The state of the State

Phantoms of the budget for fiscal year '92

By MICHAEL D. KLEMENS

Gov. Jim Edgar took the helm of a state in fiscal crisis and spent much of his first six months in office talking about the need to restore the state's fiscal integrity. State lawmakers spent much of the spring session trying to balance the state's budget. After lawmakers went home, Edgar praised them for "coming to grips with the need to restore fiscal stability and integrity to state government."

Don't be fooled by the rhetoric. Illinois has been, is and will continue to be in fiscal difficulty. Illinois' fiscal problems were not solved by July's actions and will continue for two more fiscal years. An analysis of historical patterns in the general funds, done as part of Comptroller Dawn Clark Netsch's July report, projected that Illinois could face another 21 months of month-end balances below $200 million. That means continued delays in paying bills.

The July effort by Edgar and lawmakers to produce a balanced budget proves a pair of points, neither new: First, program cuts are difficult to make, even when everyone acknowledges a fiscal crisis. Second, given the choice, state government will choose revenue measures, even those that involve smoke and mirrors, over spending cuts.

General funds revenues and spending: a look ahead to fiscal year 1993 ($ in millions)
	FY 1991	FY 1992	FY1992 one times		FY 1992 base	FY 1993
Beginning balance	$ 395	$ 100				$ 200
Revenues	13,261	14,525	$ 334		$ 14,191	14,760
Spending	13,556	14,425		382	14,043	14,560
Ending balance	100	200				$ 400
Source: Compiled from Bureau of Budget estimates. Assumes 4 percent revenue growth in fiscal year 1993 and a $400 million ending balance.

To determine precisely what happened with spending this spring consider the numbers:

• Appropriated funds: the total budget, including all money that lawmakers and the governor have the authority to allocate. For fiscal year 1991 total appropriations were $26.040 billion. In March Edgar proposed a fiscal year budget that would have cut appropriations $454 million (1.7 percent). In July he signed a 1992 budget that increased appropriations $1.579 billion (6.1 percent).

• General funds: the discretionary money that is not committed to a specific purpose, as gasoline taxes are limited to roads. For fiscal year 1991 appropriations were $12.924 billion. In March Edgar proposed to increase 1992 appropriations $202 million (1.6 percent). In July he signed a budget that increased appropriations $517 million (4.0 percent).

• General funds spending: the amount of money that will be spent from the general funds between July 1 and June 30, including transfers that are not appropriated. For 1991 spending was $13.556 billion. In March Edgar had proposed to set spending at $14.178 billion, an increase of $622 million (4.6 percent) over what would prove to be the final amount. In July Edgar, signed a budget that increased spendin $869 million (6.4 percent).

The pattern is clear. The fiscal year 1992 budget contains increases both in spending and appropriations over the 1991 budget. And the final budget sets increases larger than those Edgar originally proposed in March.

Those increases come despite a drop in revenues. Recession hit Illinois state revenues just after Edgar released his budget. State revenues tumbled in March, April,

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May and June, with sales taxes particularly hard hit. All told, fiscal year 1991 revenues fell almost $200 million below those Edgar used in preparing his budget.

Despite the spring's revenue shortfall, the fiscal year 1992 budget anticipates healthy general funds revenue growth. In March Edgar had proposed a budget premised on revenue growth of $825 million (6.1 percent). In July Edgar signed a budget premised on a $1.264 billion (9.5 percent) increase in revenues.

A big chunk of the money that Edgar and lawmakers agreed to spend came from assorted one-time fixes totalling $500 million that include:

• $110 million by requiring retailers to pay sales taxes earlier in the month.

• $85 million in transfers of unneeded Build Illinois funds.

• $60 million in other funds transfers.

• $78 million of the increased state share of the surcharge that will revert to local governments in fiscal year 1993.

• postponement of a $175 million school aid payment from June to July of 1992, which leaves more money in the bank and more unpaid bills on the table.

The Bureau of the Budget defends the use of one-time revenues to pay one-time bills as sound. They point to comparable one-time expenditures that total $500 million and include: payment of old medical bills; decreased deferrals of bills; the final Sears payment; and other smaller items.

