Slowly but steadily, Illinois’ fiscal fortunes appear to be on the road to recovery after two years of falling revenues and unprecedented budget deficits.

The prognosis — one of guarded optimism — emerges from a review of recent reports from the legislature’s fiscal agency and from state Comptroller Judy Baar Topinka. The encouraging signs include:

• Almost $4 billion growth in base revenues during Fiscal Year 2011, which ended June 30, helping to produce a closing general funds balance more than triple that of a year ago.
• Roughly $1 billion less in unpaid bills at the comptroller’s office to start the new budget year than were on hand on July 1, 2010.
• An FY 2012 budget crafted to spend less than revenues expected to come in during the year.

Perhaps the most welcome sign is the revenue growth. To be sure, the income tax rate increase enacted in January was the main reason receipts grew, and a tax amnesty program last fall also played a key role. But other factors were at work, too.
“The magnitude of the effect of those items (tax increase and amnesty) served to mask the underlying improvement in the economic sources that was happening simultaneously with the tax changes,” wrote revenue manager Jim Muschinske in the year-end report of the Commission on Government Forecasting and Accountability. “While impossible to dissect and assign values to each, it was clear from receipting performance that revenues were recovering from last year’s dismal showing which saw receipts plunge over $2 billion,” he noted.

Among major sources, personal income tax receipts jumped $2.7 billion, to $11.2 billion net of refunds, while corporate taxes rose $491 million, to $1.9 billion net of refunds. Sales taxes were up $525 million to $6.8 billion, the commission reported. 

In fact, the FY 2011 take of $30.5 billion was the first general funds revenue growth in three years, following drops of $2 billion in FY 2010 and of $515 million in FY 2009.

The extra cash helped the state to end the fiscal year with $469 million in the bank, up from $130 million a year earlier, according to a report from the comptroller.

“After three years of declining end-of-year ... balances, fiscal year 2011 has concluded with Illinois in a better position than it was 12 months ago,” Topinka wrote in the July Comptroller’s Quarterly. “But that improvement may be temporary, as not all of the state’s liabilities for the year — such as certain health insurance bills and tax refunds — have been factored into the equation.”

The comptroller said the June 30 bill backlog, some dating back to January, totaled some $3.8 billion, down from $4.7 billion last year. But an additional $1.3 billion in vouchers could be in the pipeline, along with almost $2 billion in unpaid state employee health insurance bills and unpaid corporate income tax refunds.

“Even more important than the end-of-year snapshot, though, is this reality: Illinois continues to face staggering long-term financial challenges,” Topinka wrote. And while the state “appears to be improving its overall financial condition, it will take time to regain its fiscal footing.”

Rough spots surely lie ahead — Topinka pointed to a likely ongoing backlog of bills in her office and significant delays in payments to vendors — but the FY 2012 spending plan now in place should provide a good foundation.

For the first time in a long time, lawmakers fashioned a budget based on their best guess as to how much money will come in to cover its outlays. Their approach was in sharp contrast to the last two budgets they gave Gov. Pat Quinn, neither of which made any pretense of matching outgo to income, but instead gave the governor huge pots of money and unprecedented authority to spend it as he wished. The catch, of course, was that allocations far outstripped the cash in FY 2010, leading to a record budgetary deficit of $6.4 billion. Coupled with the $3.7 billion deficit for FY 2009 — former Gov. Rod Blagojevich’s last budget — the two-year red-ink tsunami surpassed the total of all the budget deficits the state racked up over the four previous decades of annual budgets. The final tally for FY 2011 won’t be known until the end of the calendar year, when the last of the bills have to be paid, but the deficit seems sure to be much less than FY 2010, thanks to the tax increase and improving economic conditions.

And when FY 2012 ends next summer, Illinois might even see a surplus for the first time since 2001, thanks to expected continued revenue growth — almost $3 billion net despite the loss of $1 billion in federal stimulus funds — if lawmakers continue their budget restraint. The General Assembly approved a $49 billion budget for FY 2012, including $23.9 billion in general funds, both substantially below the corresponding FY 2011 authorizations. The budget provided the full $4+ billion payment to the state’s woefully underfunded retirement systems. Quinn trimmed the bottom line even further, to $23.5 billion in general funds, some $5.7 billion less than the FY 2011 number.

Advocates objected that the cuts came disproportionately from education and human services, and efforts to restore funding seem certain in the fall session. Moreover, lawmakers cut some programs without changing the statutory provisions that govern spending. One notable example was a $152 million reduction in general state aid, the program that provides the largest chunk of money that goes to local schools. But legislators didn’t change the law that guarantees each school district at least $6,119 per student. As a result, the money likely won’t cover all the eligible claims over the entire school year, officials said.

More problematic, the legislature didn’t provide enough money to cover contractual pay raises for state employees, so Quinn refused to honor the contract, a decision that state worker unions are challenging in court. The governor also faces legislative pushback on his effort to cut Medicaid provider fees and to revamp state employee health care programs, moves he contends that are necessary to hold down costs. Should Quinn not prevail, spending likely would go up.

And long-term, of course, the state still faces huge unfunded liabilities in its pension systems. For now, though, Illinoisans can be heartened by the signs that the outlook is improving for state finances.

Lawmakers approved — with but a single dissenting vote — landmark education reforms.

Charles N. Wheeler III is director of the Public Affairs Reporting program at the University of Illinois Springfield.

Illinois Issues, September 2011