The state of the State

By NORA NEWMAN JURGENS

Yellow alert: revenue lags spending

CAUTIOUS may be the best word to describe the mood among the state's number crunchers. The people who keep an eye on the state's fiscal health are concerned that the money is going out at a faster rate than it is coming in.

Bureau of the Budget (BOB) chief Robert L. Mandeville in December had already issued a warning about short-term funding problems as the first six months of fiscal year 1986 showed the state spending more than it was taking in. Comptroller's reports for those same six months show the state taking in only $5,011 billion while spending $5,182 billion. The only thing keeping the state in the black has been the available balance, which is the amount of money left each month after all bills have been paid. In effect, the state is drawing down that balance to pay its bills.

Specifics were elusive in January on the effects of the Gramm-Rudman act on Illinois' current and future budgets. While that act went into its first phase of federal budget cutting to lower the federal deficit, Illinois was closely watching its spending-revenue pattern.

The state had a very healthy $479 million balance available last July 1, the beginning of fiscal 1986. But as spending continues to outpace revenues, the available balance by the end of the fiscal year could be as low as $220 million, according to BOB estimates.

Mandeville does not see the state getting into any trouble this year, but he warned in January that spending cannot continue to grow next fiscal year at the rate it has in fiscal 1986. The budgeted spending for this fiscal year includes major increases for education and for Thompson's Build Illinois program, increases which have resulted in an 8.4 percent spending jump for the first six months compared to the same period in fiscal 1985 (see table 1).

Because revenues have been coming in at a slower pace (increasing only 2.4 percent in the first six months), the BOB has had to ask the state's code departments (those executive agencies that report to the governor) to make some adjustments in their current budgets. For the first time, Mandeville said, he has written letters asking department directors not to spend a total $297 million of this fiscal year's $10 billion general revenue fund appropriation. In essence, Mandeville is requesting that departments keep their spending at or below their appropriations for fiscal 1986; he wants the agencies to forego $260 million that BOB estimated originally wouldn't be spent anyway during fiscal 1986.

The other $37 million not to be spent will be the result of caps that Mandeville has set on the number of employees for each agency. Since the easiest way to help ease the revenue crunch is not to spend and the most direct way to control spending is to limit state jobs, Mandeville imposed the hiring freeze, which he predicts should result in 2,800 fewer state employees by the end of this fiscal year, saving the state $37 million in spending from fiscal 1986 appropriations.

Although he was clamping down on spending, Mandeville reassured the agency directors that his request not to spend should not be applied to any programs already up and running. He also said that there will be no lay-offs because of the hiring freeze.

Education will remain the major spending priority this year and in the future, according to Mandeville. "We want to have enough to fulfill our multiyear commitment to education." The trick will be in finding the necessary funding. Gov. James R. Thompson told the Illinois State Board of Education in January not to expect to get more than the $250 million increase next year that he promised last year. The board has asked for an additional $360 million for fiscal 1987. "There is no way in the world to persuade me or the General Assembly to raise taxes for anything," Thompson told the board. To help pay for the increase in education funding, the legislature last year passed an 8-cent-a-pack increase in the state's tax on cigarettes. The tax almost failed to get off the ground as lawmakers stalled last fall, waiting for congrssional action on the federal tax reduction on cigarettes. (See "The October logjam," December 1985, p. 27.) Thompson had originally wanted the state increase to take effect last October 1, but the increase did not go into effect until December 1. The delay means that additional revenue will show up in the last seven instead of nine months of the current fiscal year; estimates put that extra revenue at $55 million to $65 million through June 30.

Mandeville warned in January that spending
cannot continue to grow next fiscal year at the rate
it has in fiscal 1986

Estimating the amount of revenue to be generated by a particular source such as the cigarette tax is part of the work done by the state's two main economic forecasters: the governor's BOB and the legislature's Illinois Economic and Fiscal Commission (IEFC). They chart the fiscal health of the state, using many of the same tools as the nation's major economic prognosticators. Both the BOB and the IEFC compare Illinois' performance with such indicators as the Gross National Product, the unemployment rate and the Consumer Price Index, using them as a base along with the state's revenue his-tory to come up with their best estimates of future revenues. They must also keep an eye on what goes on in Congress, ever mindful of such potential attacks on state funds as the Gramm-Rudman deficit reduction act. In their January reports, both the BOB and the IEFC predict a modest in-crease in general revenue funds this fiscal year. But the IEFC estimate of $10.535 billion is about $128 million lower than the BOB's — an apparent difference of a mere 1 percent (see table 2).

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A closer look at the two sets of estimates, and the reasons behind them, illustrate some of the different approaches taken by the two bodies. While BOB and IEFC estimates of the revenues to be generated by the increase in the cigarette tax differ by some $17 million, with BOB on the conservative side, a more significant difference shows up in their predictions of the new tax on the private sale of used cars, known as the vehicle use tax and enacted last year to pay for Thompson's Build Illinois program

Both state forecasters have decided that the tax, which took effect October 1, will not live up to their original revenue predictions of between $70 million and $100 million this fiscal year. The BOB is a little more optimistic than the IEFC, which in its January 8 report drastically reduced its estimate, based on the first three months the tax has been collected, from a total of $57 million to $15 million for fiscal 1986. Richard Kolhauser, BOB deputy director, believes that the first three months for the tax are too tentative a base for an annual prediction. Although he is confident that revenue from the tax will increase in the long run, for this fiscal year the BOB has revised its October estimate downward, from $57 million to $36 million.

