Illinois politics has been rife with consternation and partisanship for several years. This distasteful state of affairs has persisted through changes in the Illinois economy, the national economy, world events, and leadership changes at the federal and state levels.

Our state has undergone substantial leadership changes in recent years that go beyond the occupant of the Governor’s office. Half of the legislative leadership has turned over since 2008 with the election of two new caucus leaders in the Senate. Yet our political problems remain. Why does our state government remain in gridlock? Where are the solutions to be found? Can the next Governor, whomever that may be, work cooperatively with the General Assembly to finally ease the tension that has come to personify Illinois politics? These are questions that will be answered soon enough. In the meantime, we are still left with a need to diagnose what ails our state.

A strong case can be made that the road out of political serfdom must begin with addressing what has become a quintessential “rite of spring” in Illinois - our annual budget crisis. The pressures of a mounting state deficit and the resultant pain that would be inflicted in order to close this deficit incubate an environment of fear, blame and procrastination among our political class. One might conclude that the budget deficit has become an open wound that continues to fester within our body politic.

As the state budget comes to dominate our politics and policy choices, it becomes of paramount importance to understand the budget as a serious policy issue. How does the budget process work? What is in the budget? We often hear that “Illinois has a large budget deficit,” but what does that mean? How bad is it really? This article is intended to serve as a tutorial of sorts to foster a greater understanding of the state budget.

THE BUDGET PROCESS AND BALANCED BUDGET REQUIREMENT

The state budget has been referred to by one policy organization as “the state’s fundamental policy document” and, as such, is the centerpiece of each legislative year. Every year the Governor, per the Illinois Constitution, must prepare and submit a budget to the General Assembly for its consideration. The budget document includes recommended spending levels for state agencies, estimated funds available from taxes and fees, transfers, and state debts and liabilities.

The executive branch actually begins developing a budget for the next fiscal year as early as the beginning of the present fiscal year on July 1. Each state agency tracks the cost of potential spending pressures associated with maintaining current service levels as well as for any service and programmatic expansions. The Governor’s Office of Management and Budget tracks agency spending estimates. These estimates are more carefully honed in November and December in anticipation of a budget proposal being submitted to the Governor by the Office of Management and Budget. During this time, the state agencies work with the Office of Management and Budget and the Governor’s staff to adjust their budgets to conform to the latest available revenue estimates.

In addition to their operating budgets, each state agency also develops a capital budget. The capital budgets involve spending on state facility projects. These projects are then ranked by priority. Other capital spending projects, such as highway construction, mass transit and airport facilities, alternative energy or school facilities are also reviewed and prioritized based upon expected revenues.

Once all of the spending requirements and revenue estimates are known, the Governor presents the initial budget to the General Assembly. State law requires that the Governor present his recommended budget no later than the third Wednesday in February of each year. Following the release of the recommended budget, the General Assembly exercises its oversight authority by holding appropriation hearings. The budget document begins to change as a result of these hearings and eventually goes before the full House and Senate as a series of appropriation bills. In a perfect year, these final floor votes occur toward the end of May. In recent years, disagreements involving the budget have forced the General Assembly into overtime session where a 3/5 majority is required to approve each outstanding appropriation bill that was not approved by each chamber prior to the May 31 deadline.

Under the Illinois Constitution, the state must produce a balanced budget annually. The Constitution specifically reads that “Appropriations for a fiscal year shall not exceed funds estimated by the General Assembly to be available during that year” (Article VII Section 2). Illinois’ budget has historically operated on a “cash basis.” This means that expenditures are made from available cash balances. A cash basis provides for three different views regarding what constitutes a balanced budget. The first view compares receipts and expenditures during a fiscal year. The budget is considered balanced if these numbers match. A second view compares the balance at the end of the year to what is referred to as “lapse period spending.” Lapse period spending allows the state to pay bills from the previous fiscal year using appropriations from the previous fiscal year even though the state has moved into the next fiscal year. The “lapse period” is typically two months into the fiscal year. The Office of the Illinois State Comptroller considers “lapse period” spending to be the most comprehensive approach to budgeting. Yet a third view examines changes in budgetary balance. If the budgetary balance improves throughout a fiscal year, the budget is considered “balanced” even if a deficit remains.

