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Fiscal '91 compensations for fiscal '90 overspending

By MICHAEL D. KLEMENS

When Gov. James R. Thompson proposed his fiscal year 1991 budget in March, state lawmakers objected to both tax increases and bookkeeping "fixes." Lawmakers set out to trim spending and to reallocate the available money. Lawmakers axed the tax increases. They also eliminated some of the spending tricks or tried to before Thompson used his veto pen to restore several. The budget stands with many of the one-time fixes that the governor had urged and a few more that lawmakers added.

The fiscal year 1991 budget season began inMarch with Gov. James R. Thompson's proposal to appropriate $12,929 million in the general funds. That was an increase of $519 million over the fiscal year 1990 appropriation of $12,410 million. Lawmakers pronounced the governor's budget "dead on arrival" because of $230 million in tax increases and $330 million in spending deferrals.

Thompson sought tax increases including: $135 million to be raised by increasing the tax on telephone calls; $80 million to be raised by increasing cigarette taxes; $15 million in one-time acceleration of sales taxes on alcoholic beverages.

Thompson had argued that lawmakers would ultimately find small tax increases more acceptable than budget cuts. He was wrong in part because his proposal never got strong support from lobbying groups. Education and human service providers laid off this year's tax increases for two reasons. First, they sensed lawmakers reluctance to hike taxes. Second, they wanted to save their ammunition for the big tax increase battle, the fight that will occur next spring to extend the temporary income tax increase.

Thompson proposed assorted fixes including: $15 million to be generated by a new lottery game based on the spread in sports betting; $70 million in new one-time money to be generated by a tax amnesty program; a $195 million spending reduction by taking longer to pay bills for doctors, hospitals and nursing homes that care for the poor; a $20 million reduction by similarly stretching out payments for low-income senior citizens who receive property tax circuit breaker payments; a $30 million spending reduction by providing only 10 1/2 months' payments for state employees' health insurance.

Add them up, and the tax increases and various fixes total $560 million. Lawmakers rejected all those and vowed to reallocate that money. Paying the Medicaid bills on time produces another $97 million in federal reimbursement, so lawmakers were left with a shortfall of only $463 million.

Legislators took $120 million from reserves, anticipating that the state's bank balance would be drawn down from $395 million on June 30, 1990, to $275 million on June 30, 1991. They borrowed $20 million from "feeder" funds and $36 million from the Road Fund. They cut from some lines to add money for medicaid, health insurance and the circuit breaker.

When they were done general funds appropriations stood at $13,008 million, $79 million more than Thompson had proposed. Lawmakers had increased appropriations without giving Thompson any of the tax increases he had sought.

The bottom line is that the lawmakers' budget as sent to the governor was $150 million to $200 million out of balance. The governor's Bureau of the Budget put the shortfall at $199 million through a simplified computation. After Thompson was done with the lawmakers' plan, he had balanced the budget by "cutting" $179 million and by directing agencies to create a 2 percent reserve that would set aside $20 million that could only be spent with the governor's written approval.

Thompson's "cuts" amounted to a return to the payment deferrals that he had originally proposed. He lopped $115 million from Medicaid spending, $20 million from circuit breaker payments and $25 million from state employee's group insurance. "These vetoes in essence return the billing cycle back to the budget levels," budget director Robert L. Mandeville said. Other major vetoes included $5 million cut in general state aid for public schools and $3.9 million in "new" money for a pre-trial program in Cook County.

Lawmakers made a sincere effort at balancing the budget. They trimmed almost all the spending proposals that Thompson orginally had made. And the usual late hour rush of spending bills was just a trickle, with a relatively small $16 million in new general funds spending. The General Assembly declined to move on the $1.4 billion McDome project for Chicago's McCormick Place and rejected a $70 million bond-funded project to build five marinas around the state. Much of that $16 million in new spending was sought by Thompson himself. For example, lawmakers restored half of the $15 million in operations cuts they had made earlier for the Department of Transportation. Then Thompson, with his veto, eliminated the one-time payment of bills that lawmakers had sought.

One of the problems that lawmakers faced was declining revenue estimates. The administration's general funds estimate for fiscal year 1990 was low by $168 million, or 1.3 percent. Only the fact that fiscal year 1990 spending was $288 million, or 2.2 percent, below estimates prevented a problem there. But, $70 million of that lowered spending occurred two days into the new fiscal year on July 2 and represented fiscal year 1990 Medicaid bills paid in fiscal year 1991 instead of 1990.

The Bureau of the Budget and the legislature's Economic and Fiscal Commission had been feuding since May over fiscal year 1991 revenues. After adoption of the budget the bureau dropped its estimate from $13,525 million to $13,471 million. The commission's estimate stands at $13,362 million.

