Legislative Action

Recession hits general funds

By MICHAEL D. KLEMENS

From a revenue standpoint fiscal year 1992 began the same way that fiscal year 1991 ended — badly.

At first glance the state's general funds revenues look pretty rosy, up $263 million (12.4 percent) in July and August over the same two months a year before. That is not cause for celebration, however, because a big chunk of that growth, $185 million, was short-term borrowing done on August 29 for cash-flow purposes. The borrowing must be repaid in June.

Without the borrowing, revenue growth would have been $78 million, or 3.8 percent. After two months of experience it is too early to be certain what will happen. However, the state budget is predicated upon 9.5 percent annual growth for fiscal year 1992, without the short-term borrowing.

Revenues include both state-source revenues — money that Illinois raises from taxes and fees — and federal revenues — primarily reimbursement for welfare spending. Federal revenues are dependent upon spending for welfare programs and fluctuate depending upon how fast the state spends for welfare programs.

The state-source general funds revenue base is like a three-legged stool. One leg is the income tax. One is the sales tax. The third is a host of smaller taxes and fees.

The income tax comes from two sources. The personal income tax — the tax that individuals pay — is the most dependable in the state's revenue stable. The corporate income tax — the tax paid by businesses — is erratic and unpredictable. Income taxes rose 3.7 percent in July and August.

The sales tax is a sound revenue source, particularly so in good economic times. Because it is based on sale price, it grows with inflation. When times are tight, however, individuals purchase fewer goods and sales tax receipts go down. The dropoff comes early in an economic downturn, making sales taxes a barometer of economic activity. Sales taxes declined 0.7 percent in July and August.

The other state-source revenues are things like taxes on utilities, cigarettes and liquor along with lottery profits. Most are taxes or fees assessed on a per-unit basis, and most do not increase with inflation or economic growth. Other revenues, excluding borrowing, increased 1.1 percent in July and August.

In good economic times, the state's tax system produces growth in two-thirds of the base — income and sales taxes — and stagnation in the other third. With one-third of the base flat, total base growth regularly trails both economic growth and inflation.

In bad economic times, the first impacts are in corporate income taxes and sales tax receipts. That's what's happening in Illinois today.

The revenue slowdown that began in fiscal year 1991 continued into fiscal year 1992. At the midpoint of fiscal year 1991, revenues were healthy and growth was exceeding expectations. In the second half of the year revenues went bad.

For the first six months of fiscal year 1991 (from July 1, 1990, to December 31, 1990), revenues increased $381 million. The growth included $233 million in income taxes, $84 million in sales taxes and $64 million in other revenues.

For the second six months of fiscal year 1991 total general funds revenues increased $39 million. Income taxes increased $35 million. Sales taxes decreased $48 million. Other revenues increased $52 million. That means that the state saw more than 90 percent of fiscal year 1991 revenue growth in the first half of the fiscal year.

In their August review of general funds performance, the legislative revenue staffers at the Illinois Economic and Fiscal Commission concluded that recession had hit the Illinois economy: "During the last three months of FY 1991, receipts declined at alarming rates. Most notable were the declines in sales tax receipts and corporate income tax receipts. Even growth in personal income tax receipts stagnated, as the fiscal year drew to a close."

Fiscal year 1992 has begun the same way. The first two months' general funds revenue growth, exclusive of the $185 million in borrowing, totalled $78 million. However, some of that — say $15 million— represents income tax surcharge money that had gone to cities and counties in fiscal years 1990 and 1991. Lawmakers and the governor balanced the fiscal year 1992 budget, in part, by redirecting to the general funds half the money given local governments two years before. However, half of the state's fiscal year 1992 increase will be returned to local governments beginning in fiscal year 1993.

Another $37 million came from transfers of money accumulated in assorted state funds to the general funds that state lawmakers authorized to balance the fiscal year 1992 budget. A lawsuit has stalled the transfer of another $21 million that the governor sought to take from the State Pension Fund.

Without the borrowing, the increased state share of income tax collections and the special transfers, the two-month base revenue growth stands at around $25 million, or just over 1 percent.

Not only is revenue growth ailing, it is ailing at a time that the state needs some robust growth. The state carried over estimated $800 million in general funds bills from fiscal year 1991 into fiscal year 1992, about $200 million more than was carried from fiscal year 1990 into fiscal year 1991. That means that $800 million in fiscal year 1992 revenues are being used to pay fiscal year 1991 bills.

The high carryover (called lapse period spending) and the low revenues combined to produce a dubious first, the lowest month-end balance in the history of the general funds. On August 31 the state had $7 million available for spending, eclipsing the previous low month-end balance of $12.1 million in December of 1975.

And the state had $7 million available only because the comptroller was holding $230 million in bills that the state lacked funds to pay. Another $24 million came as a result of delaying the transfer to local governments of their share of state income tax receipts.

The unpaid bills are not going to go away. Projections are that another $800 million in bills will be carried from fiscal year 1992 into fiscal year 1993.

Against the backdrop of those levels of unpaid bills, the poor revenue perfomance in July and August portends pending pecuniary problems.

20/October 1991 /Illinois Issues