THE BUDGET STRUCTURE

The FY2011 state budget contains $58.7 billion and consists of ten primary types of funds that exist as an umbrella over approximately 650 active funds. The primary fund over which the General Assembly and Governor have the most discretion is the General Fund. The General Fund is the largest of the state funds and contains $27.7 billion for FY2011 expenditures. This represents 47% of the overall budget. Revenue deposited into the General Fund is generated from individual and corporate income taxes, sales taxes, public utility taxes, federal aid, lottery and riverboat taxes, and a small percentage of other sources and transfers. The General Assembly and the Governor appropriate General Fund money for education, human services, healthcare, environmental protection and aging, and the everyday operations of state government. These expenditures come out of several sub-funds of the General Fund that include the General Revenue Fund, the Common School Fund, the Education Assistance Fund and the General Revenue-Common School Special Account Fund.

The remaining nine funds in the state budget include Highway Funds, Special State Funds, Bond Financed Funds, Debt Service Funds, Revolving Funds, State Trust Funds, Other Trust Funds, University Funds and Federal Trust Funds. These funds contain an accumulated $31 billion for FY2011 expenditures. This represents 54% of the overall budget. Unlike the money in the General Fund, the General Assembly has very little to no discretion over how these funds are spent. This is because the revenues deposited into these funds are generated from federal sources with spending mandates and state fees that must be used for specific purposes. Some of the money is also earmarked for paying the costs associated with borrowing money.

THE REVENUE STRUCTURE

State government receives the preponderance of its funding from three separate sources. These sources are taxes, fees and transfers. Taxes include personal and corporate income taxes, sales taxes, property taxes and excise taxes (assessed at a flat rate based upon units, i.e., cigarettes, liquor, motor fuel). Fees are commonly associated with such privileges as license plate renewals and hunting licenses. Money generated from fees are supposed to be used to cover programmatic administrative costs. Transfers represent money transferred from one unit of government to another, such as federal funds received by the state for programs or specified expenditures.

Approximately 59.1% of the state’s $27.7 billion General Fund (that part of the budget over which the state has most discretion) was funded through state taxation in FY2010. Federal aid constituted the second highest contribution at 22.3% of the General Fund. The remaining General Fund money came from fees, lottery/riverboat revenues and other transfers in FY2010.

In FY2011, approximately 64% of the state’s $27.7 billion in General Fund revenue is estimated to be funded through state taxation. Federal aid is estimated to account for 22.5%. The remaining General Fund money is anticipated to come from federal aid, fees and lottery/riverboat revenues.

THE APPROPRIATION STRUCTURE

Appropriations are made from the General Fund across several critical areas. In FY2010, human services received 40.7% of all General Fund Revenue. The next highest appropriation was for education at 35.5%. The remaining expenditures were for government services (17.4%), public safety (5.6%), economic development and infrastructure (0.5%), and environmental and business regulation (0.2%). Some policymakers contend that deep budget cuts are not legitimate options because the cuts would come out of vital appropriations considering that human services, education and public safety made up approximately 82% of the General Fund budget in FY2010.

STATE-SHARED REVENUE

A payment of particular interest to local governments is state-shared revenue. Local governments receive 10% of both the corporate and personal income tax revenue collected by the state after refunds. In addition, local governments receive 20% of total state sales tax imposed by the state. Other sources of state-shared revenue include the Personal Property Replacement Income Tax (a 2.5% tax imposed on corporate income and a 1.5% tax imposed on the income of partnerships, trusts and S corporations); the Electricity Distribution Tax (a tax based upon kilowatt hours that is imposed on electric utilities or alternative retail electric suppliers that distribute electricity for use or consumption); the Invested Capital Tax (a tax imposed at 0.8% on certain electric cooperatives, natural gas distributors and water companies); the Telecommunications Infrastructure Maintenance Fee (a fee imposed at 0.5% on persons in the business of transmitting, supplying or furnishing telecommunications); the Motor Fuel Tax (a tax of 19 cents per gallon of motor fuel and 21.5 cents per gallon of diesel fuel); and the Gaming Tax (a tax on operator license fees and a 3% tax on gross proceeds of charitable games).

