Objective look at our state isn’t pretty

Monday, June 28, 2010

Illinois cannot solve its budget problems without generating new tax revenue. That's not me talking, it's Standard & Poor's Ratings Services, a company that objectively evaluates the fiscal viability of governmental entities. It noted the "cumulative $13 billion gap" in the state's $24.5 billion proposed fiscal year 2011 General Fund budget is problematic because it's more than 50 percent of the total proposed expenditures on services. S&P;'s other main concerns are that the proposed FY2011 state budget includes "no revenue enhancement measures" and "deep spending cuts," "is highly reliant on debt" and "carries forward, but does not address, deficits from prior fiscal years 2008-2010."

The one Illinois development S&P; liked was Gov. Pat Quinn's support for a tax increase even though his most recent proposal -- a 1 percent income tax surcharge for education -- is not enough to get the job done. Better is the approach taken in House Bill 174, which passed the state Senate last May. Under HB174, the personal income tax rate would increase from 3 percent to 5 five percent, and the sales tax base would expand to include 39 consumer (not business, health or professional) services.

While Quinn says he would sign HB174, the problem is the Democrat-controlled House refuses to face reality and pass it. Apparently, the House is more concerned with the upcoming election than the state's fiscal needs.

This preoccupation with politics over policy hasn't gone unnoticed. S&P; actually questioned the political will of elected officials in Illinois to implement the difficult and unpopular, yet needed tax increases essential to implementing a structural solution to Illinois' recurring deficits. S&P; cautioned that this combination of bad politics and worse policy could lead to a downgrade in the state's bond rating. Other bond ratings services like Moody's and Fitch Ratings have reached similar conclusions.

As if desirous of confirming S&P;'s worst fears about Illinois, state Sen. Bill Brady, Republican candidate for governor, announced a "budget proposal" for FY2011 that's a real head-scratcher. It's not really so much of a budget as it is a collection of politically appealing action steps centered on spending cuts, Medicaid reform and tax cuts. That's right, despite a cumulative General Fund shortfall of $13 billion Brady proposes cutting taxes in FY2011 by $1 billion.

To counter the revenue loss from his tax cuts, Brady pledges to cut General Fund spending by 10 percent across the board. Sure, he recently denied taking that stance, but here's his statement, reported in a March 9 article in The Southern: "I have to cut state spending by 10 percent if I'm going to pay for my tax breaks, reconcile the budget in a balanced way and pay back the backlog of unpaid bills." Problem is the state's current FY2010 General Fund budget is $26 billion, so a 10 percent across-the-board spending cut saves just $2.6 billion, while his tax cuts cost $1 billion, and the existing hole is $13 billion, which includes a $6 billion backlog of unpaid bills. Simple math says that his proposal doesn't add up.

And that's if it were actually possible to implement a 10 percent across-the-board cut, which it isn't. See, the feds contribute $6 billion to Illinois' General Fund which cannot be cut. That reduces his potential, maximum savings to $2 billion. Other General Fund spending is mandated by federal law, state law and court order. Hence, "across-the-board" cuts aren't actually doable. That reality is why during a recent speech, former Republican governor Jim Edgar characterized Brady's call for across-the-board cuts as "naive." It also isn't transparent or accountable. Don't voters deserve to know exactly which services will be cut, and by how much -- especially since $9 out of every $10 in the General Fund are spent on education, health care, human services and public safety? Refusing to detail which of these fundamental programs gets the ax is simply not leveling with voters about the consequences spending cuts will have in their communities or on vulnerable populations, such as disabled people, the elderly and school children.

Brady also estimated he can save $1.2 billion by moving all Illinois Medicaid users to a private managed care system but didn't provide backup for how these savings would be generated nor account for how a well-designed managed care program could increase medical specialist use by Medicaid populations, thereby driving up costs. Even if his managed care proposal delivers all the savings he anticipates this year, his budget proposal is still more than $10 billion out of balance.

Edgar stated there's no way to solve Illinois' budget woes "without a tax increase," reaching the same conclusion as the bond houses. Quinn's FY2011 budget proposal may be long on debt and short on revenue, but at least it's specific. Even better, he's had the strength of character to call repeatedly for a tax increase as part of the solution. Brady's proposal, on the other hand, not only lacks specificity, it can't work mathematically and lives down to the very worst fears about our state voiced by bond ratings services like S&P.;

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank.