AT LAST. The state's budget has finally begun to recover from four years of recession. In fiscal 1985 it's "decent," not "doomsday," a dramatic budget that turned the loss of $800 million in revenue into a gain of $500 million in spending, a "compassionate budget" that spends rather than saves. "This is a budget I'm proud of," Gov. James R. Thompson told the General Assembly March 7, saying the priorities were "achievable" as well as "affordable." And it's elegantly symmetrical, with a $125 million general funds balance going in and coming out. This budget, however, is premised on continued recovery of the national economy. The greatest threat to that recovery, as Thompson told reporters, lies in the federal deficit, which could send interest rates soaring again. The crucial general funds budget is tightly balanced, with revenues at $9.467 billion and spending at $9.647 billion. Those levels are almost exactly the same as the final projections for fiscal 1984 (down $30 million for revenue and $15 million for spending). For the record, the governor called for a total appropriation in all funds of $16.669 billion (up $285 million or 1.7 percent), but spending and revenue levels for the general funds are better indicators of the budget. The total appropriation includes $3.273 billion for construction projects; $1.185 billion is for new appropriations for projects that will begin in fiscal 1985.

Thompson's general funds budget for fiscal 1985 calls for spending $506 million in "new money," modest by pre-recession standards, but almost munificent for this part post-recession year. Although the spending levels are almost the same for fiscal 1984 and 1985, this "new money" results mainly from the payment of $519 million in one-time obligations made in fiscal 1984. Thompson has designated $506 million of that new money to spend on services in fiscal 1985. He could not commit the other $13 million since fiscal 1985 revenues will not cover it.

The lesson, if there is one, is that parceling out $500 million in new money in with fiscal 1985 is just as difficult as it was to cut out $500 million in fiscal 1983.

For all the decisions Thompson made in this first post-recession budget, the General Assembly could object to only two: the thin slices of new money for elementary education and welfare. Each will get only about 10 percent of the total, yet they are the state's two biggest spenders of general funds. In dollars, elementary education and welfare were at the top of Thompson's human services priorities; when the percentages were figured, they fell to the bottom: Elementary education's $61 million is a tiny 3 percent of its huge $2 billion budget; welfare's $39 million is infinitesimal — 1 percent of its $3 million budget. (For the education story, see " 'Educational excellence' decreed in governor's budget," on p. 12.)

As for the second objection on welfare, fiscal 1985 marked Thompson's fourth consecutive budget without a cost-of-living increase for those who receive General Assistance and Aid to Families with Dependent Children (AFDC) from the Department of Public Aid. He also limits hospital reimbursement for General Assistance Medicaid patients at $500 a day. Not in the budget book, but in his budget speech, Thompson promised a 5 percent cost-of-living increase and removal of the cap, starting January 1 on the conditions that the General Assembly accepts his level of spending and that revenue starts coming in higher than estimated by next fall.

In terms of policy change, for the first time under the Thompson administration, it is more prudent for Illinois to spend for services rather than save to bolster the year-end balance. Thompson explained when he briefed reporters on the budget: "The recession taught us an awful lost about cash management; we've learned how to manage better with less in the bank." He recalled, a bit sheepishly, all the years he browbeat the General Assembly into building up the balance. Robert L. Mandeville, Thompson's budget director, predicted the balance will be back to a comfortable $200 to $300 million within two to three years.

The temporary increase in the state income tax made it possible for the state to avoid devastating budget cuts in fiscal 1984; without that revenue in fiscal 1985, the state must spend all the "new money" to avoid cutting services. Thompson's fiscal 1985 budget shows appropriations for all but three of the 74 agencies traditionally listed are higher than they were in fiscal 1983. The only three to show a loss, despite the temporary hike in taxes, were the General Assembly, the Department of Registration and Education and the Court of Claims.

The spending story

Almost all agencies show increases in Thompson's fiscal 1985 general funds budget, and greater gains for some meant less for others. The increases for some agencies, however, came strictly from the "new money." Of the $506 million in "new money," Thompson would spend more than half ($260 million) on human services — which he now defines as including corrections and law enforcement. About 35 percent ($178 million) is spread among the agencies that operate state government, and about 13 percent ($68 million) will help pay continuing bills, such as the debt service on bonds.

In the distribtution of the "new money," Thompson's priorities are clearest in the area of human services. He gave priority to the smaller programs for the old, young and mentally ill. (By agency, these increases and programs are included in box on page 14.)

Overall, Thompson's fiscal 1985 budget hires more state workers but keeps the state's contribution to its five pension system at the same level. The

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state workforce would rise by 2,000, but that's down 6,000 from fiscal 1981, when Thompson froze general hiring. The total appropriation for pensions would rise $48 million, which allows contributions to equal 60 percent of payout and includes a scheduled repayment of funds borrowed in fiscal 1983. In restoring the state's contribution to 100 percent, Thompson is behind the schedule he set in fiscal 1983, when the General Assembly agreed to help solve a cash flow problem by cutting the contribution to about 50 percent and by borrowing $90 million from the pension funds (pension funds have been receiving a high rate of return on investments).

The capital budget for fiscal 1985 appears to show the biggest thaw since Thompson froze general construction in fiscal 1981. Besides completing the construction of three new prisons and expanding three old ones, Illinois will complete two huge projects in fiscal 1985: the State of Illinois Building in Chicago and the Willard Ice Building (new home of all Department of Revenue offices) in Springfield. Other highlights include a microelectronics lab at the University of Illinois and a toxicology lab at the Southern Illinois University School of Medicine in Springfield.

