Legislative Action
By DIANE ROSS

A NATIONALLY known broker says Illinois is financially sound enough to weather a recession, according to Gov. James R. Thompson who quoted the broker in closing the annual budget message to the Illinois General Assembly March 5. "Let's listen to this man," Thompson urged the General Assembly, "his name is E. F. Hutton." The mere mention of that name stops the action on television commercials, but no one froze when Thompson repeated the magic words.

Thompson proposed a fiscal 1981 budget of $14.5 billion in appropriations, which is a 6.3 percent increase over fiscal 1980 estimated spending; but it is an 18 percent increase over Thompson's 1980 proposed budget of $11.8 billion in appropriations.

By mid-March, economic indices for January and February showed national inflation at a whopping 18 percent, President Carter said he would cut federal spending in order to balance the federal budget, and Congress jumped on the bandwagon to find the "fat" to trim from the federal budget (see "The state of the State, p. 2). It appeared certain that Congress and Carter would agree to cut the federal revenue sharing to states, which would mean $56 million would be lost from Thompson's estimated revenues. It was unclear what else might be cut, but as much as $51 million more could be cut from Thompson's fiscal 1981 federal revenues. Another $81 million could be cut in federal funds to Illinois that would indirectly effect the state government budget.

Thompson proposed a balanced budget, but its balance is based on revenue projections. These, in turn, are based on a projected 10 to 10.5 percent inflation rate and the assumption that Congress won't cut much out of Illinois' $3 billion in federal aid, which is one-fourth of the state's budgeted revenues. These assumptions may be wrong, and Thompson knew it March 5 when he told the General Assembly, "I'm trying to tell you, as sincerely and as candidly as I know how, that for fiscal 1981, more than ever before, the economic forecasts on which the budget rests ... are a very risky business." He suggested that legislators review the budget each month, revising revenue and spending figures as the forecasters project inflation rates and Congress considers cuts. A further dilemma for the state is that the federal budget final action will probably come after Illinois' 1981 fiscal year begins July 1; the federal government now begins its fiscal year on October 1.

After Carter announced he would cut federal spending, Gov. Thompson announced March 13 that his Bureau of the Budget (BOB) would start a "top to bottom" review of the fiscal 1981 budget as well as what's left of the 1980 budget.

Earlier, on March 5 Thompson called his $14.5 billion fiscal 1981 budget a blueprint for the "real world." He estimated $1 billion in new revenue and announced he had balanced revenue against spending at about $11.8 billion. (The difference between the $14.5 billion in total appropriations and $11.8 billion in expenditures is about $2.7 billion, mainly in road and other capital projects which must be appropriated but not necessarily spent in fiscal 1981.) His budget shows a 1981 year-end balance of $285 million in the general funds, the same as that projected for fiscal 1980 on June 30. However, that figure is based on two assumptions:

1.   that the General Assembly will pass Thompson's plan to give away $115 million in one-time tax relief before June 30, 1980, instead of allowing the 1980 year-end general funds balance to reach $400 million (see "Legislative Action," April).

2.   that the General Assembly will eliminate the deposit of corporate personal property replacement taxes in the general revenue funds (these tax funds go to local governments, but while temporarily deposited in the state general revenue funds, they artificially inflate the funds).

Thompson proposed two-thirds of the $1 billion in new revenue for the increased costs of education, transportation and public aid, which are traditionally the most costly state programs. The increase in the welfare budget was proposed to offset a major increase projected in the caseload as a result of an estimated upswing in unemployment. Much of the remaining one-third of new revenue would go for Thompson's priority programs:

1.   prison staff and new beds;
2.  child abuse (a doubling of reported incidents is expected);
3.  the relatively new program to provide in-home care for the elderly;
4.   prevention of infant deaths;
5.  quality care in state institutions for the mentally ill;
6.   startup of the re-conversion of state facilities to the use of Illinois coal;
7.  installation of accident monitoring systems for nuclear power plants;
8.   land preservation through soil erosion control and acquisition by the Department of Conservation.

Within these programs, $23 million is proposed to hire 3,500 new state workers, mainly to handle increased caseloads for human services.

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His exact revenue estimate is $11.755 billion, an increase of $921 million or 8.5 percent over the projected $10.834 billion in revenue for fiscal 1980. Thompson points out that this increase is less than the 9.5 percent increase projected in January for personal income during fiscal 1981. Thompson, however, has subtracted $50 million from revenues to go for his proposed tax relief.

On the spending side, Thompson has budgeted $11,792 billion in expenditures, and Thompson said this increase is below the inflation rate.

Thompson also proposed on March 15 that the General Assembly appropriate $130,148,000 to complete fiscal year 1980. A year ago he asked for only $37,663,900 in supplemental appropriations. Of the supplemental he proposed this year, the largest items are for public aid, $45,233,000; transportation, $26,900,000; and local government disbursements, $23,946,000.

The real key to fiscal restraint according to Thompson, are the general revenue funds, which account for more than half of all revenue received by the state and for more than half of state spending. This is where Thompson wants to show a year-end balance, but not too much. In the general revenue funds, he proposes expenditure of $7,538 billion and estimates revenue at $8.117 billion. He wants to end fiscal 1981 with $285 million, the same as he projects for the end of fiscal 1980.

Illinois financial soundness also depends on its credit rating, which involves any increase in general obligation bond revenue, and bond debt service spending as a percentage of all spending.

Thompson proposes general obligation bond sales of $390 billion for fiscal 1981. That is an increase of $90 million or 30 percent over the $300 million in projected sales for fiscal 1980. Total bond repayment for fiscal 1981 would be $279.7 million, which is an increase of $31.1 million or 12.5 percent over the $248.6 million in projected repayment for fiscal 1980. Debt service would represent 3 percent of all state spending for fiscal 1981, or an increase of .1 percent over the projected 2.9 percent of spending for fiscal 1980. The other question on the bond funding is the bond market itself, which is now so uncertain that the state may not be able to sell its bonds at a good rate.

