Tuesday, May 4, 2010

The State Budget Nightmare


By Woods Bowman

The Illinois state budget is like the Nightmare on Elm Street movies – progressively more horrific sequels that seemingly never end. Maybe this time it will have a happy ending, but I doubt it.

The 2010 crisis is the result of a chronic budget imbalance. Spending has been growing faster than revenue, so slash-and-burn spending cuts that don't lower growth in spending and tax increases that don't increase growth of tax receipts will provide but temporary relief.

There are three things citizens should know about the state budget.

First, when commentators speak of the deficit as $13 billion or so, they are mixing two numbers that require different solutions. In doing so, they grossly understate the size of the problem.

Second, while the state provides very little service directly, it underwrites the way local school boards, medical providers and pension systems provide services. Given the integral role of the state, it would be unwise to solve the problem with spending cuts exclusively.

Third, although a tax increase (probably income) is a necessary part of any budget solution, without tax and spending reforms even that won't prevent another budget crisis within a few years.

Here’s the real nub of the state budget problem:

The deficit consists of two parts: a one-time piece, like old unpaid bills, and a recurring piece that will cause new bills to go unpaid. These two are nearly equal parts of the $13 billion figure.

The unpaid-bill figure does not include the state's $73 million underfunded pension system – the largest in the nation. This is money the state owes its employees and former employees for services already provided and for that reason cannot take the obligation out of the debt.

Once old bills are paid, they are paid for good and off the books. Any spending cuts or new taxes for this purpose could and should be temporary. But the recurring piece is a different matter. It can be eliminated only by permanent spending cuts and tax increases.

Nearly a quarter of the state budget goes to Medicaid. The good news is that the federal government reimburses nearly half of this amount. That is also the bad news, because $2 of cuts are necessary to achieve $1 in savings and federal law imposes lower limits on types of services and scope of coverage a state must provide to receive any federal reimbursement. Simply put, that means sick people receive fewer services and they remain sick and get sicker instead of better.

Another quarter of state spending goes to school districts and local governments. It only pushes the problem onto the property tax -- the dominant tax source at local levels. Cutting appropriations to state universities and scholarship aid, which are 4 percent of the budget, would force increases in tuition and parental contributions.

Ten percent of state spending goes for debt service and pensions that, as legal obligations, cannot be cut -- period. Finally, nearly 8 percent of spending is for transportation, which is financed by taxes on gasoline license fees and the like.

These objects of spending account for over two out of every three dollars flowing through the budget. Thus a 10 percent budget cut translates into a 30 percent cut, more-or-less, in the remainder of the budget. This is why it would be unwise to try to cut our way out of the problem.

It is necessary to reduce the rate of increase in spending and increase the rate of increase in revenues. This is why various proposals for limiting the growth in pension funding requirements are on the front pages now.

This is also why it’s important to find ways to make Illinois’ tax system more progressive.
Bowman is Professor of Public Service Management at DePaul University in Chicago. He was a former legislator and past chair of an Illinois House Appropriations Committee.
Copyright (C) 2010 by the Illinois Editorial Forum. 4/10