In fiscal 1985, Thompson plans to begin construction of a new prison in Galesburg and to renovate mental health centers in Elgin and Peoria (among 170 renovations of state buildings).

As for roads, Illinois will continue work on the East St. Louis bypass and six freeways across the state. Widening and resurfacing are planned for more than 3,000 miles of other roads.

Of note in the capital budget is Thompson's recommendation to cut bond sales by 3 percent, selling $350 million in fiscal 1985. Debt service would rise more than 33 percent, reaching $433 million ($304 million from general funds). He needs General Assembly authorization before selling a planned $69 million in Capital Development Board bonds this year.

The revenue picture

The revenue story for fiscal 1985 centers on $770 million the state will gain from a variety of sources to offset the loss of $800 million that was available in fiscal 1984 from the temporary increase in the state income tax.

About one-third or $248 million of the $770 million is attributable to economic growth in the state's tax base, Mandeville said. The other sources include: $260 million from the annualization of the permanent 1 cent increase in the state sales tax, $110 million from the state lottery, $97 million from federal aid and — Thompson assumes — $55 million from new "tax management" incentives he wants the General Assembly to pass.

Mandeville said the $248 million from economic recovery represents only the net gain. He said the state would gain a total of $433 million due to economic improvement in the larger sources such as income and sales taxes, but he subtracted a total of $185 million in losses from other revenue sources. Mandeville's specific breakdown for the $433 million growth in state revenue is: $213 million from the income tax, $160 million from the sales tax, $50 million from the public utilities tax and $10 million from the interest earned on state investments.

Excluding the revenue from tax hikes approved last June, a comparison of fiscal 1984 revenue to fiscal 1985 shows the income tax up 7.7 percent, more than double the 3.5 projected in fiscal 1984; the sales tax up 6.3 percent; about the same as the 6.6 percent expected in fiscal 1984.

Overall, however, Mandeville said the sales tax would generate $420 million more in fiscal 1985, an increase of 16 percent. About $260 million or 9.7 percent of that will come from the first full 12 months of collections at the higher rate. Although the hike took effect in January (the middle of fiscal 1984), collections didn't start coming in at the higher rate until March.

Mandeville's revenue estimates may be solid, but $55 million of the $770 million still depends on the General Assembly passing Thompson's two new "tax management" incentives. Thompson says another $35 million could be generated from the income tax by adding more than 100 agents and auditors at the Department of Revenue. The governor wants to create a new Stop Tax Evasion Program (STEP), building on the apparent success of the Tax Enforcement

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Improvement Program (TEIP), which the legislature okayed in fiscal 1982. Since then TEIP has produced about $100 million by adding about 350 agents and auditors. (The extra staff is one reason the Department of Revenue's budget has gone up more than 50 percent since fiscal 1982.) The other incentive would produce a one-time increase of $20 million from the corporate income tax by changing the schedule for collecting the state's Retailers' Occupation Tax (ROT).

Mandeville said the Bureau of the Budget's (BOB) fiscal 1985 revenue estimates for the general funds are neither optimistic nor pessimistic, but rather the "most likely." He predicted estimates could only get better, not worse, and he said the legislature's Economic and Fiscal Commission (EFC) agreed with the BOB's estimates.

Mandeville said the consensus on state revenue estimates stems from a consensus on national economic projections: Chase Econometrics and Data Resources Inc. (DRI) seem to agree on how much the key economic indicators will rise nationally. The BOB projects that in Illinois inflation will run 5 percent in fiscal 1985, up from the 3.7 percent expected in fiscal 1984, while unemployment will be 8.8 percent, down from 10 percent. The BOB projections for Illinois are based on the average of Chase and DRI projections for the nation. Perhaps most significant, Mandeville said, are Chase's and DRI's identical projections of an 8 percent increase in capital investment, which seems to be the crucial indicator for fiscal 1985, as the national economy enters the second phase of recovery. The first phase last year saw a rise in consumer spending; the second phase this year should see a rise in corporate spending, specifically for equipment and other capital expenses, according to Mandeville. He said that capital investment usually triggers a rise in manufacturing, which should be good news for Illinois, whose economy still relies on high-paying manufacturing jobs.

Manufacturing jobs are expected to increase only 2.5 percent in Illinois in fiscal 1985, about the same increase as in fiscal 1984, Mandeville said. By the end of January, Illinois had regained only 48,900 of the 367,700 jobs lost since the end of December 1978, according to Marshall Langberg, executive director of the legislature's Economic and Fiscal Commission. Yet manufacturing is the bright spot in the Illinois employment picture. Overall, employment in Illinois is expected to rise only 1.8 percent in fiscal 1985, far better than the .07 percent expected in fiscal 1984, but still below the 3.1 percent expected nationally in fiscal 1985.

In Thompson's view, fiscal 1983 with its revenue shortfalls and spending crises was the "year of rescue," and fiscal 1984, with the passage of the tax hike package, the "year of renewal." Fiscal 1985 brings a "transition budget — from the old economy and the old base to a new economy and a new base," he told reporters. But Thompson knows that this budget is based on the same gamble as its predecessors: that the recovery of the national economy will last long enough for Illinois to build that new economic base.

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