State spending will increase in 2012. That is, unless additional cuts and policy changes are added to the general fund budget currently awaiting Gov. Quinn’s signature.
Following the close of the spring session, many news outlets reported that the House and Senate had passed a 2012 general fund budget of $33.2 billion that cut overall spending by about one percent from 2011’s $33.5 billion. However, a closer inspection shows there is more than $1 billion in additional spending hidden within the 2012 budget plan. This means real spending for the upcoming fiscal year is at least $34.2 billion – about 2 percent higher than last year.
After the January tax hike, both parties promised taxpayers fiscal austerity. Illinoisans are paying close attention to whether spending has in fact decreased, and asking: Is Illinois on the path to sunset the income tax hike, as promised? Or is the state instead spending at levels that will require taxes to stay high or climb even higher? The unfortunate answer: The recently passed 2012 budget puts Illinois on the path to high taxes and more debt.
Above: video of an Illinois Policy Institute press
conference at the Capitol unveiling this report
The budget plan awaiting Gov. Quinn’s signature has become known as the “House Budget Plan,” since it was the bipartisan proposal that emerged from the Illinois House of Representatives. It proposes less spending than originally requested by the governor, but far more than was suggested in March in the Illinois Policy Institute’s line-by-line alternative budget, Budget Solutions 2012. The Institute’s budget would have sustainably balanced the books without using revenue from recent tax increases.
This brief compares the House Budget Plan to Budget Solutions 2012. Unless significant spending reductions are made in the immediate future, the House budget continues Illinois down a path to ruin, paved with high taxes. Budget Solutions is a road to prosperity, one in which taxes are manageable and threats from businesses to leave Illinois are no longer a part of daily life.
Based on the House budget, future spending could lead to a cumulative deficit of more than $25 billion by the end of the decade. This is an astounding sum that dwarfs the state’s current deficits. By contrast, Budget Solutions would generate significant surpluses that would create an immediate opportunity for tax relief.
Illinois lawmakers who have staked their reputations on an anti-tax-and-spend platform should be concerned. Their commitment to promoting policy based on fiscal responsibility is at stake. The opportunity to show that they stand for real spending reform is shrinking and must be seized now.
Analysis
The budget before the governor, known as the House Budget Plan, makes the legally required contributions to the state’s pension funds. It repays bonds. It makes cuts to many state agencies and increases to others. There will be enough revenues to cover these costs. But not a penny more – because spending has been increased to match Illinois’s record-high tax revenues.
The budget has a sticker price of $33.2 billion, but an accounting gimmick was used to hide significant spending. The General Assembly essentially doubled the amount of time the state is permitted to wait before paying bills for medical assistance and nursing home programs. And lawmakers didn’t trim program eligibility or reimbursement rates, meaning costs will stay the same. They then appropriated only enough money to cover 12 months in bills, even though the actual costs for this year will be spread over a much longer billing period. By appropriating less than the full amount needed, they are claiming a cut, which simply is not accurate.
The governor’s office laid out the specifics in a statement from Department of Healthcare and Family Services Director Julie Hamos. The House budget includes a $552 million reduction recommended by the governor, but does not include the governor’s accompanying cost-saving measure of a 6 percent rate cut to service providers. The House budget also includes an additional $537 million cut from the state’s Medical Assistance program; but that cut does not change the entitlement and provider reimbursement policies that actually drive costs. Per Ms. Hamos: “If the General Assembly makes these budget reductions but does not authorize actual rate or program cuts by legislation or rule … the ending FY12 bills on hand would be $1.9 billion [which is $1.1 billion higher than expected]. This approach would not be an actual budget reduction, just a continued pattern of deferring payment of bills.”
The gimmick is akin to moving less money than you need for the month into your checking account, without trimming any of your monthly expenses. This is not a spending reduction plan, even if your savings account looks bigger for a time. After you’ve bounced checks or missed payments, bills still will be waiting. Your tax and water bills, like the state’s medical assistance and nursing home bills for this year, will have to be paid eventually.
Properly accounted for, the House budget will cost at least $34.2 billion. It’s a spending increase that could lead toward higher taxes and a continued exodus of people and jobs from Illinois.
The Path to Ruin
Presume first that pension costs grow as scheduled. Then assume all other spending grows at a rate of 3 percent and that base revenues grow at a rate of 3 percent as well (which is a reasonable estimate of state inflation and population growth). Illinois would never be able to retire its unpaid bills under the House Budget Plan.
As the 2011 tax increase sunsets, spending will continue to increase and deficits will explode. Within five years, cumulated deficits could exceed $11 billion; by the end of the decade, they would exceed $25 billion. By contrast, lawmakers in Springfield hid behind the state’s current $5.1 billion unpaid bill backlog to increase taxes by $7 billion a year.
A Road to Prosperity
The Illinois Policy Institute outlined a $27.6 billion budget plan that would have been sustainable without January’s tax increase. It included appropriate funding for core government services, and a full payment to the state’s pension funds and bondholders. Alas, taxes had already been increased.
Carried forward at a 3 percent growth rate, this budget would realize record surpluses immediately—eliminating the state’s unpaid bill backlog and seeding a rainy day fund. As shown below, the cumulative surpluses projected under this plan would allow for tax relief that includes a complete rollback of the 2011 tax hikes on schedule.
The Bottom Line
Lawmakers – especially those elected on anti-tax hike platforms – will have an opportunity to fix this situation. They’ll be called back to town, ironically, because Governor Quinn and the Senate Democrats are demanding another $480 million in appropriations, which would increase 2012 general fund spending by about $1 billion beyond the 2011 total.
Late in the spring session, Senate Democrats added earmarks and additional general fund appropriations to the state’s capital construction budget. The House rejected the Senate’s spending add-ons to the bill, leaving the construction plan in limbo back in the Senate, where Democrats nevertheless pledged to tack on additional expenditures. Suffice to say, any spending increases beyond those hidden in the already passed budget should be a non-starter.
Those truly dedicated to a sunset of the Illinois tax increase, as promised, should demand immediate spending reductions. They could start by eliminating the healthcare gimmicks above and by actually cutting costs within its medical entitlements.
Additional spending reductions could pave the way for repealing the tax hike on businesses earlier than scheduled, sending a strong signal to entrepreneurs that Illinois won’t keep slamming the door shut on job creation.