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By MICHAEL D. KLEMENS

Strong revenue growth lags soaring spending: What to do?

State revenue growth was strong for the final six months of Gov. James R. Thompson's administration. Despite the healthy revenue growth, Gov. Jim Edgar took the helm of a state experiencing serious fiscal problems. On December 31 the state had $76 million in the bank and $180 million in payments that it was holding to leave enough money for payrolls and welfare payments.

The state's fiscal problems did not result from constriction of state tax revenues by economic slowdown. For the first six months of fiscal year 1991 (July through December), state revenues grew $381 million (6.5 percent) over the previous year. That growth was better than that for the first half of the three previous fiscal years. In fiscal year 1990, six-month revenues increased $210 million, or 3.7 percent, with the 20 percent income tax rate increase. After six months of fiscal year 1989, total revenues had risen $214 million, or 3.9 percent, and in fiscal year 1988 revenues were up $291 million, or 5.7 percent, for the period.

Three sources accounted for nearly all the half-year revenue growth.

1. Income tax receipts grew 12.5 percent in the first half of fiscal 1991, an increase of $234 million over the same period one year ago. Individual receipts increased 13.1 percent. Nearly one-third of the increase came in July, a reflection of delay between passage of the rate increase on June 30, 1989, and collection of the new taxes. Corporate income tax receipts, after declining despite the rate increase in fiscal year 1990, grew in the first six months of fiscal year 1991.

2. Sales tax receipts grew $83 million, or 4.4 percent, in the first half of this fiscal year. The receipts were healthy, particularly considering the talk of recession and surveys that showed consumer confidence at low levels and consumer spending on the decline. The six-month receipts did fall short of the 5.6 percent sales tax growth projected for the year by the governor's Bureau of the Budget.

3. Federal source revenues were up $101 million in the first half of the fiscal year. Federal revenues are primarily reimbursement for welfare payments, and the half-year increase reflects higher state spending for public aid. Spending postponed from June 30 into this fiscal year helped drive up that reimbursement.

Other income sources were stagnant or declining. Investment income was down $11 million because the state had less money to invest and interest rates were lower than the year before. Utility taxes were up $6 million because the long distance telephone tax that had been paid under protest was settled. Conversely, transfers from the protest fund were down. The lottery remained stagnant, declining $4 million, or 1.5 percent, compared to the same period a year ago.

Both legislative and executive revenue forecasters claim to be comfortable with their projections for the year that will end June 30. The budget bureau has pegged fiscal year 1991 revenues at $13.471 billion, a number that they held to in their January quarterly revision of revenue and spending estimates.

The legislative forecasters at the Illinois Economic and Fiscal Commission have estimated fiscal year 1991 revenues at $13.358 billion, $113 million lower than the Bureau of the Budget's estimate. Chuck Burbridge, chief economist for


Half-year general funds revenues (July 1 through December 31), fiscal years 1990 and 1991

(dollars in millions)

Fiscal 1990

Fiscal 1991

Dollar change

Percent change

Source

Personal income tax

$1,643

$1,858

+

$215

+

13.1%

Corporate income tax

223

242

+

19

+

8.5

Sales tax

1,906

1,989

+

83

+

4.4

Public utility tax

305

311

+

6

+

2.0

Cigarette taxes

152

163

+

11

+

7.2

Other cash sources

341

340

-

1

-

0.3

Lottery transfers

264

260

-

4

1.5

Other transfers

48

67

+

19

+

39.6

Federal sources

913

1,014

+

101

+

11.1

Total revenues

$5,856

$6,237

+$

381

+

6.5%

Source; Comptroller

Roland W.

Bums.

February 1991/Illinois Issues/25


the legislative commission, says that the commission's estimates may turn out to be too low, but given the economic uncertainties, he doubts that the commission will raise its estimates.

Burbridge says that he does not expect Illinois to remain immune from the recession that appears to have hit other states. The Illinois economy has been propped up by continued high exports and strength in the farm sector. The Department of Commerce and Community Affairs reported a 25.7 percent increase in exports and a 28.2 percent increase in cash receipts from farm marketings for the first eight months of 1990. Burbridge questions whether that will continue as the world economy tightens.

Burbridge says that the quickest economic indicator, number of persons employed, is in flux. In 1990 the monthly reports from the Department of Employment Security have shown some increases and some decreases in the number of lllinoisans working. In 1989 employment grew consistently. Clearly 1990 was not the year that 1989 was, Burbridge says.

