Two contradictory pledges, more than anything else, have come to define Rod Blagojevich's tenure as governor. Since the campaign trail, the Chicago Democrat has promised he wouldn't hike income or sales taxes to erase the state deficit. And he wouldn't balance the budget by slashing spending on education, health care or public safety.
To his credit, Blagojevich has kept those promises. Amid multibillion dollar deficits, he has steered millions more into K-12 education while expanding health insurance coverage for poor families. But it has taken strenuous fiscal gymnastics to balance those commitments. And in dancing past a tax increase, the first-term governor has stepped on a lot of toes.
In his first two years, Blagojevich choreographed hundreds of small-scale budget maneuvers that, combined, moved state government along without harsh service cuts. And now, with the General Assembly's spring session in its final scheduled month, those strategies will be on display again.
There are a lot of ways to close a budget gap, but few make up as much ground as a general tax increase. And Illinois has leaned so heavily on the nickel-and-dime approach that the governor will need to recycle solutions used in the past two years.
There are a lot of ways to close a budget gap, but few make up as much ground as a general tax increase. And Illinois has leaned so heavily on the nickel-and-dime approach that the governor will need to recycle solutions used in the past two years.
A plan to restructure the state's obligation to public employee pension systems represents the biggest crutch this year. Blagojevich wants to cut benefits for new hires and immediately credit $800 million in long-term savings to the budget year that begins July 1. Because the governor wants to spend more money on education and health care, despite a deficit of $1.1 billion, the pension plan is no small change.
But it's easily dwarfed by the $2 billion in borrowed money Blagojevich spent in 2003, his first year in office. By issuing $10 billion in pension bonds, he shifted a state debt to Wall Street. The pension systems are now investing the bond proceeds in the hope that the returns will eventually cover the $2 billion Blagojevich spent up front.
Back then, the governor argued the state was deftly manipulating the bond market to come up with free money. This year, the cash will come from reining in what he says are overly generous pension benefits for workers who have yet to be hired and aren't likely to retire for decades.
It might sound confusing — borrowing from woefully underfunded pension systems and banking on savings from future employees. But the goal is clear: The state needs cash. As Blagojevich budget aides acknowledge, eliminating a multibillion-dollar state deficit is a multiyear task. They pegged the deficit at $5 billion in 2003, half that last year and slightly more than $1 billion now, on the eve of fiscal year 2006.
An income tax increase, such as the one school funding reform advocates are pushing this spring, could erase those deficits. For every half-point increase in the personal and corporate income tax — currently 3 percent and 4.8 percent respectively — the state could expect to realize about $1.3 billion. But Blagojevich has ruled it out. So, the bigger the deficit, the more creative budget-makers will need to be.
In 2002, the National Association of State Budget Officers published a 12-page report called Budget Shortfalls: Strategies for Closing Spending and Revenue Gaps. It's a blueprint Illinois has used under Blagojevich. And the state will continue to do so if lawmakers go along with the governor's budget proposal for the next fiscal year. Here are some of the main points they'll have to consider:
• Pensions. The association of budget officers says debt refinancing can allow states to take advantage of low interest rates, which is exactly how Blagojevich promoted the pension bond plan that handed him $2 billion in operating cash. Reducing or suspending payments to state pension systems also is listed as an option by the association. But Illinois already ranks 49th among the 50 states in pension funding. So, looking ahead, Blagojevich wants to scale back costs instead by reducing benefits for future employees. Pension actuaries say the move will save only $80.9 million next year, or one-tenth of what the governor wants to credit.
• Fund transfers. As the association of budget officers suggests, states can transfer money into their main checkbooks from dedicated funds — usually those supported by fees. Illinois law-makers did this before Blagojevich, approving one-time transfers of $165 million in former Gov. George Ryan's final year in office. Blagojevich has taken this strategy to a new level. Transfers brought in $520 million last year, and half that in the current budget. In 2003, the legislature also began allowing the governor's budget chief to direct the comptroller and treasurer at any time to move money out of some 400 dedicated funds.
State Treasurer Judy Baar Topinka, a prominent Republican and frequent Blagojevich critic, blocked $78 million of those transfers this spring, arguing the legislature unconstitutionally ceded budgeting authority to the executive branch.
Blagojevich's budget for next year is built on even more fund shifts. Those flush with cash would forfeit much of their balances to an education endowment fund. The move is expected to generate $420 million, which would be spent proportionally over three years.
• Fee hikes. Blagojevich used this solution to generate nearly $320 million in 2003 and another $35 million last year. The first-year hikes also generated headaches. Among the more than 300 fee hikes were higher registration costs for truckers and a new wastewater disposal charge that hit cash-strapped local governments. Truckers and small towns applied enough political pressure to get their fees rolled back a bit last year. Further, the Illinois State Chamber of Commerce won an initial court decision over increased workers' compensation fees. That challenge is headed for the Illinois Supreme Court, with the chamber arguing the state gouged employers and spent the extra revenue on general expenses. Meanwhile, employers, insurers and even boat owners are paying more to do business in Illinois.
• Sin taxes. Also known as excise taxes, they allow government to take advantage of bad behavior. In 2003, for the second straight year, Illinois increased its cut from casino gambling. Riverboat admission fees were increased and the state ratcheted up the tax rate on casinos, taking 70 percent of annual revenues above $250 million.
In Gov. Ryan's last year in office, lawmakers boosted the cigarette tax by 40 cents. And now Blagojevich wants to increase the state tax to $1.73 a pack, a 75-cent hike that would finance his plan to build roads, schools and other capital construction projects.
The governor also would allow the state's nine riverboat casinos to double in size through an auction of new gambling positions he says would generate $300 million for K-12 education.
Moral issues aside, smokers and gamblers aren't the most reliable sources of revenue. The last cigarette tax hike was supposed to net $230 million but fell $62 million short. And the higher casino taxes brought in less than half of the $240 million estimate.
• Corporate taxes. Throughout the years, lawmakers have complicated the tax code with special provisions intended to nurture one industry or another. Blagojevich convinced them to close $323 million of these so-called loopholes in 2003 and another $151 million last year. This year, he wants to make corporations pay a sales tax on prepackaged software, which could bring in $65 million for the Chicago Transit Authority. Ending a tax break for electricity purchased from landfills could bring in $17 million for conservation programs.
Along with those staples, Blagojevich has benefited from a federal windfall of $780 million associated with President George W. Bush's tax cuts. And an amnesty period for state taxpayers brought in $532 million last year. But Blagojevich has lost at least that much in projected cash after legal issues sunk plans to mortgage the James R. Thompson Center in Chicago and auction the state's dormant 10th casino license.
Cutting spending is difficult, too, when education, health care and public safety are sacred cows. Last month, the administration said it needs the legislature to approve another $86 million in spending this year or workers in three state agencies might be forced into taking unpaid furloughs.
Along with most of state government, Human Services, Corrections and Aging had their budgets cut last summer when bipartisan negotiations plunged the legislature into a record 54 days of overtime. While hiking fees or closing so-called corporate loopholes might not be as painful as a general tax increase, together they can add up to frustration for affected parties. That's essentially the assessment Chicago Democratic House Speaker Michael Madigan gave last year after allowing his members to reject $300 million in corporate tax hikes proposed by Blagojevich.
Lawmakers have the next few weeks to respond to the governor's alternatives to tax hikes. But without some fiscal maneuvers, it will be nearly impossible for Blagojevich to deliver on promises to provide schools with $440 million in new money and extend health insurance to 74,000 additional working parents.
Pat Guinane can be reached at capitolbureau@aol.com.
Illinois Issues, May 2005