In his veto messages Thompson acknowledged for the first time this budget season that a weak economy threatened revenues: "In a time when the national economy is trending down, and the first impacts of that trend are being felt in the Midwest, to gamble on the receipt of

August & September 1990/Illinois Issues/55


Legislative Action Special Section

General funds appropriations, fiscal years 1990 and 1991
($ thousands)

FY 1990 final

FY 1991 proposed in budget book

FY 1991 passed by legislature

FY 1991 governor's vetoes

FY 1991 total after vetoes

LEGISLATIVE agencies

$ 54,104.5

$ 54,980.5

$ 57,535.1

$ 57,535.1

JUDICIAL agencies

179,761.1

195,635.1

190,941.3

$ 3,900.0

187,041.3

EXECUTIVE branch:

Governor's Office

8,772.3

9,346.9

9,346.9

9,346.9

Lieutenant Governor's Office

5,180.0

9,170.8

8,962.3

8,962.3

Attorney General's Office

27,105.6

27,389.3

27,010.7

120.0

27,010.7

Secretary of State's Office

92,622.6

97,880.9

96,068.8

120.0

96,068.8

Comptroller's Office

51,498.9

55,494.7

45,200.9

45,200.9

Treasurer's Office

11,602.2

12,374.1

12,187.1

12,187.1

Code departments:

Aging

109,236.8

110,747.2

107,055.6

107,055.6

Agriculture

23,622.5

26,103.5

37,309.3

125.0

37,184.3

Alcoholism & Substance Abuse

78,841.5

84,962.0

80,358.7

80,358.7

Central Management Services

283,734.2

283,374.8

308,486.3

25,025.0

283,461.3

Children & Family Services

326,105.7

379,748.5

366,410.5

366,410.5

Commerce & Community Affairs

141,962.4

118,448.1

142,578.7

1,646.0

140,932.7

Conservation

47,336.9

53,546.9

49.959.8

49.959.8

Corrections

496,074.8

571,313.3

562,745.0

562,745.0

Employment Security

7,529.4

7,303.5

7,303.5

7,303.5

Energy & Natural Resources

25,524.3

27,498.7

25,940.1

25,940.1

Financial Institutions

1,628.5

1,834.5

1,756.8

1,756.8

Human Rights

4,320.5

5,068.2

4,938.2

4,938.2

Insurance

4,927.8

5,701.3

5,509.6

5,509.6

Labor

4,422.7

4,896.3

4,630.8

4,630.8

Mental Health & Developmental Disabilities

774,180.8

801,968.5

847,713.6

847,713.6

Military Affairs

9,677.7

10,777.2

10,452.3

10,452.3

Mines & Minerals

4,212.4

4,493.1

4,344.5

4,344.5

Nuclear Safety

1,532.0

1,570.1

1,496.4

1,496.4

Professional Regulation

7,010.9

7,181.8

7,013.1

7,013.1

Public Aid

3,811,277.8

3,996,778.5

4.112,114.3

115,335.9

3,996,778.4

Public Health

101,310.9

113,742.7

109,150.9

3,743.4

105,407.5

Rehabilitation Services

71,231.1

83,698.8

81,177.5

81,177.5

Revenue

263,789.1

258,868.9

277,162.9

20,000.0

257,162.9

State Police

136,227.9

153,504.0

85,465.6

85,465.6

Transportation

92,128.8

76,403.6

77,734.4

200.0

77,534.4

Veterans' Affairs

18,653.4

25,310.8

23,075.5

23,075.5

Other major agencies and boards*:

Capital Development Board

46,169.4

45,850.3

49,843.0

49,843.0

Comprehensive Health Insurance

12,000.0

19,400.0

18,779.2

18,779.2

Environmental Protection Agency

24,863.3

28,325.9

27,552.7

27,552.7

Historic Preservation Agency

13,232.7

13,447.7

13,179.3

2,000.0

11,179.3

Farm Development Authority

21,417.6

21,417.6

21,417.6

21,417.6

Industrial Commission

10,985.8

8,688.8

12,931.5

12,931.5

Education:

Elementary & Secondary

3,312,715.9

3,382,457.8

3,355,451.4

6,000.0

3,355,451.4

Higher Education

1,630,730.1

1,671,376.9

1,655,449.1

586.0

1,654,863.1

TOTAL

$12,409,958.6

$12,928,528.0

$13,008,195.9

$178,851.3

$12,829,344.6

*Only largest agencies listed. Totals include all boards, commissions and agencies. Source: Illinois Bureau of the Budget.

56/August & September 1990/Illinois Issues


additional revenues above current estimates would be foolish."

For fiscal year 1990 revenue performance was unimpressive. The state income tax, the single largest source of general revenue, produced an increase of $708 million or 5.8 percent even with the 20 percent increase in income tax rates. Between fiscal year 1989 and fiscal year 1990 income taxes received in all funds increased 17.6 percent, less than the rate of the increase. Despite the rate increase, corporate income tax receipts were down $98 million in the general funds.