The state's fiscal problems result from the dramatic change on the spending side of the ledger. On January 15 the Bureau of the Budget hiked its estimate of annual state spending for fiscal year 1991 by $175 million, pushing it up from $13.591 billion to $13.766 billion. The budget bureau projects an increase of $140 million in public aid spending and $35 million in various social service agency spending.

The increased full-year estimate follows an actual spending increase of $287 million (4.6 percent) for the first half of fiscal year 1991. Six-month spending stood at $6.556 billion. The increase is much smaller than the previous year, when six-month spending increased $525 million, or 9.1 percent. The current year increase is more in line with that of fiscal year 1989 when six-month spending rose $235 million (4.3 percent) or 1988 when spending increased $179 million (3.4 percent) in the first six months.

What state government spent in the first half of fiscal year 1991 is not a true picture because numerous adjustments have been made to keep money flowing. To conserve state funds, public universities have been asked to spend tuition money before they begin spending state tax dollars. Medicaid payments to doctors, hospitals and nursing homes that serve the poor have been slowed. (Public aid spending was up $261 million in the first four months of the fiscal year, then declined $45 million in November and December leaving the six-month increase at $216 million.) And some payments, particularly a $150 million school aid quarterly payment made in December of 1989, were postponed.

As of December 31 the state's general funds available balance stood at $76 million, the lowest December month-end balance since 1982. In August the Bureau of the Budget had projected that the mid-year balance would be $150 million. In October the budget bureau revised the number downward to $115 million.

Revenues were not the problem, standing at $6,237 billion, a mere $7 million below the budget bureau's August projection. Spending, even with the delays put into place, was $67 million higher than the bureau's original budget and $32 million higher than the October revised estimate.

In his monthly report for December, his last as the state comptroller, Roland W. Burris predicted continued spending delays for the rest of the fiscal year unless new money is found (borrowed most likely) or spending is cut dramatically. Burris had begun sounding the alarm in July, although he had made less splashy pronouncements of fiscal problems a year earlier, However you look at it, Gov. Edgar confronts a number fiscal problems that will combine as he begins to shape a budget for the year that begins July 1 (fiscal year 1992). His difficulties include:

The imbalance in the current year's budget, caused spending that is projected to be $295 million more than revenues.

The $160 million underfunding, via Thompson vetoes, that have delayed payment for health care for the poor, state employees' health insurance, and circuit breakers.

The $50 million in road funds that lawmakers borrowed (they promised only once) to replace general funds used to pay for state police operations. Subsequent repayment will create problems after fiscal year 1992.

Annualization costs for facilities like new prisons that were only open part of the year and for programs like the continuing state effort to move the mentally ill from nursing homes.

New federal requirements for Medicaid services, a $40 million item.

Increased demands for services prompted by the declining economy.

The threat of economic slowdown which could depress revenues in fiscal year 1992.

That is a lot of money. Throw in a big-ticket item like Illinois' chronic pension underfunding and it becomes mind boggling. All natural revenue growth for fiscal year 1992 could be committed simply to getting Illinois back on an even financial keel. That could mean virtually no new money for programs that saw only modest increases in fiscal year 1991.

It is worth noting that the fiscal problems that Edgar inherited developed with the 1989 income tax surcharge in place. The current annual surcharge yield totals roughly $900 million, after refunds: $500 million for general funds spending. Education's share of the surcharge is roughly $375 million. Another $80 million covers the doubling of the property tax exemption the income tax forms. The balance is used for general expenses. The $400 million from the surcharge not available for general funds spending flows directly to local governments on a per capital basis. The surcharge is set to expire on June 30; Edgar must win passage of an extension or face even greater problems.

Edgar takes control of a state with serious financial problems. Illinois' financial difficulties cannot be blamed on recession-driven slowdown of tax receipts. "You don't have enough revenue to pay for all your programs, but you are getting the revenue that you expected," the economic and fiscal commission's Burbridge says.

The dismal national economic forecasts appear to preclude a miraculous burst of revenues that would bail Edgar out. That leaves him two options. Edgar could raise taxes, if he is willing to break a campaign pledge, or he could cut spending. Spending cuts will have to be severe.

26/Febuary 1991/Illinois Issues


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