Perhaps the greatest potential for political controversy shows up in the two different estimates of the basic state sales tax, which generates one-third of the state's general revenues. The IEFC's January estimate projects $3.185 billion in sales tax revenues for fiscal 1986. In its January report, the BOB set its estimate at $3.233 billion, a $48 million difference.

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The lower IEFC estimate is based on what it sees as a "larger than anticipated loss" caused by the increasing consumption of gasohol, which is exempt from the state's sales tax. The IEFC estimates that the state will lose $40 million this fiscal year from the gasohol exemption alone. The IEFC also totaled up the estimated loss to the state in fiscal 1986 from all sales tax exemptions enacted during the last few years: $737 million. Since 1983, the state has been losing more money each fiscal year from the politically popular exemptions to its sales taxes (see table 3). The BOB notes in its estimates that the state will lose about $23 million in tax relief for public utility consumers during fiscal 1986.

The ultimate difference btween the executive and legislative revenue watchers shows up in their estimates of total general revenue funds. They differ by only 1 percent, but that one percentage point equals $128 million, an amount that would fund the total budget for the Department of Conservation. That $128 million would also affect the year-end available balance. If the IEFC estimate is more accurate than the BOB's, a Senate Democratic staff memo cautions that the end-of-the-year available balance will drop into the "$200 million warning zone" and leave the state facing a potential budget deficit as it enters fiscal 1987.

The state's 1987 fiscal year budget will be presented by Gov. Thompson to the General Assembly on March 5. Considering the cautious words of his budget chief, as well as those of the IEFC, indications are that the state has reached a plateau in spending, one the governor may be reluctant to go above during his reelection campaign.

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Revenue estimate assumptions

The IEFC estimates for the general revenue funds (technically a combination of the General Revenue Fund and Common School Fund) show an increase of $40 million over its October projections. All sources of revenue have been revised upward, but the total of $10,535 billion is less than BOB's. The IEFC revenue increase for fiscal 1986 include $65 million in corporate income tax receipts carried over from fiscal 1985, a one-time amount that cannot be relied on for future estimates, according to the BOB. The BOB general revenue funds estimate of $10.663 billion is up $27 million over its October projection. Unlike the IEFC, the BOB provides estimates of state spending. In January the BOB expected the state to spend $10,922 billion, leaving an available balance of $220 million on June 30, 1986. This amount includes Mandeville's request that agencies not spend $297 million in lapse funds.

The IEFC's lower revenue projection is partly due to its omission of any receipts from the state's new message tax. Those receipts — about $52 million -- are being deposited in a Protest fund while the court considers whether the new tax is valid. The BOB includes $16 million collected from the messages tax before the court challenge.

The lIEFC totaled up the estimated loss to
the state in fiscal 1986 from all sales tax exemptions
enacted during the last few
years: $737 million

The IEFC's lower revenue projection is based partly on the fact that Illinois is lagging behind both the national economy and its own rate of recovery from previous recessions. During the 32 months of recovery after the last recession (from February 1983 through October 1985), total state (nonagrarian) employment has regained only 179,100 jobs, or 40.9 percent, of nearly 438,000 jobs lost during the recession. The slow growth is particularly evident in the state's manufacturing sector, which has regained only 12,000 of the 364,000 jobs lost during the recession, according to the IEFC report. Kohlhauser of the BOB pointed out that the growth in employment in Illinois has been slower because Illinois' population has not been expanding as rapidly as the nation's.

Gramm-Rudman's effect

While the BOB and IEFC's January revenue estimates do not reflect how much the state stands to lose under the provisions of Gramm-Rudman, which calls for $11.7 billion reductions in the current federal budget, there will be revenue losses to the state this fiscal year. Mandeville estimated in January that the state budget could lose about $3 million in general revenue funds during the last part of fiscal 1986 and another $3 million the first part of fiscal 1987 (the federal fiscal year ends October 1, three months into Illinois' fiscal 1987).

Other government programs in the state may be harder hit, Mandeville said. These include local governments that receive federal moneys through revenue sharing, mass transit allocations and certain block grants. The state's road program will also be affected, Mandeville said, although the cuts will not be immediate. The Illinois Department of Transportation does not spend each year's appropriation in that year. Any cuts due to Gramm-Rudman will have to be considered as the department makes its long-range plans, Mandeville said.

Looking at the bright side of Gramm-Rudman's effects, Mandeville said that Illinois does not stand to lose as much as other states since the majority of Illinois' share of federal spending comes through entitlement programs such as food stamps, Medicaid, and Aid to Families with Dependent Children, which are exempt from the act's ax. With the uncertainty of a court challenge to Gramm-Rudman and the likelihood of a budget stalemate between Congress and the president, the BOB was reluctant to make predictions of Gramm-Rudman's effect on Illinois' fiscal 1987 budget. Mandeville did caution in January that the "large numbers" appearing in press reports are based on federal spending levels before Gramm-Rudman. A "truer" base for figuring further cuts, he said, will be the amount left after this year's round of cuts.

Using the same logic, the state's revenue estimaters will continue to keep a careful eye on the state's fiscal health, taking into account the fluctuations of the economy as they affect Illinois. And, reflecting the federal reluctance to raise revenues, they will have to convince the state's lawmakers that a little belt-tightening will be good for the state in the long run.

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