THE STRUCTURAL DEFICIT VS. THE ACCUMULATED DEFICIT

Illinois has over the years developed what is referred to as a “structural deficit.” Simply put, a structural deficit refers to a revenue system that cannot generate sufficient money to keep up with the increasing cost of providing services, even if the service levels remain relatively static and the economy booms. State leaders are joined by independent public policy groups such as the Civic Federation, the Civic Committee of the Commercial Club of Chicago, and the Center for Tax and Budget Accountability in agreeing that the Illinois budget is plagued by a severe structural deficit problem. This problem will only worsen over time in the absence of consequential fiscal policy changes in Springfield. The difficulty, of course, is in garnering enough political support to chart a new direction in fiscal policy since various leaders and policy groups present different solutions.

So what is the structural deficit expressed as a dollar amount? Keep in mind that the structural deficit for a given fiscal year represents a ‘built-in’ shortfall of revenues compared to expenditures for that year. Once again, different groups offer different estimates, but they are fairly consistent. According to the Taxpayer’s Federation of Illinois, the “acknowledged structural deficit” for FY2011 is $6.3 billion. The Taxpayer’s Federation of Illinois’ own estimate pegs the FY2011 structural deficit as slightly higher at $6.7 billion. The Civic Federation has not put forth an estimate for the structural deficit. The Center for Tax and Budget Accountability estimates the FY2011 structural deficit at $4.2 billion.

The “accumulated deficit” differs from the structural deficit in that it represents the dollar amount of previous annual deficits carried-over into a current fiscal year. The accumulated deficit grows when the state seeks to reduce the structural deficit by either borrowing money to make payments (deficit spending) or deferring payments until the next fiscal year (such as money owed for pensions and to vendors doing business with the state). Fiscal policies that entail borrowing or payment deferrals ultimately shift costs to future fiscal years, thereby adding to the accumulated deficit. The combination of cost shifting, deferred payments, and unaddressed structural deficits begin to cause significant and mounting financial obligations to accrue into future years.

As with the structural deficit, policy groups offer differing estimates as to the dollar amount of the accumulated deficit for FY2011. Per the Taxpayers’ Federation of Illinois, the “acknowledged accumulated deficit” is $12.2 billion. The Taxpayers’ Federation of Illinois independent estimate has the accumulated deficit between $13.6 - 14.3 billion. The Civic Federation believes that the accumulated deficit is $12.9 billion. The Center for Tax and Budget Accountability estimates that the accumulated deficit for FY2011 is $13.7 billion. The Civic Committee of the Commercial Club of Chicago provides an estimate of $14-15 billion for FY2010. Each of these groups acknowledges that a key contributor to the deficit is the growing costs associated with the state’s pension funds. The enactment of SB 1946 was an attempt to begin reigning in some of the long-term pension costs.

So, how bad is this accumulated deficit? One need only compare the estimates above to the $27.7 billion within the General Fund. Each of the estimates places the accumulated deficit at approximately half of the total revenues available in the General Fund. That’s a sobering amount of debt by any standard and, unless addressed promptly, endangers state programs and services and threatens to undermine the Illinois economy.

State leaders will have some very consequential decisions to make following the November elections. Many prognosticators believe that the General Assembly will seek to address the structural deficit as early as the Fall Veto Session. This could entail substantial changes to the state’s system of revenue collection and expenditures. This process may prove painful, but the cost of deferring difficult decisions could prove to be even more painful than the cure.