IGPA: How can Illinois improve its budget situation?
By RICHARD DYE
Fixing Illinois' budget crisis begins with understanding just how much money comes in and how much money is spent in a given year. Yet tracking the state's massive budget is much more difficult than it seems, especially due to convoluted accounting practices used by state government. For example, the state's fiscal managers often shift costs to the future or move funds around to alter appearances.
A lack of transparency in budgeting matters because, in addition to contributing to the budget crisis, incomplete information makes solutions harder to find. Understanding the state's true fiscal situation depends upon how clearly, consistently and broadly budget information is presented.
Illinois faces two main transparency problems: "time-shift" budgeting and an overemphasis on the General Funds budget.
Enabling time-shift budgeting is the balanced budget requirement in the Illinois Constitution. This provision is very permissive as to what counts as revenue and what spending can be ignored. As such, it allows spending pre-existing balances, borrowing or using one-time revenue, and incurring obligations that do not have to be paid until later.
Using a family budget as an example, the state's actions are similar to spending the college fund to pay for clothes or using a mortgage line of credit to pay for groceries, rather than respecting the constraints of current household salary. The state needs stronger requirements to highlight and distinguish these actions from sustainable revenue sources such as the flow of current tax revenue.
But the most glaring example of time-shifted spending is the cost of public employee pensions. With each additional year of service and salary bump, public employees qualify for higher future pensions. But Illinois has consistently failed to set aside funds for investment to cover these obligations in the long term. As a result, the state's unfunded pension liability is more than three times the combined income and sales tax collections for a year. The annual budget should report the current change in pension obligations and the additional amount needed to amortize the unfunded obligation.
The second transparency concern has to do with funds reporting. Illinois has hundreds of separate funds for budget accounting purposes. But most discussion of the state budget concentrates only on the four General Funds, which represent less than half of the total state budget. Consequently, moving funds around — cross-year accounting changes or within-year transfers between funds — can conceal what is really going on.
Between 1997 and 2009, the special fund share of total spending in Illinois ranged from 37 to 54 percent — nearly the highest variability across all states. With such changes, how can one tell what is real and what is smoke and mirrors?
To make better sense of the state's budget situation, the University of Illinois Institute of Government and Public Affairs constructed a budget measure that combines the General Funds with over 600 special-purpose funds. This broad and more consistent measure shows a persistent budget gap in recent and near-future years and not the apparent "balance" shown each year in the General Funds budget alone.
Nearly everyone agrees that Illinois' fiscal situation is a mess. Addressing the transparency problems of time-shift budgeting and failing to report on the entire state budget, we will get more fiscal responsibility in Springfield and be on track to improve our budget situation.
Any opinions expressed are those of the author. Richard Dye is an economist with expertise in state and local government finance as it relates to economic development.
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