1

Tools to Address Spending

Ameliorating Illinois Structural Defcit
by Bending the Cost Curve
Richard J. Winkel, Jr., Director, Ofce of Public Leadership
University of Illinois Institute of Government and Public Afairs
February 18, 2014
Illinois policymakers could be faced once again with
painful budget choices that include not only whether
state spending cuts will be targeted or general,
but also whether those cuts will be immediate or
gradual. This short article is about austerity policies
recently enacted by Illinois policymakers and what
additional actions they could take to ameliorate
Illinois structural defcit by bending the cost curve.

When facing budget defcits, policymakers often fnd
that plans to cut current beneft programs create strong
and immediate backlash from recipients and other
interest groups. Those benefciaries may have been
counting on those state expenditure programs, and
they may feel that the state is changing the rules in
the middle of the game. Fairness may require giving
them more time to adjust.

Even without immediate cuts in spending, however,
policymakers can help reduce future defcits if they
can reduce the growth of spending. They might
be able to bend the curve for the growth of state
expenditures, so that outlays do not grow as fast as
currently projected. However, the use of that metaphor
by experts to analyze the pros and cons of decisions
by policymakers has its critics.
1
Notwithstanding
the critics and caveats, and without resolving the
controversy, the use of the metaphor is apparently
here to stay. Therefore, the question considered here
is whether Illinois can ameliorate the structural defcit
by bending the cost curve. The short answer is yes;
even without actually cuting state spending, Illinois
policymakers can reduce the budget defcit by slower
growth in future spending.
Illinois policymakers are currently confronting the
harsh reality that they have two huge fscal problems:
a large and growing gap between sustainable
revenues and projected spending levels; and a
1
Safre, William. (September 11, 2009). On language: Bending
the curve. New York Times. Available at htp://www.nytimes.
com/2009/09/13/magazine/13FOB-OnLanguage-t.html?_r=0
White, Joseph. (October 1, 2011). Bending the cost curve and the
politics of cost control. Journal of Health Services Research & Policy,
16(195). htp://hsr.sagepub.com/content/16/4/195.full.pdf+html.
White warned, Bending the curve is a dangerous metaphor
because it suggests policy has more control of the future than
it can; because it directs atention to situations about which we
know and can do less (the future) rather than when we know and
can do more (the present); and because it favors speculative
ideas over measures with which there is more experience.
TOOLS TO ADDRESS SPENDING igpa.uillinois.edu/budget-toolbox
2
largest-in-the-nation unfunded pension liability.
2

