Governor Bruce Rauner just gave his budget address to the Illinois General Assembly and has formally submitted his budget proposal for consideration — his budget would spend $37.6 billion and is estimating that the state will bring in $37.9 billion. This begins an important process that our elected officials should go through every year — creating and passing a budget. In recent years they have generally failed to do so, until a few Republicans joined Democrats in overriding Rauner’s budget veto. From 2015 to 2017, Illinois had no budget, but spending continued due to court orders thereby adding a several billion dollar bill backlog on top of Illinois’s mounting pension debt. The Governor’s budget does not include a plan to tackle the bill backlog and also requires pension cost shifts to balance his budget (which if they don’t occur, would make his budget over $1 billion out of balance).
Illinois is still working its way out of the $14 billion backlog of unpaid bills, it currently owes $8 billion. On top of that, Illinois has to pay off $26 billion in general obligation bonds (loans, in simple parlance), as well as $129 billion in pension liabilities. According to best practices identified by budgeting experts, there are three key things the governor and legislators can do to improve the accountability and responsibility of the annual budgeting process, but to date, there has been no suggestion of changes to the state’s budgeting practices. Implementing any (or all) of these practices, experts say, might help put Illinois on better financial footing.
1. Implement better budget forecasting
People work together everyday to find compromises on their financial priorities. Really want to take that vacation? Just remember that you haven’t heard about your promotion yet, and you already put a down payment down on a new car. The state budget process involves many stakeholders, but the concepts are the same. Agreeing on how much money is likely to come in this year and knowing how much money is coming in and will have to go out of the state’s funds, over several years, allows decision makers, and the public, to know where the state’s fiscal situation is headed.
It seems simple enough. But, arguments over individual budget numbers are one reason the governor’s office and the Legislature could not come to an agreement on the budget for two years. One way to smooth over discussions regarding budget figures is to implement consensus revenue forecasting, a process of working from the same set of revenue numbers.
According to the Volcker Alliance, a national group that has studied state budgeting, “the point of a consensus forecast is to make it easier for policy makers to concentrate on expenditures during budgeting instead of arguing about whether the revenue estimate was politically driven.” A group made up of members of the executive office and the Legislature — Democrats and Republicans — gets together and agrees on the revenue numbers ahead of time. This allows everyone to be on the same page when they start to craft a budget.
Once the state’s leaders have agreed on how much revenue will come in this year, they have to agree on how to spend it, preferably without increasing the budget deficit. One tool to help with this is multi-year forecasting for revenues and spending. This allows decision makers to see when there is an imbalance in money coming in and money being spent over several years. The Volcker Alliance says multi-year spending forecasts bring “awareness of future expenditures [that] can help states take necessary steps to cover the full costs of … programs.” The Alliance recommends that states have multi-year revenue and expenditure forecasts of at least three fiscal years.
2. Switch to accrual-based accounting
Imagine if you could get a car with zero down payment for a whole year. Sounds pretty good until you look at the fine print and realize how much you’ll be shelling out in 12 months. Politicians may try to sell you their “car” by racking up spending this year, but not sending you the invoices until the next. In this way, cash-based accounting can hide the real cost of programs and projects. The costs of projects are not recorded within a current budget year because payments are delayed to future budget years. Illinois follows a cash-based accounting system during budget preparation. Best practices, experts say, would have the state using accrual-based accounting, which includes the costs of current activities in the current budget, regardless of when payment is made.
The Fiscal Futures Project, a group within the University of Illinois, provides the following analogy, “cash accounting is akin to an individual only looking at the payment due in the current month on a credit card, rather than looking at the total balance due.”
Accrual-based accounting allows for spending to be shown in the current budget even when the payment is not due until later years. This is important because it provides the whole picture of the state’s fiscal situation. Truth in Accounting, a public finance transparency organization, argues that accrual-based accounting allows for “knowing the long-term effects of current decisions” and “accurate, timely information.” They believe that with such accounting, “politicians would stop hiding costs and finances would be transparent.”
One case study of accrual-based and cash-based accounting comes from California. The state’s Medicaid program switched from accrual-based to cash-based accounting. This switch allowed the program to defer $2 billion without recognizing the cost in their immediate budgeting, for which California taxpayers still are on the hook.
3. Have a healthy rainy day fund
A rainy day fund, or budget stabilization fund, is a common feature of many states’ budgets. In fact, all 50 states have rainy day funds, including Illinois. However, Illinois only has a paltry $83,000 in its budget stabilization fund. According to the Fiscal Futures Project, the best practice is to have at least 5 percent of a state’s total annual revenue in a rainy day fund. In 2017, Illinois brought in about $33 billion in revenue. According to the Fiscal Futures Project, it should, therefore, have $1.6 billion in its rainy day fund.
The Volcker Alliance report says “rainy day funds contain cash purposefully set aside to help states avoid or limit tax increases or service cuts in emergencies or in years when expenditures outstrip revenues.” This is an important pool of money needed for emergencies, times of recession, or natural disasters – expenses that $83,000 is unlikely to cover in Illinois.
Some members of the Illinois General Assembly are aware of this problem. In 2016, state Sen. Heather Steans was working on a bipartisan bill that would fund the rainy day fund at 5 percent of general revenues once the state’s overdue bill backlog drops below $1 billion. However, her plan did not come up for debate or a vote.
Getting it done
These best practices, if implemented, would add further stability to Illinois’ budgeting process, experts agree. They have been discussed in Springfield before. The Long Term Accounting Act, which was introduced in 2015, would have moved the state toward an accrual-based accounting system, as well as having future budgets take into consideration the long-term implications of budgetary decisions. But that bipartisan bill did not get a vote. No legislation has been introduced in 2018 similar to the Long Term Accounting Act or Steans’ bill.
Still, the governor and legislators have an opportunity. Now that the governor has submitted his budget, the Illinois General Assembly has until the end of May to consider it, or pass their own budget, which Rauner then will have a chance to sign into law or veto. In their budgetary discussions, lawmakers might want to consider incorporating these best practices for future budgets to help bring Illinois back to fiscal stability. With 2018 being an election year, Illinois voters have an opportunity to ask for budgeting process changes that could help restore fiscal responsibility as candidates seek their vote.