Legislative Action

By DIANE ROSS

Thompson's balancing act and tax relief review

WHEN Gov. James R. Thompson took office he said a balanced budget was more important than tax relief. The question at the time on fiscal issues was: Can Illinois afford it? But the budget has been balanced for three years. The question now is: Why can't Illinois afford tax relief?

Thompson says the state's checkbook doesn't show a big enough year-end balance yet, predicting a $136 million balance on June 30, 1980. But the General Assembly Democrats and Democratic Comptroller Roland Burris say it does, arguing the balance could reach $236 million by the end of the fiscal year.

Thompson had little trouble selling his first two "austerity" budgets (for fiscal 1978 and 1979). The state obviously had been spending more than it earned before he took office. He easily convinced the General Assembly that its priority should be balancing the budget.

A balanced budget is one thing; a balance is another. The governor calls a balance "working cash." The legislature calls it a surplus.

In 1978, California's notorious surplus that led to Proposition 13, causing a taxpayers' revolt nationwide. It was also the year that the voters of Illinois gave Thompson a second term and elected a new General Assembly.

But in Illinois, inmates were rioting, reports of child abuse were increasing and highways were crumbling. Thompson said his third budget, despite its austerity, could afford more for "convicts, kids and concrete." The budget would still be balanced, the governor assured the legislature. The year-end balance in the general revenue funds would continue to increase, he said, as it had with his first two austerity budgets.

But legislators turned Thompson's success against him. The state was now spending within its earnings, they argued, and if the year-end balance was increasing, that margin of savings should be passed along to taxpayers.

In short, the General Assembly slammed the door on Thompson when he tried to sell his third austerity budget.

Thompson, to his credit, produced a varied tax relief package of his own. But the Democrats, despite a single-vote edge in the House, managed to block every tax relief bill but their own, which would phase out the state's four-cents-per-dollar sales tax on food and medicine over the next four years.

They had an obvious, if unspoken, motive: making Thompson practice what he preached. The governor, after all, had won his second term partly because of the popularity of the so-called Thompson Proposition, the advisory referendum in which voters said the state should limit its spending.

In July, Thompson vetoed the sales tax relief bill, arguing that during fiscal 1980, the first year of the phaseout, it would drain $47 million from the state's coffers. That, he said, could unbalance the budget and drop the year-end balance in the general revenue funds to a dangerous level.

But in September Thompson changed his mind. His compromise plan, panned as a "penny and a promise," followed the Democrats' phaseout, but only for the first year. If not forced to eat his words, Thompson felt threatened enough to soften his stance. Apparently, he implicitly admitted, the state could afford a little-tax relief after all.

Meanwhile, the Democrats assured blacks and suburban Republicans that with their/ support there would be enough votes to override the veto. Blacks had the most to gain from a four-year phase out of the sales tax on food and medicine, and suburban Republicans were keen for tax relief, since the suburbs would bear the brunt of the cost for the new billion-dollar road program Thompson's compromise may have divided the Democrats, however. Chicago Mayor Jane Byrne may find herself and her floor leader Mike Madigan aligned against the downstate, black and suburban Republican coalition. Their leader is Sen. Richard M. Daley, a regular Chicago Democrat, now a renegade as far as the mayor is concerned.

At this writing, the General Assembly is scheduled to take up the sales tax relief issue October 16.

Regardless of the outcome, taxpayers will realize the same measure of relief during fiscal 1980 since both plans would phase out a penny of the tax the first year. But the veto session will decide the larger issue of whether Illinois can afford a balanced budget and tax relief at the same time.

Austerity budgets
Thompson has increased his austerity budgets by about the same amount each year. The General Assembly followed his lead when they approved appropriations his first year, but ignored it last year and this year. Thompson used his veto power to bring appropriations back into line with the budget last year. but he didn't this year.

Thompson's budgets have increased by about $1.2 billion a year: $10.047 billion for fiscal 1978, up to $11.260 billion for fiscal 1979, up to $12.437 billion for fiscal 1980 (including the final road proposal he made in August).

The General Assembly stayed close to Thompson's guidelines the first year, going only $704 million over budget. So Thompson vetoed only $170 million, attempting a 24 percent cut in over-appropriations.

