revenue for the current fiscal year. But state lawmakers acted to decouple the federal and state tax code in certain areas their fall veto session, and the report now expects that to reduce the current-year impact to about $587 million.
Pritzker also directed state agencies to hold back $482 million in current-year spending last month.
The impact of tax code changes would be less in the upcoming fiscal year because the largest current-year impact was due to the “acceleration of certain tax benefits forward,” according to the report.
But as of Friday morning when the report was published, there was also a major unknown variable: The Trump administration had threatened to freeze $1 billion in child care-related funding to Illinois (and another $9 billion to several other blue states.)
Ostensibly, the administration said it was seeking to root out fraud — without making specific allegations — although the affected states argued the amount of paperwork required for the child care funds to be released presented them with an intentionally “impossible” task.
A federal judge on Friday issued a preliminary injunction blocking the freeze from taking effect as the full case plays out. Previously, the courts had issued two two-week restraining orders, creating an added level of uncertainty in the run-up to the budget address that Pritzker is slated to deliver on Feb. 18.
Existing budget shortfalls
The report notably didn’t touch on fiscal pressures related to structural shortfalls in ongoing revenue compared to expenditures in Illinois’ budget.
GOMB’s October report pegged the FY27 deficit at $2.2 billion if lawmakers didn’t make any changes to spending or taxing policies, noting much of the deficit was driven by the state’s own policies but exacerbated by federal changes.
The baseline projections show revenue is not expected to grow in FY27 without lawmakers finding a way to increase it. At the same time, spending was on track to increase by about $1.9 billion from the current fiscal year without changes.
Federal funding allotments are already showing signs of falling short in FY26, according to the January report from the General Assembly’s Commission on Government Forecasting and Accountability.
Federal payments to Illinois were down $169 million last month compared to January 2025 — a decline of nearly 36%. While COGFA’s experts caution that federal receipts are typically one of the state’s most volatile revenue sources because they arrive on an inconsistent schedule, January marked the third straight month of decline.
Federal receipts are now down $202 million, or 8%, so far this fiscal year.
“The FY 2026 budget assumed a notable rise in Federal Sources this fiscal year, so significant improvement is needed over the remaining five months to reach initial budget expectations for this category of revenues,” the report said.
Despite indications the federal government is sending less money to the state, other sources such as income and sales taxes continue to increase, and revenue is up 3.5% so far in FY26.