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Illinois Issues
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Ends and Means: Trends Suggest IL Faces Greater Problems Than a One-Time Decline in Revenue

Charles N. Wheeler III
WUIS/Illinois Issues

 

Dark clouds could be on the horizon for state coffers, as the slumping national economy appears to be eroding the upbeat revenue forecasts used to craft this year's state budget. The bad news came in reports last month from state Comptroller Dan Hynes and from the legislature's Commission on Government Forecasting and Accountability. The findings include the following:

• The state's cash flow position deteriorated by $885 million in the first quarter of FY 2008 compared to the similar period a year ago, Hynes noted. The slippage stemmed chiefly from accelerated Medicaid spending and a downturn in sales tax and corporate income tax receipts. Moreover, at the end of September, the comptroller was sitting on almost $1.4 billion in unpaid bills, roughly $1 billion more than a year ago.

• In the first four months of the current budget year, general fund receipts were up $158 million, according to the commission's September briefing. But the gain came from a $169 million increase in federal receipts; all other sources were off $11 million. The recent strong performance of the most closely tied economic sources — mainly sales and income taxes — appears to have ended, the commission noted. While personal income tax receipts are likely to grow at a more modest pace, sales tax and corporate income tax receipts "may well find growth elusive," the commission said, so "it would not be surprising to see revenues struggle in FY 2008."

Forecasting revenues is as much an art as a science, of course, and in recent years the prognosticators have missed the mark on the low side. Last year, for example, general fund receipts grew almost $1.3 billion, roughly double the original $672 million estimate. This budget year's disappointing early results, however, suggest forecasters were too optimistic in projecting $800 million to $900 million in growth in the general fund base for FY 2008.

Still, no one expects a repeat of the first years of the decade, when total receipts fell in both FY 2002 and in FY 2003, leaving a $2.9 billion gap between the estimates used to build the budget those two years and actual collections.

"I don't see any major decline," says J. Fred Giertz, an economist at the University of Illinois' Institute of Government and Public Affairs. While revenues won't grow as rapidly as in the past few years, a shortfall of several hundred million dollars won't represent "the tipping point" between a sound or unsound budget, he says. "We're so far away from solvency it doesn't make a difference anymore," Giertz notes.

Indeed, the state's checkbook account on June 30 — the end of the budget year — has not had enough money to cover unpaid bills for the past six years, since FY 2001 ended with a $300 million surplus. Last year's budgetary deficit was $131 million, which was expected to rise to $144 million this year, according to initial administration estimates.

Moreover, the state's structural deficit — the gap between what the state's revenue system produces and the costs of maintaining current programs — is now more than $3 billion and is projected to more than double in the next few years, according to the Center for Tax and Budget Accountability, a Chicago-based research and advocacy think tank.

To close the gap, the center argues Illinois should revamp its tax system, increasing income tax rates and broadening the sales tax base, while providing substantial property tax relief and more generous tax credits for middle- and lower-income families.

While an outmoded revenue structure may be part of the problem, the long-term anemic performance of the state economy also is a major concern, as highlighted in a recent study by the Commission on Government Forecasting and Accountability.

Titled A Comparative Study of Illinois' Economy, the report disclosed some troubling trends: 

• From 1997 to 2006, Illinois ranked 43rd among all 50 states in economic growth, averaging 4.5 percent a year, compared to the national mark of 5.5 percent.

• Forty-six other states posted higher rates for job growth than Illinois from 1997 to 2006. While the nation averaged 1.14 percent employment growth during that period, the Prairie State averaged a paltry 0.31 percent.

• The state's unemployment rate topped the national figure in almost three-quarters of the monthly reports over the past decade. On average, Illinois posted a 5.3 percent jobless mark from 1997 to 2006, compared to 4.9 percent for the country as a whole.

• While Illinoisans had the 13th highest per capita personal income in the nation at $38,215 in 2006, the state ranked only 44th in personal income growth rate over the prior decade, averaging 3.83 percent compared to the U.S. average of 4.19 percent.

Moreover, the makeup of the workforce in Illinois is changing in ways likely to place further stress on state finances, according to information from the state Department of Employment Security.

The state's total nonfarm employment stood at almost 6 million in August, the state jobs agency reported. That's some 168,000 fewer jobs than in 2002, a 2 percent decline. Perhaps more significantly, the state lost more than 180,000 manufacturing jobs during that period, a 21 percent drop, as well as 97,000 jobs in trade, transportation and utilities, almost an 8 percent dip. At the same time, Illinois gained some 156,000 jobs in education and health, leisure and hospitality, and other services, an 11 percent increase.

Because manufacturing jobs generally pay higher wages with better benefit packages than service industry jobs, the ongoing shift in the employment base is likely to translate into slower growth in income-related revenue sources like the personal income and sales taxes, as well as increased pressure for state-subsidized benefits like health care.

In all, such unsettling trends suggest that Illinois clearly faces greater problems than a one-time revenue slippage. 

Forecasting revenues is as much an art as a science, of course, and in recent years the prognosticators have missed the mark on the low side.


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

Illinois Issues, November 2007

The former director of the Public Affairs Reporting (PAR) graduate program is Professor Charles N. Wheeler III, a veteran newsman who came to the University of Illinois at Springfield following a 24-year career at the Chicago Sun-Times.
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