Revenue plummets: Blip or trend?
By MICHAEL D. KLEMENS
State revenues tumbled in December, raising the specter of financial problems later this fiscal year or next. One month does not a fiscal year make, but December managed to "unmake" several months of solid revenue gains. Still, it will be April before Illinois revenue estimators have a good handle on where the state is headed.
December general funds revenues plummeted $83 million from those of one year before, a decline of 7.5 percent that is all the more significant because of the 20 percent income tax rate increase and the 50 percent hike in cigarette tax rates. Through the first five months of fiscal year 1990 (July 1 - November 30) state revenues had grown $292 million, or 6.4 percent. The December disaster dropped fiscal 1990's six-month revenue growth to $210 million, or 3.7 percent. All told six-month general funds revenues totaled $5,856 million.
In the major sources:
Personal income taxes, on the strength of the rate increase, were up 6.4 percent.
Corporate income taxes, one of the state's most volatile revenues, were off 29.2 percent.
Sales taxes were up 2.1 percent, a figure depressed by delays that postponed December receipts into January.
Lottery profits were up 6.0 percent.
Federal funds were up 1.4 percent, in part because fiscal 1989 catch-up public aid spending was not repeated.
The $210 million (3.7 percent) growth trails that experienced in the two preceding years. In fiscal 1989 the increase was $214 million or 3.9 percent. In 1988 revenues were up $291 million or 5.7 percent. In 1987 revenues increased $130 million or 2.6 percent.
"December was not a disaster," maintains Robert L. Mandeville, director of the governor's Bureau of the Budget. Mandeville says that at midyear the $128 million cash that Illinois had available for spending was close to projections, when corrected for timing differences. In October the bureau had estimated the December 31 balance at $237 million. The difference, Mandeville says, was early payment of $123 million to reimburse local schools for special education spending.
If the early state aid payment is ignored, both revenues and spending are coming in at a rate about $100 million below the bureau's October projections. Mandeville speculates that spending may be down because of delays in billing at higher rates by hospitals and nursing homes that serve the poor. He anticipates that most of that money appropriated will be spent.
Mandeville says it's too soon to say that the state will have fiscal troubles this year. He adds that it is likewise too soon to say that the state will not
On the revenue side, Mandeville thinks that individual income tax receipts may be down because some employers were slow in implementing higher withholding rates. Among the state's major revenue sources Mandeville is only willing to project a shortfall in corporate income tax receipts, on the order of $30 million. He says that he plans no overall downward revision in total estimated general funds revenues.
The fiscal year's first-half performance illustrates that there will be no repeat of fiscal 1989 when Illinois saw $300 million in unanticipated revenue growth. Mandeville says it's too soon to say that the state will have fiscal troubles this year. He adds that it is likewise too soon to say that the state will not.
Chuck Burbridge, staff economist for the legislature's Economic and Fiscal Commission, sees trouble in the December numbers: "It's probably too soon to panic. It's not too soon to be concerned." Burbridge worries that an economic slowdown that the legislative revenue forecasters had predicted for late in the fiscal year is starting early. "Our concern is that our forecast is proving to be correct as far as the economy goes, and if our forecast holds true, we're in trouble," Burbridge says.
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He cites the well-publicized problems with the automotive industry. Depressed auto sales reduce sales taxes, while automotive manufacturing layoffs limit income tax receipts.
A number of changes complicate comparisons between the first half of fiscal 1990 and the first half of fiscal 1989. On January 1, 1989 halfway through fiscal year 1989 the new refund fund went into effect. Paid into it is a portion of income tax collections and paid out of it are income tax refunds owed taxpayers. In the first six months of this fiscal year there was $179 million paid into the refund fund instead of the general funds. The change is a "wash" because general funds spending is reduced by an equal amount.
And, effective July 1, lawmakers hiked income tax rates by 20 percent. The increase was split between the Education Assistance Fund, which provides money to public schools, colleges and universities, and the Income Tax Surcharge Local Government Distributive Fund, which gives money to local governments. The education fund is classified as one of the general funds and received $145 million in the first six months of the year; the new local government fund is not a general fund and saw $117 million in receipts the first six months.
But revenues are only half the state fiscal picture; spending is the other half. Spending was up a bunch in the first half of the fiscal year. General funds spending totaled $6,269 million, an increase of $525 million or 9.1 percent, as a result of an appropriations authority increase of 9.4 percent. By way of comparison, spending was up $235 million or 4.3 percent in fiscal 1989, $179 million or 3.4 percent in fiscal 1988 and $148 million or 2.9 percent in fiscal 1987.
The 1990 spending increase would have been larger without the refund fund, as $185 million in fiscal 1989 first-half refund spending was not repeated. For the period from July 1 through December 31, general funds spending grew faster than general funds revenues, and Illinois spent $413 million more than it took in.
For the period from July 1 through December 31, general funds spending grew faster than general funds revenues, and Illinois spent $413 million more than it took in
The fact that Illinois spent more than it took in during the first half of the year is no revelation. The budget that lawmakers adopted in June and amended in November calls for state spending of $13,300 million and revenues of $13,000 million. The difference is to be made up by drawing down the $541 million balance that Illinois had in the bank on June 30.
The drawdown means that the state will have that much less to spend in fiscal 1991. In mid-December the bureau estimated fiscal 1991 new program spending at $200 million. And Gov. James R. Thompson told lawmakers in his State of the State address that no new spending would be possible without new revenues.
If December was an aberration and state revenue growth resumes a normal pattern, fiscal 1991 spending will be tight. If December was a precursor of economic slowdown, spending will be even tighter. The combination of fiscal 1990 overspending and economic slowdown could produce fiscal crisis by 1991. The state's new governor will be able to display his financial control talents early.
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