Business as usual in Springfield?
Many things have changed in Springfield with the new Republican administration of Gov. Bruce Rauner, but some things remain the same. The recent budget compromise between the Democratic General Assembly and the governor is another example of expedient budget measures that have come to be known as "kicking the can down the road," the hallmark of budget policy for more than a decade.
In addition to the well-known long-term structural deficit issues, Rauner came into office facing an immediate problem. The fiscal year 2015 budget passed last year established appropriations based on projected tax revenues that assumed the continuation of the 2011 temporary tax increases even though income tax rates were scheduled to fall from 5 percent to 3.75 percent in January. The expiration of the higher rates created a shortfall of nearly $2 billion for the current fiscal year in addition to the underlying structural dollar deficit that has been estimated at $4 billion and growing.
The budget problem calls for a major restructuring -- most likely some combination of spending austerity and additional revenue from tax restructuring or higher tax rates. Not surprisingly, the governor and General Assembly fell back on familiar ways and chose to punt by raiding the balances of a number of special funds designated for purposes such as road building along with smaller across-the-board cuts. This avoided an immediate crisis and continues basic state services without a tax increase. On a positive note, it also showed that the two parties can cooperate on important issues.
The arrangement to make it through this fiscal year creates additional pressures for fiscal year 2016. The expiration of the higher tax rates for the full year will create a $4 billion shortfall with special funds used this year no longer available and in need of replenishing. While this fiscal problem is hardly monumental by recent Illinois standards, it sets the stage for even more challenging budget choices for 2016 and the years beyond. While there is widespread agreement that major reforms on both the tax and expenditure side are needed, past experience suggests that the exigency of the problem in Illinois is no guarantee of a positive outcome. There are two competing theories about the budget reform process. One suggests that needed changes are most likely to emerge when state finances are in good shape so that the losers in the reform process can be compensated, at least temporarily, to facilitate an agreement. The other theory holds that reform is most likely to occur when the state faces a crisis where a response is imperative.
Unfortunately, the state of Illinois has had few opportunities to test the first theory since it has operated in a near crisis environment for most of the last 15 years. However, even when revenues were plentiful in the late 1990s, no significant reforms were approved. The second theory that serious long-term problems will spur action has also not been confirmed in the state. After more than a decade of temporizing (kicking the proverbial can down the road), Illinois still has not come to terms with its structural budget problems.
Now that an agreement has been reached to limp through the remainder of the fiscal year, what does this bode for the future? Looking at the positive, the fact that the governor and General Assembly were able to work together to reach even an imperfect accord is encouraging. This could be a step toward needed changes that require compromises that will produce additional revenues along with more expenditure discipline. However, the problems are daunting with hard decisions that require higher taxes and less spending, much more difficult politically than the recent accord.
The governor's FY2016 budget with no new revenue, large and politically unpopular budget reductions such as a 31 percent reduction in state spending for higher education, and major pension cuts that are impossible to accomplish in the near term is unlikely to progress in the General Assembly. Democratic suggestions of a millionaires' tax that has virtually no chance of being approved represent similar magical thinking. It might be hoped that these ideas are only the first moves in the difficult budget process that will eventually lead to more positive results. Past experience suggests that this outcome is far from certain.
Economist J. Fred Giertz is on the faculty of the University of Illinois' Institute of Government and Public Affairs. He can be reached at 217-244-4822 or email@example.com.