Fiscal 1990's first quarter financial picture

For the first quarter of fiscal year 1990 the state's fiscal health continued sound. But the first quarter of the state's fiscal year — the months of July, August and September – tells little about where the state will end up, and the financial picture does not become clear until after income tax time in April. The first quarter tells even less this year because of uncertainty over revenue growth attributable to the income tax hike and because of the uncertain national economy.

For the first quarter of fiscal year 1990, general funds revenues totaled $2,959 million and general funds expenditures totaled $2,887 million. The $72 million surplus of receipts over spending in the quarter boosted the available cash balance from $541 million on June 30, to $613 million on September 30.

On the revenue side the individual income tax continued to lead the way. Income tax receipts rose from $786 million in the first quarter of fiscal 1989 to $828 million in the same months this year. The $42 million overall increase amounted to a 5.3 percent hike.

Strict comparison of personal income tax receipts between fiscal years 1989 and 1990 is impossible because of the refund fund created by lawmakers in January. To speed refunds owed taxpayers, lawmakers opted to set aside 6.4 percent of personal income tax receipts in a separate fund from which income tax refunds are paid. The change produced offsetting reductions in both general funds revenues from the personal income tax and general funds spending for personal income tax refunds. In the first three months of the current fiscal year there was $60 million in personal income taxes paid into the refund fund instead of the general funds. The refund fund did not exist in the first quarter of fiscal year 1989, and if for comparison's sake we pretend that it did not exist this year, income tax receipts would have been up $102 million, or 12.97 percent.

That brings us to the second big difference between the two years, the tax rate. Lawmakers hiked the personal income tax rate by 20 percent on July 1, boosting it from 2.5 to 3.0 percent for a two-year period. What the increase generated is impossible to measure because it takes a couple of weeks before the state begins to collect money based on the higher rate.

Then, not all of the tax increase money goes into the General Revenue Fund. Lawmakers divided the proceeds three ways: to education, to local governments and to higher income tax deductions for homeowners. As part of the tax increase 5.9 percent of collections after the refund fund set-aside are paid into the Income Tax Surcharge Local Government Distributive Fund and divvied up among municipalities and counties. In the first quarter of fiscal year 1990 those payments totaled $52 million and were not counted as general funds receipts.

Another 7.3 percent of after-refund receipts is transferred to the Education Assistance Fund from which it is appropriated to schools, colleges and universities. The comptroller has classified the Education Assistance Fund as one of the general funds, and the $64 million transferred to it is included in the $828 million in general funds income tax receipts.

The state's other income tax, the corporate income tax, continued its pattern of volatility into the first quarter of fiscal year 1990. The current year's collections were $105 million, down $38 million or 26.6 percent from the previous year. The $28 million diverted for income tax refunds did not account for the loss, which would have been $10 million or 7.0 percent without the refund fund. And the decline came despite a 20 percent increase in the tax rate, from 4.0 to 4.8 percent. As part of the tax increase package $7 million in corporate income tax receipts was diverted to the Income Tax Surcharge Local Government Distributive Fund and $8 million was paid into the Education Assistance Fund.

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Illinois' largest single state tax source, the sales tax, saw sluggish growth from $927 million to $953 million in the first quarter of the current fiscal year. The $26 million increase is 2.8 percent more than fiscal year 1989 receipts. The increase would have been larger except for an increase in diversions to other funds. Build Illinois diversions increased from $39 million in the first three months of fiscal 1989 to $56 million in the first three months of fiscal 1990. The money will be used to pay debt service on Build Illinois projects including rehabilitation of Navy Pier, university science facilities and sewer plants. Some will be transferred back to the general funds later this year because the bonds it will pay off have not yet been sold. The other increased diversion of sales tax was the transfer to the Local Government Distributive Fund that was part of last year's sales tax "reform" package. Local governments get .4 percent of total sales tax collections as part of the 1988 sales tax revisions that boosted state collections and provided more state money for sewage treatment plants. The .4 percent diversion did not start until September 1, 1988, and the $1 million diverted in its first month was exceeded by $4 million diverted in July, August and September of 1989.

