Legislative Action

Revenue plummets: Blip or trend?

By MICHAEL D. KLEMENS

State revenues tumbled in December, raising the specter of financial problems later this fiscal year or next. One month does not a fiscal year make, but December managed to "unmake" several months of solid revenue gains. Still, it will be April before Illinois revenue estimators have a good handle on where the state is headed.

December general funds revenues plummeted $83 million from those of one year before, a decline of 7.5 percent that is all the more significant because of the 20 percent income tax rate increase and the 50 percent hike in cigarette tax rates. Through the first five months of fiscal year 1990 (July 1 - November 30) state revenues had grown $292 million, or 6.4 percent. The December disaster dropped fiscal 1990's six-month revenue growth to $210 million, or 3.7 percent. All told six-month general funds revenues totaled $5,856 million.

In the major sources:

• Personal income taxes, on the strength of the rate increase, were up 6.4 percent.

• Corporate income taxes, one of the state's most volatile revenues, were off 29.2 percent.

• Sales taxes were up 2.1 percent, a figure depressed by delays that postponed December receipts into January.

• Lottery profits were up 6.0 percent.

• Federal funds were up 1.4 percent, in part because fiscal 1989 catch-up public aid spending was not repeated.

The $210 million (3.7 percent) growth trails that experienced in the two preceding years. In fiscal 1989 the increase was $214 million or 3.9 percent. In 1988 revenues were up $291 million or 5.7 percent. In 1987 revenues increased $130 million or 2.6 percent.

"December was not a disaster," maintains Robert L. Mandeville, director of the governor's Bureau of the Budget. Mandeville says that at midyear the $128 million cash that Illinois had available for spending was close to projections, when corrected for timing differences. In October the bureau had estimated the December 31 balance at $237 million. The difference, Mandeville says, was early payment of $123 million to reimburse local schools for special education spending.

Six months' general funds revenues, July 1-December 31, fiscal years 1989 and 1990 ($ millions)
	FY1989	FY1990	change	% change
Personal income tax	$1,544	$1,643	+$ 99	+ 6.4
Corporate income tax	315	223	- 92	-29.2
Sales tax	1,866	1,906	+ 40	+ 2.1
Public utility tax	250	305	+ 55	+22.0
Cigarette tax	115	152	+ 37	+32.2
Other cash revenue	291	341	+ 50	+17.2
transfers in from:
Lottery	249	264	+ 15	+ 6.0
Other funds	118	111	- 7	-5.9
Federal sources	898	911	+ 13	+ 1.4
Total revenues	$5,646	$5,856	+$210	+ 3.7

If the early state aid payment is ignored, both revenues and spending are coming in at a rate about $100 million below the bureau's October projections. Mandeville speculates that spending may be down because of delays in billing at higher rates by hospitals and nursing homes that serve the poor. He anticipates that most of that money appropriated will be spent.

On the revenue side, Mandeville thinks that individual income tax receipts may be down because some employers were slow in implementing higher withholding rates. Among the state's major revenue sources Mandeville is only willing to project a shortfall in corporate income tax receipts, on the order of $30 million. He says that he plans no overall downward revision in total estimated general funds revenues.

The fiscal year's first-half performance illustrates that there will be no repeat of fiscal 1989 when Illinois saw $300 million in unanticipated revenue growth. Mandeville says it's too soon to say that the state will have fiscal troubles this year. He adds that it is likewise too soon to say that the state will not.

Chuck Burbridge, staff economist for the legislature's Economic and Fiscal Commission, sees trouble in the December numbers: "It's probably too soon to panic. It's not too soon to be concerned." Burbridge worries that an economic slowdown that the legislative revenue forecasters had predicted for late in the fiscal year is starting early. "Our concern is that our forecast is proving to be correct as far as the economy goes, and if our forecast holds true, we're in trouble," Burbridge says.

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He cites the well-publicized problems with the automotive industry. Depressed auto sales reduce sales taxes, while automotive manufacturing layoffs limit income tax receipts.

A number of changes complicate comparisons between the first half of fiscal 1990 and the first half of fiscal 1989. On January 1, 1989 — halfway through fiscal year 1989 — the new refund fund went into effect. Paid into it is a portion of income tax collections and paid out of it are income tax refunds owed taxpayers. In the first six months of this fiscal year there was $179 million paid into the refund fund instead of the general funds. The change is a "wash" because general funds spending is reduced by an equal amount.

