Fiscal 1989 at midpoint

By MICHAEL D. KLEMENS

When Illinois found itself with financial problems 18 months ago, lawmakers chose not to raise income taxes. Instead in two successive budgets they restrained spending, waiting for revenues to catch up. In the first six months of the current (1989) fiscal year, the state saw solid revenue growth and progress toward that goal. Through December 31, state general funds revenues totaled $5,646 billion, an increase of $214 million or 3.9 percent over the first six months of the 1988 fiscal year. Six months' revenues were $39 million above October estimates made by Bureau of the Budget.

The economy is growing. "All arrows are up," says Paul Vallas, director of the legislature's Economic and Fiscal Commission. Projections call for continued growth. "No forseeable economic contraction is likely to develop over the next two quarters in the state of Illinois according to leading economic indicators," the December issue of the University of Illinois' Illinois Business Review stated.

Richard Kolhauser, deputy director of Gov. James R. Thompson's Bureau of the Budget, describes the current economic growth as "mature" and in its second year of strong performance. Personal income in the state is projected to grow 7.6 percent this year, up slightly from 7.4 percent in the year that ended June 30. A year before that growth had been 5.3 percent, and a year before that it had been 5.1 percent.

Healthy increases in personal income fuel increases in the state's primary tax revenues, the income and sales taxes. Increases in those accounts for the first six months of the year were:

• Individual income tax up $90 million, or 6.2 percent.
• Corporate income tax up $19 million, or 6.4 percent.
• Sales taxes up $88 million, or 4.9 percent.

Other revenues that saw changes and the reasons for them included:

• Investment income up $14 million, or 33 percent, because of heftier bank balances and higher interest rates.
• Federal sources, up $110 million or 15 percent, reflecting higher medicaid spending to clear the backlog of claims.
• Lottery income up $9 million or 3.8 percent, continuing two years of sluggish performance.
• All other revenues (cigarette, liquor, insurance, public utility, inheritance, etc.) down $10 million, or 1.6 percent, continuing the trend of limited growth.

One category of general funds receipts took a big hit during the first six months of the fiscal year. Transfers from the protest fund were down because the August 1987 release of $118 million taxes paid under protest on out-of-state telephone calls was not repeated. The non-repeat also masks some substantial growth in the general funds. Disregarding messages taxes, state revenues grew $327 million or 6.2 percent.

There are some deviations from a year ago. Under a provision of the law that established a fund for sewage treatment plants, since September 1 there has been $5 million in sales tax monies paid into the Local Government Distributive Fund. That money would otherwise have gone into the general funds. It is to be made up with money from the new tax on photoprocessing, but the Department of Revenue does not keep separate records for the photo processing sales tax. That makes it impossible to measure whether the diversion to local governments is covered by the new photoprocessing tax.

Spending through December 31 was $24 million below the Bureau of the Budget's

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October projections. Spending for the period was up 4.3 percent over the previous year and exceeded revenues, the normal pattern for the first half of the fiscal year. The biggest increase came as the state paid bills owed doctors and hospitals who serve the poor. Spending for medical assistance to the poor increased $119 million in the first six months of the year. Other increases followed higher spending authority (appropriations) given by the General Assembly for public schools and state agencies.

There were some spending decreases, too. Higher education spending was down $23 million, because public universities were asked to spend from their tuition funds before drawing on state monies. The result is that spending in the second half of the fiscal year will be higher than in 1988. Also down was spending for income tax refunds, which totalled $38 million less than in the first six months of fiscal 1988. That change comes because the state did not begin this year with the unpaid refunds that it had on July 1, 1987.

Taken together the lower spending and higher revenues left Illinois with more money in the bank at mid fiscal year than had been estimated. In October the Bureau of the Budget had estimated that there would be $85 million in the bank on December 31. In reality there was $148 million.

There were a few dramatic changes immediately after the start of the second half of the fiscal year. The state's fiscal condition got a shot in the arm on January 3, when Atty. Gen. Neil F. Hartigan announced settlement of a lawsuit challenging a 2 percent state tax on premiums of insurance companies located outside Illinois. The money had been paid into a protest fund since 1985. Besides the $56 million, the settlement will generate about $10 million the rest of this year and $20 million next.

And on January 10 the U.S. Supreme Court ruled constitutional the 5 percent state tax on out-of-state phone calls. The ruling frees $47 million that Hartigan called a "windfall." However, lawmakers had constructed the current budget assuming a favorable court ruling.

There were also some post half-year spending increases. Lawmakers on January 10 approved $73 million in supplemental

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spending, as their December resolve to restrain supplemental spending either wavered or broke, depending on your point of view. Sen. Howard W. Carroll (D-1, Chicago) said the weakening was only "moderate." He said that without the $56 million from the settlement of the foreign insurance companies, lawmakers would have been forced spend less.

Winning approval was almost $210 million in new spending of which nearly $73 million came from the general funds, including:

• $4 million to the Asbestos Abatement Authority to survey asbestos in state buildings.
• $7.2 million to the state scholarship commission to offset tuition increases approved by public universities.
• $14.3 million to the Department of Children and Family Services to cover caseload increases.
• $7.7 million to the Department of Corrections to avert layoffs, to recall parole agents and to hire staff for new prisons at Canton and Mount Sterling.
• $5.8 million to fund the Comprehensive Health Insurance Program.
• $10.1 million to the State Board of Education to reimburse districts that lost aid because of consolidation, to fully pay tuition for students in orphanages, foster homes and state facilities and to pay completely what was owed school districts hurt by declining farmland assessments.
• $179,000 to the state treasurer to add 12 full-time and 15 temporary positions.
• $30,000 to the Mexican Fine Arts Museum in Chicago.

And one post December 31 change will trim both revenue and spending. Beginning January 1 a portion of income tax receipts is set aside to pay refunds. Previously all income taxes collected were counted as revenue and the refunds as a spending item. The special fund will reduce receipts to the general funds. At the same time, the state will be required to spend correspondingly less to pay refunds due to taxpayers.

Through the first half of fiscal 1989 there were few fiscal surprises. Illinois' economic growth is comparable to the rest of the country's. At the cost of restrained spending, Illinois is working its way out of the hole. But the spending restraints imposed to reach that goal will themselves bring political pressure for increased spending from those who depend on state services.

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