Illinois Issues: Fiscal Fantasy
Commentary: The time has come to stop talking about a 'truly balanced budget'
“Let’s get a truly balanced budget ... ” Gov. Bruce Rauner and his aides, in various venues on numerous occasions, 2015-present.
Not to downplay the governor’s mantra, but what exactly is a “truly balanced budget?”
And if it means what most folks are apt to think, do we really want a “truly balanced budget?”
Consider the notion of a balanced budget for a family. For the average Illinois family, a balanced budget most likely means that household expenses don’t exceed household income for the period being measured: a month, a year, whatever. That’s living paycheck-to-paycheck. Ideally, we’d hope to do more, setting something aside for the future, too, for college tuition, perhaps, or a retirement nest egg each month without exceeding our income.
But what about the home mortgage? Very few families can pay cash for a house, so most of us borrow, repaying the loan plus interest over a number of years. Does that mean our budget is out-of-whack by tens of thousands of dollars? Or do we just count the monthly mortgage payment as another recurring expense along with utilities, groceries, and other costs in determining whether the household budget is balanced?
How about credit cards? If we can't pay the full balance each month but instead make just the minimum payment, is our budget unbalanced? What if we're able to reduce the ongoing balance from month-to-month,? Does that show a balanced budget?
The same questions can be asked about the state's finances: just add six zeroes at the end of each number. The traditional measure of a balanced state budget has started with the money in general funds, the state’s main checking account, on June 30, the end of the fiscal year. If the available balance is enough to pay all the outstanding bills over the next two months with some left over, the state has a budgetary surplus. If the balance won’t cover everything, what’s left is the budgetary deficit, the typical case in recent years. Illinois hasn’t enjoyed a budgetary surplus since Fiscal Year 2001, which came out $300 million to the good. Since then, it’s been red ink after red ink, most recently a $3.5 billion deficit for FY 2016. So by this measure, to achieve a balanced budget for the current fiscal year, Illinois would have to take in whatever’s needed to pay FY 2017 expenses plus an additional $3.5 billion to fill the FY 2016 hole. Making matters worse, the state already has a huge backlog of bills — $12.4 billion by the latest count from the comptroller — so the chances of achieving a “truly balanced budget” this year is about as likely as the Chicago Cubs winning the Stanley Cup.
The task doesn’t get any easier in crafting a budget for the next fiscal year, which starts July 1, because the FY 2017 deficit is expected to be even larger, with estimates varying from $14.5 billion by The Civic Federation to $5.7 billion, according to Rauner's budget office.
At the same time, as introduced, Rauner's FY18 budget proposal is roughly $7.2 billion out of balance, despite the governor's claims to the contrary. Ironically, his online budget documents provide the proof — a financial walk down page shows general funds outlays pegged at $39.7 billion against estimated revenues of $32.5 billion, based on current autopilot spending levels and existing statutes.
To bolster claims of a balanced budget, the Rauner camp points to another chart on the same page, which conveniently matches spending and revenues at $37.3 billion each. But budgeting rules don't allow governors to count make-believe cuts in crafting a spending plan, like the $1.6 billion in unspecified pension reductions, or wishful thinking, like the $4.6 billion “savings” Rauner booked as “Working together on 'grand bargain.’”
Simple arithmetic shows a “truly balanced budget” for FY18 — one in which all bills are paid and money’s left in the bank — would require some combination of cuts and new revenues in the neighborhood of perhaps $20 billion — roughly equal to 60 percent of estimated resources.
That’s theoretically possible — spending could be cut by one-third, for example, saving $10 billion or so, and income and sales tax rates could be raised by 40 percent to bring in another $10 billion — and voila! a “truly balanced” budget. In the real world, however, such deep cuts would impact voter-popular programs like education and health care, and a 5.25 percent personal income tax wouldn’t win favor with constituents, either.
Why not make the task a multi-year effort, spending less than revenues over several years, with the surplus each year reducing the deficit?
Perhaps the time has come to move away from the fantasy rhetoric and consider a modified “balanced budget” approach. Instead of trying to close the gap in a single budget year, why not make the task a multi-year effort, spending less than revenues over several years, with the surplus each year reducing the deficit, akin to the consumer who pays more than the minimum each month to reduce the credit card balance?
But what about the constitutional requirement for a balanced budget? Contrary to popular belief, the constitutional mandate is not as clear-cut or iron-clad as folks like to believe. Instead, the provision provides plenty of wiggle room, starting with its requirement that governors propose and lawmakers enact budgets in which spending in a given fiscal year doesn’t exceed funds estimated to be available for that fiscal year. “Estimates,” of course, are educated guesses, and traditionally they’ve reflected what's been convenient for governors and lawmakers. Moreover, because the language focuses on a given fiscal year, paying backlogged bills from prior years doesn't figure into the balanced-or-not calculation.
In fact, Illinois has followed the multi-year path in the past. As noted above, the last budgetary surplus under the traditional yardstick was $300 million in FY 2001. But revenues plummeted the following year due in the aftermath of the 9/11 attacks, leading to a deficit of $1.2 billion for FY 2002. In succeeding years, spending was held below revenues, so that by FY 2007 the red ink was just $135 million. Then the Great Recession hit tax collections hard, and the deficit soared to a record $6.1 billion in FY 2010. Aided by the temporary income tax increase in 2011, receipts generally outpaced spending for the next few years, bringing the deficit down to $2.9 billion for FY 2015. But the higher income tax rates rolled back in mid-year, and the deficit began to The Fiscal Futures Project climb again.
Needless to say, fashioning a multi-year spending plan to eliminate the deficit in, say three or four years, would be a much more doable political task.
The Civic Federation, for example, in February proposed a “Budget Roadmap” for FY 2018, a five-year plan to stabilize state finances. Its main recommendations include tight spending controls, higher income tax rates, an expanded sales tax base with a lower rate, and short-term borrowing to pay off the bill backlog. After five years, Illinois would have budget surpluses to build a reserve fund to weather the next economic downturn, under the federation's plan.
Last November, a policy brief from The Fiscal Futures Project of the University of Illinois' Institute of Government and Public Affairs reached a similar conclusion after reviewing the state's financial challenges.
“It is almost certainly not feasible to remedy imbalances of this magnitude by policy changes in a single year,” the researchers wrote. “Rather, climbing out of the hole that Illinois is in likely will require hard choices, fiscal discipline and sustained attention over a long period of time. Because of this, our analyses put particular emphasis on projecting the implications of sustained multi-year policy changes that move Illinois toward fiscal balance.”
With less than a month remaining to the legislature's scheduled spring session adjournment, and a threat looming from credit rating agencies to downgrade the state yet again, the governor — and to a lesser extent the legislative leaders — could do us all a big favor by knocking off the campaign rhetoric and considering seriously the solid recommendations from the economic and finance experts at the federation and at the U of I.
As the Roadmap noted, “The delay in acting on the State’s fiscal problems means that the measures taken now need to be more dramatic and the resolution of the crisis will take longer.” True in February, even more so in May.