That is not to say there were no budget cuts in the 1992 budget that Edgar signed. They just were not as deep as originally proposed. All told, spending in the final general funds budget increased $315 million over Edgar's initial March proposal. Of the increase, $230 million was for the Department of Public Aid.

Program cuts approved included eliminating Aid to the Medically Indigent, restructuring of the General Assistance program, capping of pharmaceutical assistance under the circuit breaker program and ending state-funded energy assistance for the poor, for total savings of $170 million in fiscal year 1992.

Compared with 1991, education funding remained level, while the Department of Public Aid's funding increased $441 million. A handful of human service agencies saw budget increases. Other state agencies saw cuts, most in the range of 5 to 10 percent.

One other major fiscal maneuver involved adoption of an assessment program designed to capture $640 million in new federal aid. The new program taxes hospitals and nursing homes $640 million, qualifies for a federal match for that money, then returns the tax and the match to the hospitals and nursing homes through higher state payments for services. In the process, as much as $600 million in services to the poor is no longer charged against the general funds budget.

The one-time revenues, the spending increases and the devices to attract new federal aid make the adopted fiscal year 1992 budget a very different plan from that proposed in March by Edgar. The governor's original budget would have slashed program spending to pay off old bills in fiscal year 1992. Under Edgar's original plan those bills would have been paid off before the start of fiscal year 1993, freeing up money for new spending. Estimates of total new spending that would have been possible in 1993 ran to $1 billion.

The difference between Edgar's original budget and the one he signed are significant for two reasons: (1) Edgar's pledge not to raise taxes in his first term; and (2) revenues growing slower than inflation. Had Edgar been able to prevail with deeper spending cuts, he would have had more money available later in his term.

Looking ahead to fiscal year 1993, Edgar will see nothing like the $1 billion in new spending ability that his original budget would have allowed. For fiscal year 1993, state spending can rise $125 million over the fiscal year 1992 level. Taking into account the one-time fiscal year 1992 spending, new program spending can increase $500 million (see table).

But there will be many spending demands made on that money. The state will still be waiting 60 days to pay medical bills, and a return to the 35-day cycle will cost $200 million. Illinois will enter the 1993 fiscal year with $800 million in bills owed. That is $200 million to $250 million higher than the new standard of $550 million to $600 million for bill carryover.

There is little political benefit from increasing spending to pay bills on time or from deferring less spending. There will be demands for new spending to open prisons and to pay negotiated raises to state workers. And education, which saw budget cuts or token increases this year, will demand more money.

Continued high carryovers of bills into fiscal year 1993 guarantee that cash flow problems will continue. Under Illinois law, payment of bills incurred in the previous year can be made in the three months following the close of the fiscal year (from July 1 to September 30). By this deferral, "lapse period spending," in effect the state pays one year's bills with the next year's revenues.

Many of the fiscal problems that Edgar confronted upon taking office could be pinned to the record lapse period spending in July, August and September of 1990. A record high $586 million was paid from 1991 revenues for bills incurred during fiscal year 1990.

Accordingly, in his original budget Edgar proposed to reduce lapse period spending. Then revenues in March, April, May and June fell nearly $200 million below the Bureau of the Budget's estimates. The administration's response was to push more spending off into the lapse period. As of August 15 (halfway through the lapse period) the state had spent $593 million during the lapse period, eclipsing the previous year's record. Current estimates are that lapse period spending will total $814 million by September 30.

For the 1992 lapse period (July, August and September of 1992) the administration projects $769 million in spending for 1991 bills. That will extend the cash flow problems at least through the early part of fiscal year 1993.

Three other factors could wreak havoc with the budget between now and fiscal year 1993: (1) A federal government determination to disallow the hospital and nursing home assessment program would leave a large hole in the budget. (2) The budget's revenue estimates, premised on economic recovery, could prove optimistic. The sales tax estimates, for example, are $70 million higher than those of the legislative forecasters at the Illinois Economic and Fiscal Commission. (3) Problems could arise with programs to attract $80 million in federal reimbursement for psychological and psychiatric services for children and the mentally ill.

Even if the 1992 budget holds together, fiscal year 1993 will offer more difficult choices. Lawmakers will confront pent up spending demands; they will have no more than inflationary growth in revenues. And by then attempts to blame Jim Thompson for the budget problems will be lame.

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