Your turn
By David R. Olson
Illinois' finances appear to be in great shape. Indeed, state Comptroller Daniel Hynes reported a record cash balance of $1.35 billion in the state's general fund as of June 30, the end of the last fiscal year.
Yet appearances can be deceiving.
It's true, of course, that Illinois' financial condition has improved over the last five years. Certainly, compared to the recent past, state finances look pretty good. Still, while officials managed in recent years to keep the growth in general fund spending (the dollars used to keep government running day to day) below the growth in revenue (read taxes), much more needs to be done to put Illinois on a sound financial footing over the long term. This becomes even more obvious when we consider the experiences of other states. In fact, if we examine the budget practices of three other states comparable in size and financial conditions, Illinois' bottom line doesn't look so great after all.
There's a ready test. State governments must account for the unrestricted resources in their general funds. This is a valuable practice because when governments experience financial difficulty it usually begins in the management of the general funds. Thus, Illinois' comprehensive annual financial report, which is prepared by the state comptroller and reviewed by the state auditor general, is the best source of information about the state's finances. And it's the only financial document that is comparable to reports issued by other states. In short, it provides a good internal and external reality check on this state's fiscal health.
And what does it reveal? Illinois' most recent report (for the fiscal year that ended June 30, 1998) shows that the state's general fund, where approximately 63 percent of total state revenues are accounted for, had a negative balance of $213 million. To be sure, the state's general fund had a cash balance of more than $1.2 billion on that same date. The fund also had other assets of $2.4 billion. But at the same time, the general fund had liabilities of nearly $3.9 billion, or $213 million more than total assets.
That's the danger in focusing on the cash balance. It's important information, but it's only part of the story.
While the final figures for fiscal year 1999 won't be known until next month, the best estimate is that Illinois' general fund balance will be close to zero. In fact, the last time the fund had a positive balance was 1985. The fund's balance dropped in the mid-1980s, improving slightly in 1988 and 1989. The recession in the early 1990s depleted the balance significantly over four years. Illinois officials raised the income tax and delayed paying the state's bills. Then, between 1994 and 1998, they exercised some much needed fiscal restraint.
Still, they should take the next step. They need to create a plan, a rainy day fund, to weather future economic storms. Other states have. Three provide good comparisons.
Michigan, for one, also was adversely affected by the recession of the early 1990s. But, according to that state's audited financial report, though Michigan officials raised state taxes, lowered property taxes and increased state education spending after 1994, they managed to hold spending from the general fund significantly below the growth in revenues. And they managed to boost the state's rainy day fund, established in 1977, from $20 million in 1992 to $1 billion in 1995.
Ohio, too, faced a dip in its general fund balance in fiscal year 1992. But that state recovered nicely by fiscal year 1998. It reduced general fund expenditures in fiscal year 1993 by 5 percent from the year before, and built a rainy day fund from zero in 1993 to $900 million in 1998.
Pennsylvania's general fund deteriorated during the recession, plunging to negative $980 million at the end of fiscal year 1991. But that state's officials enacted significant tax increases, and, since fiscal year 1995, managed to keep spending growth below the growth in revenues. The general fund balance in fiscal year 1998 included $657 million in the rainy day fund that was created in 1985.
Though we are years behind these three states, Illinois could create a plan now to accumulate the financial resources to weather the next recession. Certainly, in proposing or endorsing a rainy day fund for this state, Gov. George Ryan, Comptroller Hynes and some lawmakers appear to recognize the need to improve Illinois' finances.
David R. Olson is an associate professor of accountancy at the University of Illinois at Springfield.
Illinois Issues November 1999 / 43