Controlling the future growth of government spending is key to solving the state’s budget crisis and turning Illinois’s economy around.
Tax and expenditure limits can be a good way to ensure that government outlays do not grow faster than the public’s ability to pay.
All spending limits are not created equal, however. How they are written and implemented goes a long way in determining if they’ll meet their underlying goals of promoting fiscal stability and responsibility.
Two spending limit proposals before the Illinois General Assembly include HJRCA 59 (introduced by State Representative Keith Farnham) and the Pension Funding & Fairness Act (developed by the Illinois Policy Institute). Both measures seek to limit state spending growth to a reasonable level.
For a detailed analysis of spending limits, see the tables in the full report.
Recommendations for Improvement
Amending HJCRA 59 with provisions from the Pension Funding & Fairness Act will help achieve the ultimate goal of a balanced and reliable state budget.
Strengthen the spending cap.
HJRCA 59 relies on a spending limit tied to personal income growth. In particular, it limits spending growth to the average annual percentage change in average per capita personal income for Illinois for most recent 5 years, as defined by U.S. Department of Commerce.
Had this limit been in place from fiscal years 1997 to 2009, Illinois would have saved a cumulative $29.392 billion over actual general revenue fund spending. Fiscal year 2009 spending would have totaled $27.335 billion, or $1.8 billion less than available revenues.
While the per capita income growth index is a good measure, removing government transfer payments and compensation from personal income calculations can strengthen this limit. This would ensure that government payments to individuals don’t drive more government spending by upping personal income statistics. Had this measure been in place, the fiscal year 2009 budget would have been $27.323 billion.
Another route would be to limit spending to the combination of the growth in inflation plus the growth in population. Had this measure been in place from fiscal years 1997 to 2009, total savings would have equaled $37.376 billion. The fiscal year 2009 budget would have been $26.185 billion, or roughly $3 billion under available revenues.
Apply to funds beyond general revenue.
HJRCA 59 applies to aggregate appropriations and transfers from the general funds. Additional spending out of other funds could skirt the intent of the measure.
For example, the state of Maine sought to impose fiscal responsibility on their budget with LD 1, which focused on limiting general fund spending. After it’s implementation the state saw greater spending out growth of other funds between fiscal years 2005 and 2010, thereby skirting the original intent. To avoid this problem, HJRCA 59 could apply the spending growth index to other funds.
Define “emergency.”
HJRCA 59 allows the governor to define a fiscal emergency. This provides a large amount of leeway; “emergency” should be defined as extraordinary circumstances outside the control of the General Assembly, including catastrophic events, such as natural disaster, terrorism, fire, war, riots, or court orders.
Also, HJRCA 59 doesn’t indicate if an “emergency” year with higher expenditures resets the baseline for future years. This could be used as a loophole and destroy the spending limit’s “slow but steady” growth rate target. It should therefore be clarified, preferably for the baseline to return to the prior non-emergency year spending adjusted for per capita personal income growth.
Require voter approval for spending limit overrides.
HJRCA 59 includes no provision for voter approval on the decision to spend beyond the cap. Voters should have a say if the spending growth index is lifted, especially because they may be asked to pay higher taxes to fund higher levels of spending. The decision to pass a spending cap lift should be approved by a majority of voters, either at the next general election or a special election.
Define Budget Stabilization Fund.
HJRCA 59 should better define how Budget Stabilization Funds are set up, funded, and used. For example, the funds could be directed first to pay down “past due” debt, and then may only be used when revenues available do not match the amount of spending permitted by the spending growth limit.
Define taxpayer refunds.
HJRCA 59 indicates that excess revenues “shall be refunded in a manner and in amounts determined by the General Assembly.” The process and timeline for issuing taxpayer refunds should be explicit. For example, refunds could take the form of permanent broad-based rate reductions, or they could be issued annually to Illinois taxpayers according to the number of exemptions filed on their most recent tax returns. Either way, should the General Assembly fail to lower rates, the Department of Revenue should be instructed to issue taxpayer rebates.
Require liability payments to be appropriated, including pension payment.
HJRCA 59 doesn’t require the General Assembly to appropriate funds for liabilities incurred. For example, the General Assembly could fail to make the annual pension system contribution and still abide by the spending limit totals. It should be clear that the General Assembly must make expected appropriations within the spending limit.
Include a revenue provision.
HJRCA 59 doesn’t contain a provision limiting tax increases. Should the spending growth index allow for expenditures beyond what is available in state coffers from natural revenue growth, a tax increase provision is important to ensure the spending growth index isn’t used as an excuse to take more from residents. Tax increases should require a 3/5 supermajority in both the House and Senate, as well as majority voter approval in the next general elections. Provisions for “emergency taxes” can help address situations that call for immediate, unexpected additional revenue.
Enactment via statue and constitutional amendment.
HJRCA 59 is a constitutional amendment that would go into effect in fiscal year 2014. In the meantime, the measure should be passed statutorily so the benefits could be recognized immediately.
Conclusion
By embracing a strong spending growth index, Illinois will be able to control spending excesses, budget responsibly, and fully fund the annual required pension payment. It will help the government honor its commitments while also honoring its responsibility to the taxpayers—all while launching a new period of growth and government accountability in Illinois.
