The budget shortfall that confronted lawmakers in June had been brewing since 1984 but went undetected for three years because of budgetary manipulations, the General Assembly's fiscal watchdogs have concluded. By the year that ended June 30, that "structural imbalance" between revenues and intended spending had reached $400 million, according to the Economic and Fiscal Commission, the General Assembly's revenue forecasting arm.

"The seeds for the FY 1988 budget crisis were planted in FY 1984," the commission reported on July 1. Flush with money from the temporary income tax and permanent sales tax increases, Illinois began spending to rebuild programs curtailed during the recession years of 1982 and 1983. What followed was spending that exceeded both natural revenue growth and growth from new taxes enacted to fund new programs. Budgetary management techniques "served to temporarily cloak the imbalance," it said.

Talk of a structural imbalance was not new. Gov. James R. Thompson's budget book had begun with the phrase. Lawmakers heard plenty about it during tax hike discussions. And in pronouncing tax hikes dead on June 29, in a presentation some fiscal observers consider one of the most remarkable to come out of the tax fracas, Thompson acknowledged that since 1985 he had signed into law dozens of programs without funds to pay for them: "Many of them I signed against the advice of my director of the Bureau of the Budget [Dr. Robert L. Mandeville], who for 11 years has stood for fiscal integrity and don't sign a bill unless you can pay for it, regardless of how good it is. And I'd say to him, 'Doc, this is a good idea.' And he'd say, 'You can't pay for good ideas with no money.' . . . And I'd sit and say to myself, well, maybe the economy will pick up. Maybe they'll do the right thing next year. Maybe prosperity is around the corner. Maybe, maybe, maybe."

Thompson pledged to end that practice. (Comptroller Roland W. Burris would later jest that the governor "got religion.") Thompson vowed, "We're going back to the old days. By that, I mean we're going to stand for fiscal integrity once more in Illinois. Without any questions. Without any caveats. Without any maybes. Without any promises that can't be fulfilled. "But I wanted you to understand. I wanted the people of Illinois to understand that I will stand in line first to say what I did, no matter how worthy the intent, no matter how much that I wanted to help, no matter how worthy the program or appealing the group, was wrong to do without the money to pay for it. I should not have listened to the groups. I should not have listened to the editorials. I should not have listened to the legislature. The money was either there or it wasn't. I should have listened to Dr. Bob."

To understand the budgetary management techniques used to "massage" the budget, the commission explained the three stages in the budgetary process: introduction by the governor, appropriation by the General Assembly and rolling readjustment by the governor. Failure to balance revenues and spending at stages one and two means more adjustments at stage three. Those adjustments shift authority to the executive branch and reduce legislative oversight, the commission said. They also concealed the shortfall. The commission identified three techniques:

• Drawing on the available balance, the state's cash reserves. When spending exceeded revenues, part of that difference was made up by drawing on cash on hand at the beginning of the year.

• Pushing increased amounts of spending into the July 1 to September 30 ''lapse period." The lapse period is the three months after June 30 during which money appropriated for the fiscal year that just ended can be spent. Delaying the expenditure past June 30 inflates the July 1 available balance.

• Not spending (permanently lapsing) increasing amounts of money, deferring those obligations.

"The continual use of these tools to spend beyond available revenue can lead to fiscal crises such as the one the state is experiencing. Moreover, use of these tools during a period of economic growth could preclude their use during a recession," the commission said.

The commission co-chairs Sen. Dawn Clark Netsch (D-4, Chicago) and Rep. Thomas Ewing (R- 87, Pontiac), who unveiled the report July 1, were most adamant about changing the way tax refunds are handled. Payments are counted as revenue and the refunds as an expenditure. As a result, revenue growth is inflated because growth in income tax receipts prompts growth in refund obligations. The state can use the money while it delays paying refunds to taypayers. Netsch and Ewing suggested that a percentage of income tax receipts be deposited into a special account for refunds, separate from other revenue. The report also recommended:

• Ending the practice of underfunding pensions.

• Requiring the budget to be balanced on available revenues, not revenues plus available cash, to end the practice of commiting to expenditures without money to support them.

• Budgeting based on previous year's spending, not appropriations.

• Requiring that appropriations be balanced with a June estimate of revenues.

• Using a single general revenue fund appropriations bill to make balancing easier and to focus debate on tradeoffs between agencies.

• Requiring that supplemental appropriations be accompanied by identification of new revenue or of funds not to be unspent in order to preserve a balance between appropriations and revenue.

• Requiring notification to the legislature of major permanent expenditures will lapse.

• Shortening the lapse period from three to two months.

Michael D. Klemens