Illinois policymakers deserve much credit for taking
the necessary and difcult frst steps through a tax
increase and pension reform. However, they still have
many miles to go on the road to solving the structural
budget gap and restoring fscal sustainability.
3
Bending the curve focuses on future or projected
costs. Thus, Illinois policymakers might logically
consider adopting austerity measures to change the
future cost trend and avoid the fscal imbalance. In
fact, Illinois policymakers have already undertaken to
bend the curve in the past three years.
Efective January 1, 2011, Illinois policymakers
enacted temporary increases in the personal and
corporate income tax rates and capped the growth of
General Funds spending. They increased the personal
income tax rate from 3.0 percent to 5.0 percent and
the corporate tax rate from 4.8 percent to 7.0 percent.
General Funds spending was capped at 2 percent per
year for 2012-2015. The income tax rate increases will
phase-out beginning January 1, 2015.
In an efort to save the Medicaid program, the
Governor approved a legislative package on June 14,
2012 that increases the cigarete tax by $1.00 per pack
to $1.98 and increases the number of tobacco products
under the tax, which will raise about $675 million in
new revenues for Medicaid. At the same time, they
enacted cuts and efciencies in the Medicaid program
that will save an estimated $1.6 billion in fscal year
2013.
Finally, over the last three years, Illinois policymakers
also adopted some reforms to the budget process that
could result in future cost savings. For example, they
(1) created the new Budgeting for Results Commission
and spending reforms that require the Illinois to live
within its means and focus on performance efective
since July 1, 2010, (2) enacted a new requirement
efective beginning January 1, 2014 that the Governors
Ofce of Management and Budget shall publish to its
2
Dye, Richard, Hudspeth, Nancy and Merriman, David. (January
2014). Illinois still has serious fscal problems after December 2013
pension law changes. University of Illinois Institute of Government
and Public Afairs. Available at htp://igpa.uillinois.edu/system/
fles/Pension-Reform-Will-Not-Fix-Defcit.pdf. This paper is
quoted and summarized throughout this paper.
3
See generally, Dye, Richard, Merriman, David, Hudspeth, Nancy
and Crosby, Andrew. (January 2013). And miles to go before its
balanced: Illinois still faces tough budget choices. The Illinois
Report 2013. University of Illinois Institute of Government and
Public Afairs. Available at htp://igpa.uillinois.edu/IR13/pdfs/
IR13_CH2c_Fiscal.pdf. This report is quoted and summarized
throughout this paper.
website the budget of the State of Illinois for the coming
fscal year in its entirety in an accessible format, and
(3) authorized an ongoing study that is due December
2014 on how to make the Illinois budget process the
most transparent in the nation.
In an October 2013 analysis of the states fscal
condition, the Fiscal Futures Project at the University
of Illinois Institute of Government and Public Afairs
(IGPA) observed that Illinois policymakers have made
progress. They noted policies implementing cost
reductions and increasing revenue; on the other hand,
they also noted that the state has over $5 billion in
unpaid obligations from prior years and historically
rising Medicaid expenditures that continue to be a
serious concern.
Using the Fiscal Futures Model, the researchers
demonstrated that the combination of increased
income tax, large cuts in spending, and the efect of
a gradually improving economy would decrease the
defcit to an estimated $4.9 billion in FY2013, and
that the defcit would still be $1.6 billion in FY2014.
If the income tax increases are phased out after 2014,
then the defcit would grow to $6 billion by FY2016.
They concluded that while Illinois policymakers took
important steps to deal with its fscal challenges, more
they would need to take more action.
The Fiscal Futures project has shown that this is a
chronic problemnot just a short-term crisis. It is a
problem that compounds over time, puting us so far
in the hole that we wont be able to rely on economic
growthor singular policy changesto dig ourselves
out. In early December 2013, Illinois enacted a major
pension cost reduction bill. While the new pension
law, if upheld in the courts, would reduce the states
unfunded pension liabilities in 25 or 30 years, it
evidently does not come close to bending the cost
curve sufciently to balance the budget. Indeed, a
January 2014 analysis of the pension law changes
by the Fiscal Futures Project found that even if we
combine the change in pension laws with higher tax
rates, the structural defcit still grows.
In early December 2013, Illinois enacted a major
pension cost reduction bill.
4
In particular, if it is
upheld in the courts, the new pension law would not
change any current state spending but instead reduce
unfunded pension liability in 25 or 30 years, a prime
example of bending the expected future cost curve.
However, it evidently does not come close to bending
the cost curve sufciently to balance the budget. As the
4
Public Act 98-0599, efective June 1, 2014.
3
The Illinois Budget Policy Toolbox is a project by the University
of Illinois Institute of Government and Public Afairs. IGPA
is a public policy research organization striving to improve
public policy and government performance by: producing
and distributing cuting-edge research and analysis, engaging
the public in dialogue and education, and providing practical
assistance in decision making to government and policymakers.
Learn more at igpa.uillinois.edu
Fiscal Future Project researchers explained, Illinois
has a chronic, structural fscal problem so huge that it
cannot be eliminated by increases in economic growth
alone, increases in taxes alone, oralasaggressive
pension changes alone. Indeed, the researchers
concluded, even if we combine the change in pension
laws with higher tax rates, the structural defcit still
grows.
So, what more can Illinois do to bend the curve toward
balance in the budget? The Fiscal Futures Project
researchers recommended options that could reduce
the growth of spending by dealing with the specifc
elements of its current fscal imbalance. Illinois
policymakers could atempt to bend the cost curve by
making permanent adjustments to Medicaid benefts
to slow the cost of the program and adopt policies to
increase revenue that coincide with projected increases
in the Medicaid program and the phase-in of the ACA.
In addition, they could use the Budgeting for Results
Commission to identify costly inefciencies in state
government programs for corrective legislative action.
The Fiscal Futures Project researchers also suggested
additional budget process reforms. Illinois could
change the way it calculates and reports its revenue,
expenses and liabilities, including technical changes
such as timely reporting, multi-year forecasting,
consolidated budget reporting, and apolitical revenue
estimates. However, they recognized that, though
easy and inexpensive to do, implementation of these
changes would be difcult because they have the
greatest potential to alter the information used in
fscal decision making on an ongoing basis, and
thus the greatest potential to fundamentally change
budgeting.
5
Nonetheless, legislators might consider using the
Budgeting for Results Commission to study and
develop a comprehensive overhaul of the budget
process. Policymakers and interested observers need
accurate, easily understood, and consistent reports
without political bias, and they need timely access
to the reports and data. Making these changes in
the budget process would open the process up to
independent review and analysis. Such reform would
not only make the process more open, consistent, and
straightforward, it could even bend the cost curve:
it would not change current spending but instead
cut future costs by pleasing credit-rating agencies
enough to lower Illinois borrowing costs.
5
Thus the political nature of bending the cost curve suggested
by Professor Whites article. See footnote 2, above.
The take away is that Illinois policymakers can reduce
future growth in spending. They could deal directly
with elements of the current fscal imbalance or further
reform the budget process, or both. Such measures
could ameliorate Illinois structural defcit by bending
the cost curve. Doing so could reduce the necessity
for immediate and therefore more painful across-the-
board program cuts, while improving the quality of
state services for people who need them.
Further Reading
National Association of State Budget Ofcers.
(2013). State budgeting and lessons learned from
the economic downturn. Available at htp://www.
nasbo.org/sites/default/fles/State%20Budgeting%20
and%20Lessons%20Learned%20from%20the%20
Economic%20Downturn-fnal.pdf
Poterba, James M. (May, 1993). State responses to
fscal crisis: The efects of budgetary institutions and
politics, Working Paper No. 4375. National Bureau
of Economic Research. Available at htp://www.nber.
org/papers/w4375