And, effective July 1, lawmakers hiked income tax rates by 20 percent. The increase was split between the Education Assistance Fund, which provides money to public schools, colleges and universities, and the Income Tax Surcharge Local Government Distributive Fund, which gives money to local governments. The education fund is classified as one of the general funds and received $145 million in the first six months of the year; the new local government fund is not a general fund and saw $117 million in receipts the first six months.

But revenues are only half the state fiscal picture; spending is the other half. Spending was up a bunch in the first half of the fiscal year. General funds spending totaled $6,269 million, an increase of $525 million or 9.1 percent, as a result of an appropriations authority increase of 9.4 percent. By way of comparison, spending was up $235 million or 4.3 percent in fiscal 1989, $179 million or 3.4 percent in fiscal 1988 and $148 million or 2.9 percent in fiscal 1987.

The 1990 spending increase would have been larger without the refund fund, as $185 million in fiscal 1989 first-half refund spending was not repeated. For the period from July 1 through December 31, general funds spending grew faster than general funds revenues, and Illinois spent $413 million more than it took in.

Expectations for natural revenue growth Natural revenue growth or base growth — the amount that state revenues grow without new taxes —will be a big deal for the next six months. Last spring Illinois lawmakers parlayed the base growth, the state's relatively healthy fiscal situation and $800 million in new general funds taxes into $1.7 billion in new general funds spending. This year the fall election precludes another massive tax increase, and lawmakers have already spent what they put away last year. All that's left is the base growth. To guess at next year's base growth we need to know this year's. It is not an easy task. The base growth is buried beneath the new revenues from two major general funds tax increases. The individual and corporate income tax rates were raised 20 percent to 3.0 percent and 4.8 percent, respectively. The per pack cigarette tax was hiked from 20 to 30 cents. Total general funds revenues for the first six months of fiscal 1990 (the year that began July 1) were $5,856 million. The growth, which includes the base growth and the tax hike growth, was $210 million. Another $179 million in growth never made it to the general funds because it was diverted to the tax refund fund that was created, effective January 1, 1989. For comparison purposes it should be added back in. Revenue base growth, fiscal year 1990, first half ($ millions) FY1989 FY1990 growth %growth Total revenues $5,646 $5,856 +210 +3.7 Base growth adjustments:         Education assistance fund   - 145     Cigarette tax increase   - 37     Refund fund   + 179     Base revenue growth $5,646 $5,858 +212 +3.8 At the same time, if we are looking for base growth, the money from the tax increases should be taken out. Money is money and does not arrive in Springfield tagged old taxes or new. We can assume, however, that the $145 million paid into the education assistance fund is the new money. We can likewise assume that, because cigarette taxes are a declining source, that all of the $37 million increase in receipts resulted from the higher taxes. Put the numbers together and the base revenue growth is 3.7 percent. With inflation projected at 4.7 percent for fiscal year 1990, base growth is unspectacular. Growth of 3.7 percent in fiscal 1991 would yield just under $500 million in new money to spend. Take away the current year's overspending, and new spending becomes $200 million. After $1.7 billion in new spending this year that may not seem like a big deal. It won't be a big deal, but it will be the only deal in town. Michael D. Klemens

The fact that Illinois spent more than it took in during the first half of the year is no revelation. The budget that lawmakers adopted in June and amended in November calls for state spending of $13,300 million and revenues of $13,000 million. The difference is to be made up by drawing down the $541 million balance that Illinois had in the bank on June 30.

The drawdown means that the state will have that much less to spend in fiscal 1991. In mid-December the bureau estimated fiscal 1991 new program spending at $200 million. And Gov. James R. Thompson told lawmakers in his State of the State address that no new spending would be possible without new revenues.

If December was an aberration and state revenue growth resumes a normal pattern, fiscal 1991 spending will be tight. If December was a precursor of economic slowdown, spending will be even tighter. The combination of fiscal 1990 overspending and economic slowdown could produce fiscal crisis by 1991. The state's new governor will be able to display his financial control talents early.

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