Recession, revenue and the budget reserve

IT WAS more than four months into the fiscal year — just after the elections and just before the veto session — and Gov. James R. Thompson was briefing the Statehouse news media on the fiscal state of the state as Illinois entered its second year of recession.

Illinois didn't face a crisis, Thompson said. But it did face a crossroads. And the choice of the right road was so crucial he had received permission from legislative leaders to address a joint session of the House and Senate, a forum he usually reserves for the State of the State address and the budget message.

Spending is soaring,, Thompson said, echoing his all too familiar refrains: expenditures are far beyond the budget's projections; revenues are up somewhat, despite the recession, despite the loss due to tax relief. But the increase in revenues will cover only half the increase in spending.

Therein lay the rub. For the first time in four years, a Thompson budget — by the governor's own definition — was unbalanced, and he couldn't blame the legislature. But he did warn them that overriding any vetoes would make the situation worse.

Thompson said revenues won't cover spending, but for at least this fiscal year, the built-in $390 million reserve will cover the extra spending. If spending continues to soar unchecked, he warned the reserve will be gone by the end of next fiscal year, and Illinois will face a real crisis: taxes will go up; services will be cut; the state's credit rating will be lost.

To avoid such a crisis, the governor announced he had already acted to control spending under his control by:
•     freezing hiring by his agencies until mid-January;
•    ordering his agency directors to cut $1 billion from their fiscal 1982 requests;
•    canceling his call for pay raises for his directors.

He pleaded with the legislature to do its part. He asked them not to override the $42 million he vetoed in fiscal 1981 appropriations — and the $183 million he vetoed in tax exemptions, deductions and credits in substantive measures. Override those vetoes, Thompson said, and the legislature would bankrupt Illinois by this July.

Illinois faces its toughest fiscal year since he took office, Thompson said. If fiscal 1981 looks bad, 1982 looks worse. No, he didn't have all the figures; call the Bureau of the Budget (BOB).

Better off than most

Thompson's BOB people had the figures — and more. Toughest year or no, they said, Illinois is still better off than most states. Collectively, state governments are facing the worst fiscal crisis they've seen since the Great Depression. Thirty of the 50 states are in trouble to some extern, Illinois is not among them — now.

In fact, BOB said Illinois has been, is, and should continue to be far better off than its industrial neighbors in the Midwest:
•    Missouri has scooped $100 million out of its reserve already;
•     Iowa has cut $150 million in services;
•    Minnesota has cut appropriations 8 percent across the board;
•    Wisconsin has cut appropriations 4 percent across the board;
•    Indiana has cut $150 million in services;
•    Kentucky has cut the state workforce by 10 percent;
•    Michigan — perhaps the worst off — has already spent most of its $250 million reserve — and gone on to cut more than $1 billion in services. By Illinois standards, Thompson said, Michigan is already bankrupt.

What has been keeping Illinois black? Thompson's BOB says Illinois maintained a strong reserve in the prerecession years, meted out doses of tax relief — despite the pressure from Proposition 13 — and tightened controls on spending. Illinois' neighbors settled for relatively weaker reserves, doled out generous helpings of tax relief and were less successful in holding down spending.

Thompson's BOB now projects that fiscal 1981 spending out of the crucial general funds will be 11 percent over the previous year and not 8.9 percent as projected last March. BOB now projects $8,290 billion in general funds spending by the end of fiscal 1981, instead of $8,117 billion. On the other hand, BOB now projects general funds revenues will be 10 percent above last year's revenue instead of 9.3 percent as projected last March. In dollars, the revenue increase amounts to $57 million lion. The net result will be $116 million more in projected spending than revenue this fiscal year — in effect, unbalancing the budget. The $390 million balance in the general funds carried over from last year will make up the difference, but that will drop the yearend fiscal 1981 balance to $274 million And that $274 million figure is optimistic tic, according to BOB. If spending continues to increase at the rate it did during the first quarter of fiscal 1981, another $50 million would be needed from the reserve.

