PI Original Micah Maidenberg Monday February 7th, 2011, 2:48pm

Report: Despite Tax Hike, Deficits Still Loom For State

The Center for Tax and Budget Accountability has released a new analysis of state revenues and spending. In short, the state tax battle isn't over.

The tax deal General Assembly Democrats and Gov. Pat Quinn struck last month was seen by many advocates and budget reformers in Illinois as a "monumental first step" in creating a sustainable fiscal policy for the state. But a new analysis of the plan by researchers at the Center for Tax and Budget Accountability (CTBA) suggests the emphasis probably should be squarely on the "first step" part of that equation.

The tax deal will generate a net addition to the General Revenue Fund of more than $7.2 billion annually through the state's 2015 fiscal year budget, CTBA says in an issues brief (PDF) released earlier this month. That amount, however, will not be enough to allow the state to spend to the maximum authorized under spending caps included in the tax deal that limit the state budget to no more than about $36.8 billion, $37.6 billion, $38.3 billion, and $39.1 billion for the FY2012 to FY2015 budgets (or 2 percent growth each year).

Compare those four numbers with the current revenue and spending projections from the governor's budget office CTBA collected in this chart:

In other words, the tax deal doesn't mean the end of annual deficits for the State of Illinois in the General Revenue fund -- the state's spending and revenue problems are not fundamentally solved. "[D]espite not spending to the cap limit in any of fiscal years 2012-2015, the Governor’s currently suggested spending levels are none-the-less greater than the revenue that will be available to support said spending, resulting in annual deficits ranging from $310 million to $4.59 billion," is how CTBA's report summarizes the situation. (And even if the state did spend to the maximum allowed under the cap, it would still face a cumulative shortfall over the four-year budget outlook under consideration here, CTBA estimates, because of payments like debt service and pension costs.)

As a consequence, education, health care, human services and public safety, the four primary services the state pays for using General Fund revenues, are likely to feel the squeeze. This is already starting to play out. Quinn has talked about creating a bipartisan commission that will recommend $500 million in program cuts per year. And, as Progress Illinois has noted before, when adjusted for inflation the Illinois Department of Human Services is already working with over $1 billion less in real dollars than it had a decade ago.

Note in the chart above that the governor's projections for General Fund spending for services will remain largely flat; the FY2015 General Fund spending is just 1.4 percent above the amount seen for FY2012. Revenues rise before falling again. One of the increases is in pension payments.

Anders Lindall, a spokesman for AFSCME Council 31, argued that unfunded pension obligations, as opposed to current-year labor costs, should not be included under the spending caps. That would help ease the operational budget. "The unfunded liability, the contributions the state should have been making during the past three decades [when] it habitually, as a practice, shorted or outright skipped its obligations ... the interest on that unfunded liability is not a personnel cost of the current year," he said. "And thus it should not be under a single-year spending cap."

Looming over all of this, meanwhile, is the simple fact that last month's tax hikes are scheduled to expire in 2015. Rates for the personal income and corporate tax will suddenly drop. And Illinois, which is a relatively low-tax state even after last month's tax deal on the personal and, as CTBA points out in their brief, the corporate side, will have even less revenue to fund basic services. The tax battle isn't over in Illinois.

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