But the General Assembly disregarded his guidelines last year, going $1.113 billion over budget. He retaliated by vetoing $969 million, trying to slash 87 percent of the overappropriation.

This year the General Assembly went further, going $1,361 billion over budget. Yet Thompson's retaliation has been mild. He vetoed only $321 million, a proposed 24 percent cut in overappropriations.

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The bottom line is how well appropriations passed by the legislature stack up against Thompson's proposed budjets, and how often the governor used his veto power to make up for the legislature's lack of cooperation.

The appropriations for Thompson's first year (fiscal 1978) came fairly close to his budget: the $10,581 billion approved was only $534 million over budget. Appropriations passed during his second year were incredibly close: the $11,403 billion approved was a mere $143 million over. But the third year — this year — appropriations were far beyond: the $13,367 billion approved including the billion-dollar road pro(ram) was a massive $930 million more than budgeted.

Thompson feels austerity has forced the state to spend within its earnings when revenue and spending are compared to two economic indices: the growth of personal income and the increase in the cost of living).

Since Thompson took office, reveue, chiefly from the income and sales taxes, has generally lagged behind total personal income: state revenue went up 5 percent in fiscal 1978, and 11.9 percent in fiscal 1979; it is expected to go up 6.4 perrcent in fiscal 1980. Personal income went up 9.2 percent in fiscal 1978, about 10.2 percent in fiscal 1979 and is expected to go up 10 percent in fiscal 1980.

In addition, since Thompson took office in 1977, spending, mainly for education and public aid, has stayed well below the cost of living. Spending went up 2 percent in 1978, 8 percent in 1979; spending for fiscal 1980 has not been predicted. Meanwhile, the cost of living went up 7 percent in 1978, 9 percent in 1979 and is expected to go up 11.2 percent in 1980. (Income and sales axes generate half of the state's revenue, and half of the state's spending goes for education and public aid.)

The focal point of the state's fiscal licture is the general revenue funds GRF), which channel the income and sales taxes revenue to education and public aid.

In fiscal 1978, GRF revenue was at $6.342 billion, an increase of 6.7 percent, under personal income which rose 9.2 percent. That same year, GRF spending was at $6,309 billion, up 5 percent, but well under the inflation rate of 7 percent.

In fiscal 1979, revenues were $7,056 billion, up 11.2 percent and moving ahead of personal income, which was up 10.2 percent. Fiscal 1979 spending was $6,751 billion, an increase of 7 percent, but again well under the inflation rate of 9 percent.

For fiscal 1980, GRF revenue is estimated at $7,404 billion, up 5.2 percent, way behind personal income, which is expected to go up 10 percent. GRF spending is estimated at $7,490 billion, up 6.3 percent, way behind inflation, which is expected to jump 11.2 percent.

Year-end balance
The key figure, however, is the year-end balance in the general revenue funds, which shows whether the state's checkbook is in the red or black. The year-end balance should be at least $200 million if the state is to claim a healthy contingency fund, according to Bureau of the Budget Director Robert L. Mandeville. Even more desirable, Mandeville says, would be a year-end balance that is 5 percent of total spending. Thompson feels austerity has moved the state closer to these goals.

Since Thompson took office, the year-end balance in the general revenue funds has more than doubled, from $52 million at the end of fiscal 1977 to an estimated $136 million at the end of fiscal 1980. That's much closer to the necessary $200 million contingency fund, but still far short of the 5 percent Mandeville desires. For fiscal 1978, the predicted balance was $85 million, up 63 percent over the preceding year, but only 1.4 percent of total spending. The actual balance was $86 million, incredibly close to the estimate.

For fiscal 1979, the predicted balance was $136 million, up 58 percent, but still only 1 percent of spending. The actual balance was nearly three times that: $390 million. It was a 353 percent increase; it was 5.8 percent of total spending; and it was a fluke.

The reason for the windfall shows why the state probably won't be so lucky again. In fiscal 1979 the state spent less on public aid than it had for 20 years; received additional one-time federal aid; reached peak reimbursement for programs funded under Title XX of the federal Social Security Act; realized more in interest income because interest rates went up; and received more inheritance tax revenue earlier because of a collection speedup required by a new law.

