The state of the State

The budgetary transition:
from bust to flush

Madigan's victory came one year after conventional wisdom decreed that rookie Gov. Edgar had bested Madigan by holding out for passage of property tax caps in the five suburban counties surrounding Cook and by trimming welfare programs.

Table 1 General funds spending on a 15-month basis, fiscal years 1982-1994 (dollars in amount)

Fiscal year Total spending Dollar change Percentage change 1982 $ 8,494     1983 8,484 - $10 - 0.1 1984 9,522 + 1,038 + 12.2 1985 10,101 + 579 + 6.1 1986 10,780 + 679 + 6.7 1987 11,223 + 443 + 4.1 1988 11,378 + 155 + 1.4 1989 11,909 + 531 + 4.7 1990 13,180 + 1,271 + 10.7 1991 13,736 + 556 + 4.2 1992* 14,246 + 510 + 3.7 1993* 14,209 -37 - 0.3 1994** 15,030 + 821 + 5.8

* Fiscal Budget years 1992 and 1993 assume Bureau of the Budget projections of the lapse period spending $1,010 million for the fiscal 1992 and $765 million for fiscal 1993 **Fiscal 1994 assumes 3.5 percent growth in revnues and no change in ending balnces or lase period spending Source: comptroller's records and Bereau of the Budget

Edgar's 1991 victory was short-lived. The budget that lawmakers and Edgar hammered out all but assured the 1992 fiscal crisis. The 1991 agreement's reliance on one time revenues and overly optimistic revenue estimates presaged financial problems that became evident when the spending plan fell apart by January.

In contrast, this spring's spending plan does not guarantee a crisis next year. In fact, if the governor can get through fiscal year 1993 without "busting the budget," he could allocate from $500 million to $800 million in new spending next year. By recent standards, that would leave Edgar flush.

The transition from bust to flush has not been painless. Two years of budget cutting (fiscal years 1992 and 1993), have held the increases in spending below growth in revenues. Now, with a little good fortune and a little good management Edgar could be sitting pretty.

First, the state will have to get through fiscal year 1993. Revenues are projected at $14.523 billion, an increase of $491 million or 3.5 percerent over fiscal year 1992 revenues. That is somewhat better than the $425 million (3.2 percent) growth, when onetime increases are ignored, that the state enjoyed in fiscal year 1992.

For fiscal year 1993 the state is projecting 4.4 percent base growth in personal income tax receipts, up from 1.4 percent fiscal year 1992. In sales taxes the Bureau of the Budget is projecting 4.8 percent base growth, up from 1.3 percent in fiscal 1992. Lottery profits, which grew 5.3 percent in fiscal 1992, are budgeted for 6.6 percent growth

12/August & September 1992/Illinois Issues

in fiscal 1993.

In short there needs to be economic recovery. Economists are notoriously bad at predicting when economic growth will resume, and prolonged stagnation could undo Edgar's budget.

Second, Edgar will have to withstand pressures to add to the fiscal 1993 budget. Many of the cuts that lawmakers imposed will not save money. Typical is the Illinois Farm Development Authority. Edgar had sought $20 million for farm loan guarantees, a number that lawmakers reduced to $5 million. However, those guarantees have never been paid, so the cut is unlikely to reduce spending.

Likewise there are cuts that will be difficult to sustain. Sue Suter resigned her post as director of the Department of Children and Family Services, claiming that she could not run the agency on the funds allocated. A federal court suit could force restoration of some money. Similar problems could arise with almost any human service agency.

State employees' health insurance is underfunded by something like $100 million. When state workers' health insurance claims are not being paid, expect a repeat of last year's push for supplemental funding. If lawmakers press for increased spending, Edgar can play a strong card. He had proposed higher spending; they had insisted on the cuts.

Third, currently committed funds will require some of the money that will be available for fiscal year 1994. This year's agreement guarantees that local governments will get $40 million in fiscal year 1994 to make up for money that they lost from the income tax surcharge in fiscal year 1993.

Table 2. General funds budgetary balances, fiscal years 1983-1993 (dollars in millions)

Fiscal Year June 30 Balance Lapse period Spending Budgetary balance 1983 $ 110 $467 - $357 1984 217 389 - 172 1985 479 435 + 44 1986 288 441 - 153 1987 154 472 - 318 1988 246 322 - 76 1989 541 393 + 148 1990 395 586 - 191 1991 100 766 - $666 1992 131 1,010* - 879* 1993 200* 765* - 565*

* Bureau of the Budget projections. Source:Comptroller's records.

Some of the cuts that lawmakers imposed in fiscal year 1993 consisted of delays in opening a new prison at Mount Vernon, four downstate work camps and a work release center in Chicago. Operating those facilities for a full year instead of just a few months in fiscal year 1994 will cost something on the order of $85 million.

And then state workers are slated to receive a 5 percent salary increase on July 1, 1993, the largest single increase in their three-year contract agreement. Total cost of that increase could approach $200 million.

Fourth, almost all of the new money could be committed to financial improvements. Lapse period spending could be further reduced. Funding for pensions should be increased. And the year-end balance could be raised.

Nevertheless, after two years of fiscal headaches things will likely get better for Edgar. Two years of virtually no program growth have allowed revenues to catch up with and push ahead of spending, offering Edgar the opportunity to increase spending.

The pattern is clearest when 15-month spending is considered. The use of 15-month spending figures corrects for spending that is done in the lapse period, the three-month period following the close of the fiscal year when spending can be done from the previous year's appropriation. The Bureau of the Budget projects that lapse period spending will be $1,010 million in July, August and September of 1992 and $765 million in July, August and September of 1993.

On a 15-month basis, spending between fiscal year 1992 and fiscal year 1993 will decrease $37 million (0.3) percent, when fiscal year 1992's short-term borrowing of $185 million is ignored. The decrease would have been $222 million (1.5 percent) if the borrowing were included in the 1992 figures. In either case the decline is significant.

The only other decline in 15-month spending for the last 20 years came in 1983, when spending dropped $10 million (0.3 percent) in the depths of the recession. As illustrated in table 1, holding spending down in fiscal 1993 in effect will allow two years of increase in fiscal 1994.

Another measure of the state's improving fiscal health is illustrated by its budgetary balance. The budgetary balance is a concept for determining whether the state budget is balanced by assuming that the state should have enough cash on hand June 30 to pay bills that will be charged to the previous year's appropriation.

Table 2 indicates that the balance is almost always negative and that the budgetary balance has declined precipitiously since fiscal year 1989. However, even though the balance is usually negative, its size and whether it is growing or shrinking give a good indication of health.

The $314 million improvement in the budgetary balance between fiscal year 1993 and fiscal year 1994, if the state hits those figures, would be the largest single-year improvement ever.

Optimism about state finances is not widely held. Both Standard & Poor's and Moody's Investors Service dropped the state's general obligation bond rating a notch in August. "The underlying revenue growth expected by the state, while not large in absolute terms, is much stronger than was actually achieved in fiscal 1992, and there is also risk that not all of the spending reductions embodied in the budget are achievable," Moody's maintained.

Despite the rating agencies' misgivings, it is too early to declare Gov. Edgar the loser from the spring session. With an economic upturn and careful management he could yet be the winner.

Readers: This is my last attempt to put arcane fiscal matters into perspective for you. I leave Illinois Issues on August 24 to become manager of the office of public information in the Illinois Department of Revenue.

— Michael D. Klemens

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