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The state of the State

Democratic dilemma in
reconfiguring Edgar's budget

Michael D. Klemens


Gov Jim Edgar handed state Democratic lawmakers a dilemma with his "Republican" budget that included no new taxes and sharp spending cuts. Democrats have attacked Edgar's deep cuts to welfare spending and aid to cities; they have not denied the state's fiscal problems.

The budget focus now switches to the Democratic-controlled General Assembly, but Edgar holds some cards. The first is his veto pen, with which he can trim spending, provided that he keeps Senate Republicans behind him. Such vetoes earn the governor the wrath of those affected, which is fine with Democratic lawmakers.

The second is the general voter support for state school spending. Edgar eked out increases in education spending. If lawmakers trim school money, they will be cutting the most-supported area of state spending.

In the month following Edgar's budget address, Democratic proposals were scarce. In the House, aides to Speaker Michael J. Madigan (D-30, Chicago) were waiting to see how many of Edgar's proposed program cuts get approved. In the Senate, President Philip J. Rock (D-8, Oak Park) suggested that state government could look at borrowing money to pay off old bills.

There has been no shortage of proposals floated quietly. They fall generally into four areas: (1) taking longer to get out of the fiscal hole, (2) switching spending from the hard-pressed general funds to other funding sources, probably bond-funded, (3) other spending cuts, and (4) implementing exotic fixes.

Legislative budget makers confront a difficult fiscal situation in trying to construct a budget. First, the state owes more than $600 million in old bills for medical service to the poor, employees' health insurance and senior citizens' circuit breaker payments. Edgar has proposed to pay the bills. Second, in the current year's budget spending exceeds revenues by almost $300 million, an imbalance that must be corrected. Third, the state will end the year with only $100 million in the bank, less than two days' spending. Edgar proposed to boost that to $200 million by June 30, 1992.

Edgar has proposed draconian fiscal year 1992 spending cuts to allow payment of $600 million in old bills. Revenue allocated to old bills in fiscal 1992 can be used for other purposes in fiscal 1993, including further fiscal corrections.

The cuts Edgar proposed to allow the one-time payments produce a lot of pain now but give Edgar flexibility a year from now. One response being eyed by Democrats calls for the state to borrow money, either from banks or from other state funds, to cover some part of the one-time costs and then repay the money over several years. If the state borrowed $300 million, it could repay $100 million per year, earmarking a portion of natural revenue growth for the repayment. Such a scheme eases current pain and would tie Edgar's hands fiscally in future years.

One casualty of delays in correcting the state's financial situation would likely be the state's bond rating. If it is lowered, Illinois may have to pay higher rates on money it borrows. In recent years most of its borrowing has been done via college savings bonds; thus a lower bond rating would mean higher interest rates paid to middle-income Illinoisans trying to save for their children's college educations.

Lawmakers will also scrutinize Edgar's budget for other savings. Some of the governor's cuts can be restored more easily than others. Of the $600 million in reduced spending for medical services for the poor, more than half came in programs that earn federal reimbursement. In such cases lawmakers can restore $2 in programs with $1 in net spending increases. For example, the $180 million that Edgar proposed to save through a 5 percent rate cut for nursing homes, hospitals and doctors would, if restored, bring with it $90 million in new federal aid.

8/May 1991/Illinois Issues

Lawmakers may also look outside the hard-pressed general funds for help. Edgar has proposed to slow bond sales for road work, adopting more of a pay-as-you-go approach. If bond sales were continued, some flexibility could be found in the road fund. Lawmakers could perhaps end the $75 million sales tax transfer to the road fund or continue to pay $40 million in state police costs from the road fund.

Lawmakers may also propose some cuts of their own. A 2 percent across-the-board cut would yield $280 million; a 2 percent cut in operations would yield $75 million. Other likely targets would be any new spending proposed by Edgar: the $50 million for elementary and secondary education or the double digit increases for the Department of Rehabilitation Services and the Department of Children and Family Services.

There are also a number of the so-called exotic options open to lawmakers. A tax amnesty program could generate $50 million or so in new revenues. The double deduction for property taxes on the income tax form could be halved, or eliminated, producing $100 million to $200 million in new revenues. Lawmakers could reconfigure the $160 million that Edgar proposes to take from local government's share of income tax receipts as a loan or one-year transfer.

The most exotic option of all would be a tax increase. The $600 million in old bills is tailor-made for a temporary increase. Boost the income tax half a percent for one year, pay the old bills, and let the increase lapse.

But economic reality may intrude on budget deliberations. Edgar's budget was premised on sluggish but steady revenue growth, and March proved to be a revenue disaster. Total March revenues were $124 million below those received in March of 1990. In 12 of 14 revenue categories reported monthly by the comptroller, receipts fell. The General Revenue Fund (the noneducation portion of the general funds) balance on March 31 was $5 million, the lowest since at least 1960.

The revenues did not recover in the first few days of April. "It's more than just a hiccup in revenue flow," says Charles A. Burbridge, the economist with the Illinois Economic and Fiscal Commission. A worsening Illinois economy could limit both gubernatorial and legislative options.

May 1991/IIlinois Issues/9

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