For fiscal 1980 the predicted balance is again $136 million. Discounting the one-time bonanza in fiscal 1979, that means the balance won't move any closer to the $200 million contingency fund which Mandeville considers essential. And because spending will increase, that means the balance will move further from the desirable 5 percent of total spending.

If the year-end balance in the general revenue funds is a key figure, it also is a controversial one, especially when the governor is a Republican and the comptroller a Democrat.

When Comptroller Burris issued June's fiscal report (actually the statistics on fiscal 1979's year-end balance), he said the state could well afford sales tax relief in fiscal 1980. Burris said the year-end GRF balance could have been $477 million, instead of the actual $390

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million if the governor had transferred an unused $87 million which had accumulated in other funds.

Theoretically, Burris said, the same thing could happen this year. That could mean a $236 million balance rather than the $136 million predicted now. A possible $100 million surplus would easily offset the $47 million drain in revenue expected by sales tax relief.

The capital portion of the budget, or bond financing, is much simpler than the operating portion. But bond financing has become more complicated since the 1970 Constitution lifted the restrictions on state debt (see Illinois Issues, July 1976).

The important figure here is how much more in bonds is approved for sale each year, that is, how much more the state goes into debt.

Since Thompson has taken office, additional bond authorizations have dropped about 28 percent, from the $535 million authorized in fiscal 1977 to the $380 million first proposed for fiscal 1980.

Thompson's bond plunge
In all three years, Thompson cautiously proposed smaller and smaller amounts of additional bonds to be sold. He made the biggest cuts the first year, proposing $405 million be sold, down 24 percent from the preceding year. The next two years he made much smaller cuts, proposing $390 million be sold for fiscal 1979, down 3 percent; and proposing $380 million be sold in fiscal 1980, down 2 percent.

But this August, Thompson took the plunge, proposing an additional $600 million more in transportation bonds to be sold over the next four years. This was part of the billion-dollar road program for fiscal 1980 which the General Assembly approved in September. (See Illinois Issues, October 1979.)

While additional bond authorizations have dropped over the last three years, the $600 million in transportation bonds authorized this year will certainly restrict additional bond sales over the next three years.

The other key figure is how much more in interest and principal is repaid

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each year to reduce bond debt and how this relates to total spending. Since Thompson took office, repayment has increased about 71 percent from the $147 million repaid in fiscal 1977 to the $252 million expected to be repaid in fiscal 1980.

The state spent $187.3 million in fiscal 1978, up about 40 percent over the preceding year and 2.6 percent of total 1978 spending. The state spent $252 million in fiscal 1979, a slightly smaller increase, 34 percent, than the year before but slightly more of total 1979 spending, 3.3 percent. The state expects to again spend $252 million in fiscal 1980, which means no increase, and the same percentage of total 1980 spending.

Repayment has been increasing more slowly than under previous administrations, and the percentage of total spending appears to have leveled off. But the $600 million in transportation bonds to be sold means that this trend cannot continue over the next three years of Thompson's administration.

By law, the state now can sell $4.82 billion in bonds. When the $380 million first proposed for fiscal 1980 and the $600 million proposed through fiscal 1983 are sold, the state will be $3,965 billion in bond debt.

So on the operating side of the ledger, Thompson has balanced the budget, forcing the stale to spend within its earnings. This has caused the year-end balance in the general revenue funds to increase. Thompson feels the projected $136 million balance at the end of fiscal 1980 is not enough of a contingency fund. But it appears Illinois can easily afford the $47 million pricetag for sales tax relief this year.

Whether or not Illinois will be able to afford sales tax relief in 1983 when the full four cents will have been phased out, as the Democrats propose, is another question. The revenue loss is expected to run to $ 1.6 billion a year by then. Even if Thompson transfers all the available surpluses from other funds as Burris suggests, it's unlikely the beefed-up balance could offset that kind of loss in sales tax revenue.

Thompson says wait and see. But the Democrats, who won't have a better opportunity to win votes for next year's crucial election, want it all now. Either way, it's Thompson who'll have to balance the budget. With his billion-dollar road program, that won't be easy.