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The State of the state

Budget imbalance:
when 12 months of revenue cover 15 months of spending

Michael D. Klemens

By MICHAEL D. KLEMENS

Few disputed the difficult financial situation that Illinois state government faced this spring. There was no agreement on the cause of the problem. Many tagged overspending as the culprit, while a vocal minority union members, human service providers and state employees argued that Illinois' problems stemmed from a revenue shortage. It was like a low calorie beer commercial with part of the crowd chanting "less spending" and part chanting "more money."

The fiscal crisis and the debate highlighted the central question of state

Sagging revenues and soaring spending: a 15-year overview of general funds revenue and spending ($ in millions)

Revenues minus
spending

Fiscal year

15-month spending

Revenues

1978

$ 6,343

$ 6,336

$ 7

1979

7,055

6,843

212

1980

7,442

7,506

- 64

1981

8,100

8,172

- 72

1982

8,265

8,494

-229

1983

8,437

8,484

- 47

1984

9,707

9,522

185

1985

10,317

10,101

216

1986

10,583

10,780

-197

1987

11,057

11,223

-166

1988

11,620

11,378

242

1989

12,133

11,909

224

1990

12,841

13,180

-339

1991*

13,278

13,752

-474

change:

FY78 to FY91

$ 6,935 or 109.3%

$ 7,416

or 117.8%

*Estimated. Source: Comptroller's records.

finance: Does Illinois have a revenue problem or a spending problem?

First, a quick budget review. The state fiscal year begins July 1, ends the follow ing June 30 and is named for the June in which it ends. Fiscal year 1984, for exam pie, began July 1, 1983, and ended June 30, 1984. Revenues for that fiscal year are whatever the state collects between July and June 30 (12 months).

Spending is more complex. Appropriations (spending authority) are contained in bills passed by the General Assembly and signed by the governor. Appropriations for a fiscal year can be spent both in that fiscal year and, in most cases, during the first three months (July, August and September) of the next fiscal year the lapse period.

State spending for a given fiscal year cannot be determined until the conclusion of the three-month lapse period. The result is 15 months worth of spending based on 12 months of revenues.

The table illustrates 12-month revenues and 15-month spending. Revenues increased each year, some years a lot because of economic growth and new taxes and some years a little because of tax cuts or economic contraction. In fiscal year 1982 a slowing economy slowed revenue growth; in fiscal year 1984 tax increases sparked $1.2 billion in revenue growth; in fiscal year 1986 revenue growth slowed again when the temporary income tax increase expired.

Likewise, 15-month spending grew each year, with one exception. Two years of recession forced a $10 million drop in spending for fiscal year 1983.

One striking aspect is that while revenues rose $6.9 billion (109 percent) between 1978 and 1991, spending rose $7.4 billion (118 percent). The pattern of spending rising faster than revenues holds for eight of the 13 years since fiscal 1978.

8/July 1991/Illinois Issues


That is a neat trick. How has Illinois managed to increase spending faster than it increased revenues? The answer is that increasingly the state shifted spending past June 30, into the three-month lapse period. Such postponements artificially inflate the June 30 cash balance, the number upon which attention is focused, confusing the fiscal situation.

Before fiscal year 1986 there was only one year in which 15-month spending greatly exceeded revenues: the fiscal crisis year of 1982. In the six fiscal years beginning with fiscal year 1986, spending outstripped revenues four times.

The other factor that must be considered is inflation. The implicit price deflator for state and local government purchases of goods and services, a U.S. government measure of the increase in the cost of things that governments buy, increased by a factor of 2.11 between 1978 and 1991. The deflator's overall increase was 111 percent, slightly higher than the 109 percent growth in revenues and slightly less than the 117 percent growth in spending.

Put another way, total general funds revenues would have needed to grow an additional $100 million just to keep up with inflation between 1978 and 1991. Over the same period, state spending rose about $380 million more than would have been needed to meet inflation.


Does Illinois face a spending problem or a revenue problem?


Back to our original question: Does Illinois face a spending problem or a revenue problem? Revenues have grown more slowly than inflation over the last 14 years. And that comes despite two temporary income tax increases and a permanent hike in the sales tax. At the same time, Illinois is spending more than it takes in. Illinois has pushed spending to the limit, more often than not exceeding revenues when counted on a 15-month basis.

And that is our answer. Illinois has both a revenue and a spending problem. The "more money" crew can, and will argue, that revenue growth has trailed inflation. And the "less spending" crowd can, and will, maintain that state spending needs to be contained. You can bet a cold brew on it.

July 1991/Illinois Issues/9


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