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The state of the State

Thompson and legislators caught in mid-innings budget deadlock

By MICHAEL D. KLEMENS

The annual contest between the governor and state lawmakers over the state budget moved into the middle innings in May with the teams in a scoreless deadlock. Thompson had pitched a series of tax increases in March, but lawmakers watched them go by. In the meantime Republicans and Democrats in the Senate joined forces to come up with their own game plan. The game will not be played out until June 30, but here's where it stands six weeks before fiscal year 1991 begins on July 1.

Thompson had opened the contest with proposals for $230 million in new taxes and $350 million in deferred or replaced spending. The new taxes, postponed bills and one-time revenues kept few spectators happy. Those receiving state services saw too little money. Those paying state taxes saw too many tax increases.

Thompson's game plan began with current year (fiscal year 1990) revenues of $13,009 million to which was added natural revenue growth of $531 million, bringing fiscal year 1991's projected revenues to $13,540 million. Thompson sought an additional $230 million in new taxes: an increase in the tax on telephone calls from 5 to 8 percent ($135 million), a boost in the cigarette tax from 30 to 38 cents per pack plus a tax on other tobacco products ($80 million), and accelerated collection of sales tax on liquor ($15 million). Natural revenue growth plus the proposed tax increases gave Thompson $13,770 million to spend -- $495 million more than fiscal year 1990 spending estimates of $13,275 million.

And spend it he did. Not only did Thompson's budget plan spend the $13,770 million, it also called for deferring spending or replacing general funds spending with other sources to the tune of $350 million. Specifically, he proposed to put off from fiscal 1991 to fiscal year 1992 payment of almost $200 million in bills for medical service to the poor. He likewise put off $20 million in senior citizens' circuit breaker payments and $30 million in payments for state employees' health insurance. He used $70 million in tax amnesty proceeds to pay for mental health operations and $30 million to be raised by accelerated collection of unclaimed property to fund state pensions. Both of the latter maneuvers -- amnesty and accelerated collections reduce general funds spending.

The spending that Thompson proposed to pay for ($13,770 million) and the spending he proposed to defer ($350 million) together would allow the state to spend as if it had $14,120 million.

But much of that for which Thompson proposed to spend new money was not entirely new. The state had begun a number of programs part way through fiscal year 1990, had agreed to begin new programs in fiscal year 1991 or had been required by the federal government to undertake new spending. These changes include:

$125 million in welfare costs including the mid-year grant increase for public aid recipients, higher reimbursement rates for doctors, hospitals and nursing homes that serve the poor, and extended health insurance and day care for those leaving welfare rolls for jobs;

$75 million to pay full-year costs of staff added at state psychiatric hospitals and for continued movement of mentally ill persons from nursing homes;

$23 million for the double personal exemption lawmakers gave elderly taxpayers on their state income taxes;

$28 million to operate new prisons and work camps authorized by lawmakers last year;

$7.4 million to pay increased costs in the Comprehensive Health Insurance

8/June 1990/Illinois Issues


Program; and

$20 million to pay for new child protective services staff in the Department of Children and Family Services, for new day care programs and for background checks care providers.

Call the annualizations $300 million, before inflationary costs like salary increases for unionized employees or higher prices for gasoline or telephone service. That means it will cost $13,575 million ($13,275 million in fiscal year 1990 spending plus $300 million in annualizations), plus inflation, to provide services in fiscal year 1991.

Even without inflation, the $13,575 million cost of annualized fiscal year 1990 programs exceeds the $13,540 million available through natural revenue growth.That explains why Thompson proposed new taxes and deferrals without dramatic program growth.

But lawmakers liked neither the new taxes nor the magnitude of the deferrals. The Senate appropriations committees looked at Thompson's budget and decided that there was a $463 million gap between what the governor had proposed and what lawmakers would approve. Republicans and Democrats huddled and produced the Bipartisan Senate Budget Plan.