The question now is what will inflation, Congress and the General Assembly do to Thompson's budget.

The Democrats always accuse the governor of underestimating revenue, and they argue that Thompson is once again too conservative. For the past three years, Thompson's Bureau of the Budget (BOB) has been pretty much on

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target with inflation. But even the BOB realizes that inflation is going up faster than the increases can be forecast. The BOB initially targeted inflation at 10 to 10.5 percent, midway between the forecasts of the conservative Chase Econometrics and the liberal Data Resources, Inc. But then inflation reached 18 percent in the third quarter of fiscal 1980. BOB believes inflation will drop in the fourth quarter, leaving the overall rate for fiscal 1980 at 12 to 13 percent, much closer to their own 11.2 percent projection. That means BOB's initial 10 to 10.5 percent projection for fiscal 1981 would be much closer to target.

As for inflation, the issue between Thompson and the Democrats is whether a higher rate would produce a windfall in state revenue from the sales and income taxes. The Democrats think this will happen because inflation will push up both wages and prices, which will mean higher tax receipts. Thompson, however, does not agree because wages don't always "keep up with prices. He thinks the resulting decrease in the volume of business from a higher rate of inflation would wipe out any increase in sales tax revenue and any windfall from the income tax. One observer has noted that revenue estimates made by the Economic and Fiscal Commission, which advises the legislature, are getting closer to the BOB estimates.

No one knows for certain what cuts might come from the federal government. The BOB projected federal aid at $2,924 billion for fiscal 1981. The breakdown by purpose is $1.2 billion in reimbursements for public aid: $446 million in matching funds for transportation; $371 milion in reimbursement for education, specifically, special education and the school lunch program; and $113 million in general revenue sharing which goes to education (this would be cut to $56 million if Congress doesn't continue the program beyond October). The other $794 million in federal aid is spread over a number of programs.

As soon as proposed cuts in the federal budget are known, BOB can predict Illinois' losses. Federal disbursements to the states are based on population, and as soon as a final federal appropriation is known for a program to the states, the population formula can be applied to estimate Illinois' share. But Illinois' population as a percentage of the national population has dropped about 5 percent, according to the census now underway. No matter what Congress does this year, Illinois can expect to lose at least 5 percent in federal aid. If that kind of reduction went into effect now, federal aid would drop about $146 million.

The question on federal aid cuts is whether federal money will be made up with state money. Thompson has already committed the $1 billion in new revenue. His tax relief proposals account for about $65 million in fiscal 1981. And Thompson's dividend relief of $115 million would draw down the available balance for fiscal 1981.

Neither the governor nor the legislative majority leadership knows precisely what Congress might cut. Neither Carter's proposal nor the U.S. House Budget Resolution include the detail necessary to determine precisely what the proposed cuts mean to state and local government programs. What was known by April 1 was that federal funds for road construction would probably be down by about $20 million for fiscal 1981 out of a total $61 million cut in federal road money to Illinois; the other $41 million would be lost in fiscal years 1982 and 1983.

Other federal cuts for specific programs are in law enforcement grants, which BOB expects to be cut by about $14.5 million for fiscal 1981, a 40 percent reduction in expected federal revenue. Another cut is expected in the Young Adult Conservation Corps, which could jeopardize the continuation of that program beyond October, the end of the federal fiscal year. The expected federal cut in the summer Youth Conservation Corps would also come October 1, but that program could operate this summer. The big cut, of course, is in revenue sharing to the states.

Robert Mandeville, director of the BOB, believes the state should not shift its funds to cover the loss in federal money in programs which have received that money directly. He feels that designated programs cut in Washington should stay cut. The exception to Mandeville's statement is in student financial aid. He does believe that if Congress changes the maximum which poorer students can receive in basic education grants, that the state should shift funds to the state scholarship commission to make up that difference for those needy students.

As for the $56 million cut in revenue sharing for fiscal 1981, Mandeville believes that education, which technically is the recipient of that money, should not have to suffer the full cut. He points out that the state has made the decision on where it uses federal revenue sharing, and the state should make the decision on how to absorb that cut. The $56 million represents 7/10 of 1 percent of the state general revenue funds, and Mandeville says that each entity of state government funded by the general revenue funds should reduce its total budget by 7/10 of 1 percent.

But the Democrats have not yet made any commitments beyond tax relief, and some are questioning how far tax relief should be carried under threat of federal cuts, even in an election year. The Democrats are in control of the General Assembly, but whether they will be unified in dealing with Thompson's budget is another question. It is certain that they will attack his year-end balance of $285 million.

It would appear that the Democrats could argue convincingly that Thompson's proposed $115 one-time tax relief dividend (to be given away before June 30) might be better used as a hedge against inflation or the ax from Washington. Thompson has increased the year-end balance from $52 million in fiscal 1978 to $400 million in fiscal 1980 (assuming the $115 million dividend proposal is not approved). The Democrats say there is as much as $500 million in reserve although they include about $100 million that goes automatically to local governments.

With the uncertainty of the economy and of exactly what Congress may cut in funds in order to balance the national budget, the decisions to be made in Springfield on the state's budget may be more difficult this year -especially since it is an election year. It would seem that the General Assembly, controlled by the Democrats, would have to take some lead from the decisions in Congress, also controlled by the Democrats, and, of course, from President Carter. Even Illinois Republican Gov. James R. Thompson can't easily criticize federal cuts to balance the budget, since balancing the state budget is what he boasts about.

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