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Past Due: Special Funds Blur Budgeting Process

WUIS/Illinois Issues

A version of the story first ran in Illinois Issues magazine in April 2012. It has been updated with new information.

The state’s complicated budget mess is a source of headlines for the media and headaches for those who administer state-funded programs and the politicians whose job it is to solve the problem. But most people — politicians, reporters and Statehouse commentators alike — only focus on four out of hundreds of funds when it comes time to craft the state’s budget each year.

  The four funds, commonly referred to together as the General Funds, make up much of the operating spending in the budget. But according to the comptroller’s office, there are 727 other active funds. (You can check out all the funds on the comptroller’s website, if you are so inclined.) Special funds have a variety of uses. They can be a place to put federal money that is designated for a specific purpose, such as fund number 657, which holds federal dollars for the Illinois Arts Council. They can hold fees collected for a certain function, such as fund number 655, which holds money made from issuing special license plates. The money from that fund is supposed to be spent on benefits for surviving family members of police officers killed in the line of duty. Fund number 515, the Local Distributive Fund, contains tax revenues collected by the state that are funneled to local governments. While these funds can help those crafting the budget keep all those requirements and priorities straight, at best they can make the budgeting process opaque; at worst, they can be used to obscure budgeting tricks. 

In recent years, governors have proposed and lawmakers have approved so-called sweeps of money from such funds to cover the state’s operating expenses. Other times, the money was borrowed and paid back later with interest. Multiple grabs at these designated accounts have left the groups that rely on the revenue wondering how special the funds really are. 

Gov. Bruce Rauner’s budget plan for Fiscal Year 2016 calls for tapping revenue that would typically go to some special funds. For instance, he would cut by about half the share of income tax that is distributed to local governments. He has also asked for special budgeting power to move money around and manage the $1.6 billion shortfall for the current fiscal year.  Senate Democrats propose taking revenue from a laundry list of special funds to pay for programs that have run out of money for FY 15. Senate Bill 274 would allow for the sweep of $580 million to fund such services, including child care for low-income families.

Rauner and Democratic lawmakers seem to be on the same page about the broad-strokes idea of drawing from special funds to help the state’s broken budget limp along through the remainder of the current fiscal year. But the details matter, too, and Rauner and legislative leaders have been unable to work out a deal so far. Senate Republicans are critical of SB 274. They argue that the bill could sour ongoing talks between Rauner and the leaders. Still, it seems likely that some special funds will give up a portion of their cash for operating costs in FY 15 and possibly FY 16, too.

All this moving around of spending can also make it very difficult track the budget from year to year. When the Fiscal Futures Project sought to create budget projections, professors from the Institute of Government and Public Affairs (IGPA) at the University of Illinois discovered that they first had to make sense of the state’s budget. From year to year, spending shifted back and forth through the budget’s hundreds of funds. Fund sweeps also dumped money from special funds into general spending. “We started to build a budget projection model for the state of Illinois, feeling the lack of long-term planning in the state budget,” says Richard Dye, an economics professor at the University of Illinois Chicago and public finance expert with the IGPA. “We found that there was no consistently defined state budget. …There were things that moved in and out of the [General Fund]; there were transfers from [the General Fund].”

The group found that those changes sometimes made it difficult to understand how much the state actually spends and on what. The IGPA weighed Illinois’ budget transparency against other states. When it came to the use of special funds, Illinois did not fare well. The state did not have a large number of special funds when compared with other states. However, Dye said it is not the use of such funds that makes Illinois’ budget hard to understand; it is the fact that spending is reclassified and swapped from fund to fund under different budgets with no clear rhyme or reason, making it difficult to keep track of. “It isn’t whether on average or overall you have a lot of general revenue funds or a lot of special funds. It’s about whether or not from one year to the next there is a lot of movement,” Dye says. 

The group’s report says: “For most states, the year-to-year change in transfers is very small: 20 states have standard deviations of less than 1 percent and another 18 are below 3 percent. Ten states, including Illinois, have variation in the 3 to 6 percent range, suggesting that these are states with a higher degree of budget obscurity.” In a time when Illinois is often earning unfortunate distinctions, such as the lowest credit rating in the nation or the third most corrupt state, residents can be relieved that in this study it was not among the worst of the worst. “Alabama and Wyoming are the outliers, with cross-year variation averaging a whopping 13 and 18 percent, respectively.” However, under the rankings the project created for transparency related to funds, Illinois fell in the bottom 15 for all but one category. 

To address the transparency problem, Dye advocates that governors present a more comprehensive version of the budget, which would include some of the larger funds outside of the General Revenue Fund: “a more meaningful list of 50 funds that would get transportation and some of the big federal funds.” 

While hundreds of funds can cloud the state’s spending, those who have observed —and at times been a part of — Illinois’ budgeting process over the years agree that they serve a purpose. “You don’t want simplicity just for simplicity’s sake,” says Kent Redfield, an emeritus professor and political scientist at the University of Illinois Springfield.

“Most special funds are special because a particular revenue source has been linked to a particular spending, which is good in terms of control,” Dye says. 

Steve Schnorf, a former director of the Bureau of the Budget under former Gov. George Ryan, says that funds outside of the General Revenue Fund have grown out of the budgeting process. “A lot of it comes from the way our funding of services has developed over the years,” he says. “A fee is charged for a certain government activity [such as issuing hunting or fishing licenses], and that fee goes into the special funds dedicated to that service.”