To trim the governor's budget by $463 million, the Senate proposed cutting $322 million from Thompson's spending levels. Senators deleted all funding for new programs, thereby eliminating $72 million. Next they axed $43 million by eliminating specific items. Finally, they cut $207 million through across-the-board reductions:

1 percent for education;

1.5 percent for the departments of Public Aid. Mental Health and Developmental Disabilities, Corrections and Children and Family Services; and

3.2 percent for all other agencies. The senators got the rest of the money -- another $141 million from one-time revenue sources, including transfers of $46 million from the Road Fund to pay state police expenses and of another $20 million from other funds. They also proposed drawing down the year-end balance by $75 million, from $275 million on June 30, 1990, to $200 million on June 30, 1991.

Both the governor's and the Senate's budget plans are premised on relatively healthy revenue growth that will require economic growth. For example, both plans assume growth of 6.1 percent in individual income taxes and 5.2 percent in sales taxes. For the first 10 months of fiscal 1990 that level of growth has been absent. Total general funds revenues between July 1 and April 30 grew $514 million, or 5.2 percent, with the tax increases.

Major revenue sources looked like this:

Personal income taxes were up 9.7 percent. Correcting for diversions to the Refund Fund and Income Tax Surcharge Local Government Distributive Fund, total receipts rose 21.1 percent, just barely ahead of the 20 percent tax rate increase.

Sales taxes were up 3.5 percent. The amount diverted to Build Illinois to pay for sewage treatment plants. Navy Pier renovations and new university science facilities was up from 2.2 to 3.8 percent. Without the increased diversion, sales tax growth would have been 5.1 percent.

Public utility taxes were up 14.4 percent after the courts ruled constitutional the state's tax on long distance phone calls.

Lottery transfers were down 1.1 percent over the previous year.

Corporate income tax receipts were off 17.2 percent. As with the personal income tax, if increases in refund and local government diversions were ignored, base growth would have been 8 percent, despite the 20 percent rate hike.

The comptroller and the legislative revenue forecasters at the Illinois Economic and Fiscal Commission believe that the state will fall short of its projected $ 13,009 million in revenues for the current year. So does Robert Mandeville, the governor's budget director, who estimates that the shortfall could be around $50 million.

Turning to fiscal year 1991, the governor's Bureau of the Budget's revenue estimate is $ 150 million higher than that of the legislature's Economic and Fiscal Commission. Differences are not unusual. But the magnitude of the difference suggests that absent a surge in Illinois' economy more budget problems may loom.

Closing the shortfall will be a difficult trick. To maintain current services the governor or lawmakers must match current year revenues of $13,009 plus $531 in natural revenue growth (total revenues of $13,540) with current year spending of $13,275 plus $300 million in annualization costs (total spending of $13,575 million). Then they must account for inflation.

Lawmakers have the next move. Thompson and his veto pen get a final turn at bat.

Preserving state services without a tax increase

State government needs a handy escape from the overspending hole that it dug for itself in fiscal year 1990. Illinois must either increase revenues or reduce spending.

One way to increase revenues without imposing any new taxes thereby eliminating the need for more than $200 million in budget cuts is the Three-Step Plan to Preserve State Services:

1) Eliminate money from the income tax surcharge flowing to local governments by abolishing the Income Tax Surcharge Local Government Distributive Fund (ITSLGDF). This would free up $307 million for general funds spending.

2) Raise the percentage of money paid to cities, villages and counties from the regular Local Government Distributive Fund from 1/12 to 1/10 of all income tax collections. This would provide $87 million to local governments.

3) Replace, for fiscal year 1991 only, the $220 million net loss to local governments with one-time revenues. The Senate's balance drawdowns and spending from the Road Fund together with the governor's tax amnesty would do the trick.

What does the plan do? First, it raises general funds revenues by $220 million, without any new taxes.

Second, it pays for no operational costs with one-time revenues, avoiding problems inherent in Thompson's and to a lesser extent, the Senate's plan.

Third, it fulfills to local governments the promise of the 1989 tax increase two years of increased revenues. And it also gives them permanently a larger piece of Illinois' premier growth revenue source, the state income tax. Current political rhetoric seems to say continuation of the surcharge for local governments past fiscal 1991 is by no means certain.

Of course all this works only if you assume that the surcharge is going to be extended. Otherwise you have a $307 million hole in the fiscal year 1992 budget. But the one-time revenues contained in Gov. Thompson's and the Senate's plans decrease the likelihood that the source can be reduced anyway. It will stem some of the bloodshed this year.

Michael D. Klemens

June 1990/Illinois Issues/9


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