Fix the flaws in the fiscal system

Annual budget crises have become fairly predictable. Our fiscal system has broken down. Both the General Assembly and the governor must share the blame.

The basic problem is that our system encourages cash flow budgeting. This means that if we have the money, we spend it, regardless of whether we are accumulating deficits. We mimic the household that lets its credit card balances increase. The time for budget reform is here. The staff of the respected Illinois Economic and Fiscal Commission (IEFC), a bipartisan legislative group, urged several specific reforms. I will highlight the most important and add others.

The rite of spring. The General Assembly generally passes a budget in the spring that looks balanced. Appropriations, which are annual grants of legal authority to state agencies to spend money, rarely exceed projected revenue. This creates an illusion of a balanced budget because some expenditures, such as debt service, enjoy permanent legal authorization and do not require annual appropriations.

More important, because many millions of appropriated dollars are typically not spent in any given year, the General Assembly often appropriates the cash at the beginning of the fiscal year and the governor often signs the bills. Technically this does not unbalance the budget.

This appropriations process is so fragmented and complicated that it is impossible for the public, and even most legislators, to keep track of the bottom line. How fragmented is it?

• The Bureau of the Budget prepares one bill for each agency; over 100 bills are used to implement the governor's budget.
• Half of these bills start in the Senate and half in the House. This arragement may ease the work load, but the budget is never reviewed as a whole by either chamber.
• The budget bills for education, which appropriate about 40 percent of general funds, do not originate with the Bureau of the Budget. Although the governor announces his "bottom line" for education, the bills are submitted directly by the State Board of Education and the Board of Higher Education independently. That State Board of Education usually ignores the governor's bottom line, and the legislator is whipsawed between extremes.

Fragmentation also encourages game-playing: The Department of Public Aid budget bill was defeated on the floor at least three years in a row only to be resurrected as an amendment to the budget bill for a small agency, such as the Racing Board.

When I was a new legislator, I tried to amend the budget bill for the Department of Children and Family Services (DCFS). Four times I filed an amendment, but each time the DCFS budget was shifted en toto by amendment to another bill. I was checkmated when the DCFS budget was included in a conference committee report, which cannot be amended on the floor.

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Reform proposal 1. To focus attention on the bottom line at every step in the appropriations process: There should be an omnibus budget bill.

The simple reform is the most important step we can take and should be done by constitutional amendment. Nearly all other states do this. It will focus public attention on the bottom line of the budget and will help expose deficits during the process. Also education will no longer be a political football between the governor and the General Assembly because education agencies' appropriations will be included as part of the governor's budget bill. This reform enhances the governor's power, but the legislature can match him through better coordination between the House and Senate, perhaps through joint budget hearings. Joint hearings would also diminish the end-of-session reconciliation role of the conference committee.

Reform proposal 2. To further focus attention on the budget by disengaging the budget from the hundreds of other bills that clog the legislative calendar at the end of the spring session, I suggest a second constitutional change: The deadline for passing appropriations bills should be moved to June 1 although the fiscal year should still begin July 1. This will also help avoid deadlocks, like the one in 1985, when the legislature failed to adjourn until mid-July.

Gubernatorial games. The governor, too, is guilty of ignoring the bottom line. He frequently spends far more than he requested from the legislature in the spring. The Illinois Constitution requires the governor to present a balanced budget and the legislature to pass a balanced budget. Significantly, it does not require us to live within a balanced budget, and we don't.

Supplemental approprations (called supplementals for short) are generally considered in omnibus bills that amend the appropriations acts passed the previous spring. In fiscal year 1987 we passed several supplemental bills, including one on the final day of the fiscal year.

This fiscal year the governor vetoed $363 million in early July proclaiming insufficient revenue. Then before the month was over his budget director submitted a letter to the four legislative leaders detailing plans for $44 million in supplementals. These administration plans were put on hold during the fall veto session, during which the legislature passed $29 million in supplemental and another $6 million in transfers out of general funds, most of which were not covered by the budget director's letter. The neglected items, in fact, are essential, and I predict they will be formally requested later this fiscal year along with many new items as well.

Extensive use of supplemental breeds careless agencies. For example, the in-home service program for disabled persons came within two weeks of running out of cash last year before the Department of Rehabilitation Services notified the legislature and requested a supplemental.

The best example of Keystone Kops budgeting occurred this spring, two days before the end of the fiscal year, when Director Gordon Johnson of the Department of Children and Family Services notified the conference committee on appropriations that he was running a deficit in the foster care program and needed more money. Was he increasing his budget request to prevent a recurrence? "No," he said, but four hours later Deputy Gov. Jim Reilly came in with the governor's list of last-minute requests, including the one that Director Johnson rejected. Reilly was surprised to learn that Johnson had denied needing it.