The state's other major revenue source, the sales tax, saw an increase of 2.7 percent in fiscal year 1990. The second largest revenue increase, behind the individual income tax, was in federal aid, where higher welfare spending boosted receipts by $185 million, or 11.4 percent. According to the plan outlined by Thompson, the state will receive $ 13.471 billion in revenues in fiscal year 1991 and spend $13.591. Illinois would see its bank balance drop from $395 million on July 1, 1990, to $275 million on June 30, 1991. On the revenue side general funds receipts will grow $620 million, or 4.9 percent, over fiscal year 1990. On the spending side expenditures would increase by $604 million, or 4.7 percent.

Both increases are healthy, but there are a couple of aberrations worth noting. First, the state spent about $100 million early in July- the largest payment was $70 million in Medicaid bills paid July 2 that it had intended to spend before the current fiscal year started. Move that spending back two days to its appropriate year and the increase becomes $404 million, or 3.1 percent. And the real available balance becomes $295 million; that's $100 million less money that the state can draw from its ending balance.

Between Thompson and lawmakers the fiscal year 1991 budget has been balanced by an assortment of one-time techniques. The $36 million borrowed from the Road Fund is a one-time revenue that creates a hole in the 1992 budget. When repayment is made, more holes will appear. The same is trueof the $20 million drawn from feeder funds and of the $120 million drawdown of the balance. To put Medicaid, circuit breaker and health insurance back on track - and there will be pressure to do so -will require $160 million, partially offset by $60 million in federal aid generated by the larger Medicaid payments. That hole created in the 1992 budget is between $250 million and $300 million.

Comptroller Roland W. Burris looked at the numbers and concluded that the state is headed for its most difficult financial times in 20 years. On July 23 Burris warned that the next governor may face the most severe budget crisis since 1969. Burris anticipates major cash-flow problems between January and June of 1991 and more problems in fiscal year 1992, which begins July 1, 1991. Burris warned: "Our forecasts suggest that fiscal year 1992 could present the toughest fiscal challenge since 1969 when the state income tax was adopted."

Burris criticized Thompson's budget cuts as a way to delay spending from one year to another. He argued that they were not cuts, but only deferrals of spending from fiscal year 1991 into fiscal year 1992. 'These phantom cuts will make the next governor's decisions all the more difficult," he said.

Burris utilized checkbook balances to identify three budget crises since 1980. In fiscal years 1980 and 1981 monthly balances stood consistently above $200 million. In 1982 and 1983 the balances were below $200 million. In 1985 and 1986 the balances were up again. In 1987 and 1988 balances again tumbled. In 1990 they were up. Burris attributed the post-1980 decline to recession and the post-1986 decline to overspending.

Besides overspending, Burris raised the prospect of economic slowdown. Gross National Product grew at 4.8 percent in 1988 and at 3 percent in 1989. The projection is for 1.9 percent GNP growth in 1990, 2.2 percent growth in 1991 and 1.9 percent growth in 1992, Burris said. The slowdown means that economic growth will not help solve budget deficits.

Burris urged two steps to alleviate future budget problems by restraining spending when the state has high balances. First, he urged creation of a "rainy day fund" into which extra money would be put for use when money is tight. His second proposal would raise the warning zone for monthly balances from $200 million to $400 million to emphasize the need to keep more cash on hand. Inflation justifies doubling the $200 million level set in 1981, Burris said.

State lawmakers also tangled with one other fiscal issue, the question of property tax reform. Since last summer relief from rising property taxes levied by local governments has been on the minds of voters and of lawmakers. There was no shortage of proposals this year, but there was no solution.

House Speaker Michael J. Madigan (D-30, Chicago) tried to push for an increase in the homestead exemption in November and again in January. He was rebuffed. Lawmakers approved an expansion of the senior citizen's circuit breaker program in January, but it was vetoed by the governor.

In the spring session the Republicans pushed a plan championed by their gubernatorial candidate, Secy. of State Jim Edgar, that would have limited tax levy increases to 5 percent or the rate of inflation, whichever is less. The House version died in the Rules Committee, and the Senate bill failed in a Senate vote.

Speaker Madigan named a task force to study the issue. Rep. Barbara Flynn Currie (D-26, Chicago) chaired the group, which met twice. She said that as lawmakers examined the alternatives they concluded that any reform would cost either state or local governments some money. "I didn't see any enthusiasm on the part of legislators to seriously consider replacement revenue," Currie said. Rep. Jack L. Kubik (R-43, Forest Park), who represented Republicans on the task force, saw the same dilemma: "If it doesn't cost us money, it costs local government money."

On June 7 Republicans released a report of their own task force on property taxes. Rep. Thomas W. Ewing (R-87, Pontiac) criticized Democrats for bottling up the GOP efforts and refusing to talk about a comprehensive solution. The actual report contained little new. As Ewing candidly acknowledged: "There are going to be some who say this report is a rehash of what Republicans have been saying for the entire session, and they're basically right."

Problems with the property tax will be with lawmakers when they return in November and again next spring. So will the shortage of money. And next spring lawmakers get to decide whether to extend the two-year income tax increase. Fiscal year 1991 compensations for fiscal year 1990 overspending may leave lawmakers little option but to extend the increase in order to balance the fiscal 1992 budget.

August & September 1990/Illinois Issues/57


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