Special funds sometimes hold money that has been entrusted to the state by outside entities to be spent on certain goals or from revenue streams that are set up with a specific intent. They can also help ensure that money, such as federal funding, is spent on programs for which it was intended. “You’ve got federal things that come with strings,” Dye says. “You can account for it that way by making payments only out of that fund and for that purpose.”

However, the Illinois Supreme Court has ruled in 2011 that lawmakers have the authority to move money from designated funds and use it for general spending. 

If you've trusted something to the government, then it's your fault.

The Cycle Rider Safety Training Fund contained money that was intended to be spent on motorcycle training classes. But in 2003 and 2004, about $1.2 million was moved out of the funds and used for general spending. The motorcycle advocacy group ABATE sued the state, claiming that the money came from surcharges that were added to licensing fees for the explicit purpose of paying for the class and should therefore be protected. The court disagreed. “The money which enters the CRSTF is simply a percentage of the fee collected by the state for the registration and licensing of motorcycles. Clearly, the fee charged by the state for motorcycle registration and licensing is state revenue,” said the opinion written by Supreme Court Justice Anne Burke. At the time of the opinion, the fund contained about $10.8 million. “If you’ve trusted something to the government, then it’s your fault,” bemoans George Tinkham, a Springfield lawyer who worked on ABATE’s case. 

Redfield says it makes sense for lawmakers to do some fund sweeps if large amounts of revenue are sitting around unused. However, he said if funds are growing large surpluses, perhaps it is time to rethink the fees that provide their revenue. “If you’ve got a huge excess in the fund that licenses horseshoes, maybe you should charge less for licensing horseshoes.”

Perhaps the most controversial sweeps in recent years came from charitable funds that taxpayers contributed to by checking a box on their income tax returns. The Illinois Times reported that Quinn swept more than $400,000 from such funds in Fiscal Year 2010 and borrowed more than $1 million from them in FY 2011. After the issue made headlines, some lawmakers proposed legislation to bar such sweeps from happening. Laws protecting specific funds create another hurdle to sweeps, but future General Assemblies could choose to repeal them.

“The question is, do we need to have a constitutional amendment to protect special funds?” asks Tinkham.  He says that persuading lawmakers to pass a constitutional amendment that would limit their budgeting powers would be difficult. “It wouldn’t necessarily be impossible, but it would take a lot of effort, and it would take a lot of convincing.” Tinkham says such an effort would require support from groups, such as ABATE, that have an interest in protecting special funds. He says support would have to come from “all over the political spectrum” and “all over the social fabric of Illinois.” 

We've protected pet political projects over time, and they haven't been reviewed in the budget process. Now some of those projects may have merit, some of them may not, but how is the public supposed to know?

  But in tough budget times, should some areas of spending be shielded from scrutiny? Sen. Dan Kotowski, who sponsors SB274, has said he opposes sweeping charity funds, but he supports taking a look at money that is automatically transferred out of the General Revenue Fund into other funds each year. “There’s no reason why we should have $1.1 billion in the state budget that’s not reviewed in the appropriations process,” he says. 

Kotowski — who sponsored budget reforms called Budgeting for Results, which were signed into law in 2010 — says lawmakers need to put sacred cow programs on the table. “We’ve protected pet political projects over time, and they haven’t been reviewed in the budget process. Now some of those projects may have merit, some of them may not, but how is the public supposed to know?” Kotowski said that to Illinois issues in 2012. His rhetoric about special funds has gotten a bit stronger since then. He said in a statement this week: “I have led the charge to reform our state budget to protect taxpayers who have worked hard and played by the rules. We must continue to tap into the nearly $1 billion in excess funds reserved for special interests. I encourage my colleagues on both sides of the aisle to join me in putting people over potholes.” Which “special interests” are some lawmakers looking to ding? The list in SB 274 includes the Road Fund, the Motor Fuel Tax Fund, and funds for registration, permitting, certification and discipline of professionals, including lobbyists, pharmacists and tattoo artists.  The list also includes funds that support services for sexual assault victims, the state’s forensic crime labs, the disposal of prescription drugs and drug use and violence protection programs.

Schnorf, who serves on the Budgeting for Results Commission, warns that many of the automatic transfers were put in place as a solution to a budgeting problem and can represent hard-won compromises. “Most of those are there because of agreements that were reached some time in the past.” He says lawmakers must take care when scrutinizing the transfers to make sure that they understand the history of each one. “They just didn’t pop out of nowhere for no reason.”

Redfield says that if lawmakers continue to tap special funds and transfers to keep the operating budget above water, “it really doesn’t make any sense to have any special funds at all.”

He says such practices allow policymakers to avoid making difficult choices and presenting tough decisions to their constituents back home. “You’re never going to have that conversation, but you ought to have that conversation,” Redfield says. “You need to have that conversation about what we can and can’t afford.”

Schnorf says it is fair to give the General Revenue Fund more attention because that is where the bulk of budgeting decisions are made. Many funds have the same revenue streams and spending priorities year after year. “The other funds deserve scrutiny, but not to the level of [the General Revenue Fund].”

As for the transparency issue, Schnorf is skeptical about the public’s desire to understand the budget. “Go sit at McDonald’s and listen to the conversations sometime.” Schnorf says the budget will not be the primary topic of discussion. “I don’t believe that 99 percent of the populace have any interest in understanding the budget.”

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