Why has spending soared beyond projections? While spending in some areas will be less than expected, spending for public aid is now increasing by 21 percent instead of 13 percent as projected in March. Total public aid spending for fiscal 1981 is now projected to run $104 million more than estimated last March. The explanation lies in an unexpected increase in the cost of medical benefits; BOB had anticipated an increase in the cost of income benefits associated with increasing unemployment. By the end of fiscal 1981, BOB now projects medical grants will run $201 million more than projected, while income grants will be $80 million more.

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Public aid spending is also up because the state took over a county-run program for the medically indigent and established a new state program to provide benefits under Aid to Families with Dependent Children for women in their first pregnancies.

But public aid is not the only culprit. Of the overall increase in general funds spending, another $56 million can be traced to legislation increasing funding lo elementary and secondary education. Another $35 million was paid out to community colleges earlier than expected and is not really an increase in fiscal 1981 spending.

Punch in the cushion

Why have revenues edged $57 million above the March budget projections? An unexpected gain in federal aid is the biggest reason. Despite the expected loss of almost $57 million in federal revenue sharing funds, the Bureau of the Budget now projects federal aid at $103 million above budget. Ironically, much of the increase in federal revenue is due to the increase in public aid spending since most benefits are reimbursed by the feds.

The state has also gained $57 million in general funds revenue above March budget projections from: (1) interest earned on state investments because of higher rates ($33 million), and (2) inheritance taxes ($10 million).

Together, the unexpected gains from all sources total $160 million. But an unexpected loss of $103 million in state income and sales tax revenues puts the net gain at $57 million in general funds revenues.

Due to the recession, the BOB now projects individual income taxes will generate $31 million less than it projected in March, the corporate income tax $19 million less, and the sales tax $53 million less. The obvious explanation for the sales tax loss is tax relief, which the BOB now projects will cost Illinois $284 million in fiscal 1981 or $77 million more than budgeted. For fiscal 1981, the cost of first-penny relief on food and drug sales is still figured at $102 million, and the second penny at $38 million. First quarter returns show, however, that the loss in revenue due to the business machinery exemption will run $120 million in fiscal 1981 or nearly twice what was projected. Another $24 million will be lost in sales tax revenue as a result of new legislation: (1) allowing farmers a similar tax exemption on machinery, and (2) allowing a deduction in corporate income tax.

Clearly, under Thompson's balance-the-budget policy, spending cannot be allowed to increase another 11 percent in fiscal 1982. If it does, the year-end balance on June 30, 1982, could drop to $58 million. Ironically, that's the same amount Thompson criticizes former Gov. Dan Walker for leaving as a reserve. The BOB says the year-end balance should be a cushion and should be in the range of 3.5 to 6.5 percent of total spending. BOB now projects fiscal 1981 will end with a balance of $274 million, which is 3 percent of BOB's current spending projections. To maintain that cushion, BOB says fiscal 1982 spending must not increase by more than 5 percent.

Thompson's BOB may have done their homework too well. Their figures suggest that Thompson's reserve is strong enough to see Illinois through three years of recession (fiscal 1980, 1981 and 1982). To the Democrats, Thompson's reserve may still seem like a surplus.

The Democrats may see Thompson's recession-proof reserve as evidence that Illinois can afford one more bite out of its tax base.

In a broad sense, any fiscal fight between the governor and the opposition party winds up on the floor of the legislature. This is especially true if the opposition party controls the legislature, which has been the case with Thompson and the Democrats until now.

With the 1981-1982 General Assembly, Thompson gains a Republican House, which should only increase the control over spending that he exercises as governor. And, with Jim Edgar as secretary of state, Thompson has another Republican on the executive team.

As secretary of state and highest ranking Democrat among the constitutional officers, Alan Dixon had avoided the role of spokesman for the opposition. The Democrats have only Comptroller Roland Burris and Treasurer Jerry Cosentino in the executive branch, and it is Burris who has emerged as spokesman for the Democrats.

The issue in the fiscal fight between Thompson and Burris centers on the transfers of monies between state accounts. Burris charges Thompson with manipulation in order to artificially lower the reserve for the general funds. Thompson, of course, says he's only being fiscally prudent and that only a strong reserve will save Illinois from bankruptcy.

But as the 1981 legislative session gets underway, Thompson may try to maintain the reserve, fund the road program and keep spending increases under 5 percent.

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