Public utility and cigarette taxes both showed good growth over the previous year. Receipts from the public utility tax increased from $122 million to $150 million, a boost of $28 million or 23.0 percent. Much of that increase reflected the court settlement of the tax on out-of-state telephone calls as the state was able to receive money that a year before had been paid into protest funds. That settlement also provided a boost to transfers from the protest fund. In September the state nearly closed out the books on the long distance call tax. The settlement brought $50 million into the state general funds from the protest fund, an increase of $33 million in what had come from the protest fund in the first quarter of 1989.

Cigarette taxes were up from $55 million to $71 million, an increase of $16 million or 29.1 percent. The revenue increase reflects the increase in the per pack cigarette tax from 20 cents to 30 cents, along with some earlier purchase of tax stamps to avoid the higher rate.

The lottery continued on the upswing, generating $132 million in profits for the general funds, a 17.9 percent increase. But it is on the upswing from weak first quarter performance a year ago. At the rate of $132 million per quarter, the lottery would generate $528 million for the entire year, below 1989 receipts and 1990 budget estimates. But the lottery performed strongly in the last three quarters of the 1989 fiscal year.

Federal revenues on the other hand were down because the state did not repeat the June and July payments of bills owed doctors, hospitals and nursing homes who care for the poor. Federal revenues, many of which take the form of reimbursement for Medicaid spending, dropped $20 million in the first quarter of fiscal 1990.

On the other side of the ledger, spending was up but not as much as revenues. Total general funds spending in the first quarter of fiscal year 1990 was $2,887 million, an increase of $51 million or 1.8 percent. Overall spending increases were depressed by the refund fund. Spending from the general funds for refunds was reduced because the money is now being paid from the refund fund. Pretending, as we did on the revenue side for comparison purposes, that the refund fund did not exist would add $112 million to general funds spending and bring the percentage increase to 5.74.

Education spending, as a result of the tax increase, was up. Higher education spending from the general funds increased from $255 million to $268 million, an increase of $13 million or 5.1 percent. State aid to elementary and secondary schools rose even more, from $355 million to $401 million, an increase of $46 million or 13.0 percent.

Spending decreases showed up in two areas. General funds debt service spending of $20 million in the first quarter of the 1989 fiscal year was not repeated because the state debt to the federal government for unemployment system was repaid. And spending for Department of Public Aid grants was down $52 million because the state did not have the backlog of Medicaid bills to clear up as it did last year.

For fiscal year 1990's first quarter, revenues were higher and spending lower than the governor's Bureau of the Budget had projected in August. The $2,959 million in actual revenues exceeded the bureau's estimate by $11 million. The $2,887 million in first quarter spending trailed the bureau estimates by $41 million. Together the two figures pushed the amount of cash on hand September 30 upward to $613 million, $52 million above the bureau's August estimate.

The completion of the first quarter also allows the books to be closed on fiscal 1989; spending from the 1989 appropriations is permitted in the first three months of fiscal 1990. That lapse period spending totalled $386 million, an increase of $66 million over that spent in the 1988 lapse period. Despite the increase, lapse period spending remains below historic levels and is higher than only one other year in the last 10. And because lapse period spending was less than the June 30 budgetary balance, the state had a balanced budget under the budgetary balance concept that says cash on hand June 30 should cover spending charged to the previous year's appropriation.

Somewhere beneath increased diversions, new funds and one-time revenues, there is underlying growth in both revenues and spending. On the revenue side the $139 million in growth could be inflated by the $88 million ($60 million personal and $28 million corporate) in income tax receipts paid into the refund fund. That brings growth to $227 million. It could be deflated by the $33 million in released protested long distance telephone call taxes, bringing growth down to $194 million. At $194 million the underlying revenue growth would be 6.9 percent.

On the spending side the $51 million in growth would have been $163 million had the refund fund not been created. Had refunds continued to be paid from the general funds, underlying spending would have grown 5.8 percent in the first quarter of the current fiscal year.

On September 30 the state looked in good shape, but one quarter does not a fiscal year make. On October 13 the stock market plunged 190 points sparking renewed talk of recession and economic slowdown and illustrating how external factors could change the picture by spring.□

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