Reform proposal 3. To keep the budget balanced throughout the fiscal year regardless of when or how it is adjusted, I suggest as a further constitutional revision: There should be NO supplemental appropriations UNLESS they are financed by transfers from other line items, new federal funds or new revenue sources.

Lately half of all supplementals have been for income tax refunds. The IEFC staff has said, "A key contributor to the divergence between revenue and appropriations has been the growth in supplemental appropriations for tax refunds."

Reform proposal 4. I support House Bill 2918: A Tax Refund Fund (TRF) should be established. Payments into the TRF would be a fixed percentage of collections. Refunds would be paid automatically out of this fund, and the state would budget on the basis of net receipts.

Reform proposal 5. The TRF proposal would expedite refunds of money legally belonging to the taxpayers, but there should also be a significant positive balance as a matter of routine. Thus I am planning to amend H.B. 2918 to: Establish a "rainy day fund" with the unused balance in the TRF.

Many states have revenue stabilization accounts or rainy day funds, and this proposal would permit us to combine two useful fund functions into one. We will be able to avoid costly market financing except in extreme cases.

An objection to this may be that we should not borrow from taxpayers; however, the proposal contemplates borrowing only from an excess balance. At any rate, the governor can borrow from taxpayers now by the simple expedient of delaying refunds without legislative approval. My proposal represents a significant improvement in public accountability over today's situation.

Short-term debt. In February 1987 the governor borrowed $100 million short term from the private market. This was not the first time he had to borrow. He also borrowed $150 million from the private market in fiscal year 1983 and $62 million internally in fiscal year 1981. The $62 million

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borrowed from other state funds required legislative approval. The legislature should also be required to approve marketing of short-term debt. Thus I recommend:

Reform proposal 6. The Casual Deficit Act of 1897, under which the governor has marketed short-term debt without legislative approval, should be repealed.

The Illinois Constitution permits short-term borrowing in accordance with law, but without the Casual Deficit Act, the governor would have to come to the legislature each time for approval. There should be nothing "casual" about deficits.

The governor also has several borrowing tricks for hiding debt. Probably the one most amenable to reform is the practice of drawing down the cash on hand.

An increase in the cash on hand during the fiscal year signals a cash surplus. A drop, or drawdown, signals a cash deficit. For example, if your checkbook balance falls to zero, you are running a deficit in your cash position.

Ideally, a drawdown one year would be corrected by a buildup the next. The governor's budget never proposes drawdowns, but it almost always accepts those which have occurred. The cash on hand, or available balance, at year's end has been drawn down regularly since fiscal 1980 except between fiscal years 1984 and 1985. Chronic drawdowns are symptomatic of structural budget deficits which need to be remedied. I suggest:

Reform proposal 7. Any amount drawn down in the available balance below a threshold level established by law must be restored during the following fiscal year. To allow for long-term growth the threshold should be a percentage of tax deposits to the general funds.

The squeeze on revenue. Coincidentally, the $900 million in current revenue losses resulting from tax relief which has been granted incrementally during the past decade has been almost exactly offset by piecemeal permanent tax increases.

We are, however, tapping at an increasing rate into the revenue stream that feeds the general funds, placing us in danger of killing the goose that lays the golden egg. Consider:

• Since 1979 the general funds have lost 2.5 percent of general sales tax receipts annually to the Road Fund.
• The tax package of 1983 provides for a direct transfer of general funds to public transportation approximately equal to 3 percent of general sales tax collections.
• The Build Illinois program, created in 1985, grabs 3.95 percent of general sales taxes before they are deposited into the general funds.

Thus in fiscal year 1986 more than $300 million in general sales taxes either bypassed the general funds or was recycled through the general funds but earmarked for road purposes. This figure is up from zero in fiscal year 1979.

Furthermore, while appropriations grew by 46 percent between fiscal years 1980 and 1986, transfers from general funds to support debt service grew nearly twice as fast, or 82 percent.

This is the most difficult problem to deal with since multiyear funding commitments have already been made. Imposing arbitrary restrictions on debt only encourages creative financing schemes which will turn out to be more costly in the long run. As an informal rule of thumb we should keep debt service at some fixed percentage of general funds.

As soon as our current obligations permit we should also end the several automatic transfers from the General Revenue Fund for Build Illinois and the highway programs.

Let there be no doubt, the system is broke, so let's fix it. These reform proposals will make both the General Assembly and the governor more fiscally accountable and bring about far greater stability to general funds budgeting.

State Rep. Woods Bowman (D-4, Evanston) is chairman of the Appropriation II Committee. He holds a master's degree in public administration and a doctorate in economics.

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