T a x & B u d g e t
B r i e f
J a n u a r y 3 , 2 0 1 1
A Bright Tomorrow
How a spending growth index will help Illinois
Introduction
Controlling the future growth of governmentspending is key to solving the state’s budgetcrisis and turning Illinois’s economy around. Tax and expenditure limits can be a good way to ensure that government outlays do not grow faster than the public’s ability to pay. All spending limits are not created equal, how-ever. How they are written and implementedgoes a long way in determining if they’ll meettheir underlying goals of promoting scal sta-bility and responsibility. Two spending limit proposals before the IllinoisGeneral Assembly include HJRCA 59 (intro-duced by State Representative Keith Farnham)and the Pension Funding & Fairness Act(developed by the Illinois Policy Institute). Bothmeasures seek to limit state spending growth toa reasonable level.
Kristina Rasmussen
is Executive Vice President with the Illinois Policy Institute.
J. Scott Moody
is a Senior Fellow for Budget and Tax Policy for the Illinois Policy Institute.
HJRCA 59Pension Funding & Fairness Act
Effective DateFiscal Year 2014 and thereafter.Fiscal year after Act takes effect.ExpendituresAffectedAggregate appropriations and trans-fers from the general funds.General Fund, Road Fund, other funds (calculatedseparately).ExpendituresExcludedRe-appropriations from previousyears, debt service, and funds depos-ited in budget stabilization fund(s).Amounts returned to taxpayers as refunds, federalfunds, funds collected on behalf of another level of government, pension contributions by employees andpension earnings, pension and disability payments toformer government employees, gifts/grants/donations,court awards, and reserve transfers.Spending GrowthIndexPersonal Income. Average annualpercentage change in average percapita personal income for Illinoisfor most recent 5 years, denedby U.S. Department of Commerce.Government transfer payments arenot excluded.Ination + Population. Ination is the increase in theChicago Metropolitan Statistical Area Consumer PriceIndex for most recent calendar year as calculated byU.S. Department of Labor (not more than 10% or lessthan zero). Population is average annual percentageincrease in population for the 3 most recent yearsavailable, as calculated by U.S. Department of Com-merce (not less than zero).Spending GrowthIndex OverridesGovernor declares scal emergency.With concurrence from Comp-troller and Treasurer, the GeneralAssembly may override spending capwith a 3/5 vote in each house.Measure approved by 3/5 vote in House and Senate,along with a majority of voters in a general or specialelection.
Detailed Analysis of Spending Limits
Graphic 1. Side-by-Side Comparison of HJRCA 59 andPension Funding & Fairness Act
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HJRCA 59Pension Funding & Fairness Act
“Emergency”DenitionDened by governor.“Emergency” dened as extraordinary circumstancesoutside the control of the General Assembly, includingcatastrophic events, such as natural disaster, terrorism,re, war, riots, or court orders.Voter InputNo provision.Voters approve whether to allow spending beyondlimit by a majority vote at next general election (orthe General Assembly may call for a special election).Past Due PaydownFundNo provision.Funds available over spending growth index go rstto Past Due Paydown Fund, to be used to pay off pastdue debt. Fund closes when past due operating debt ispaid off. Excess revenues then go to Budget Stabiliza-tion Fund.Budget StabilizationFundExcess funds over spending limitmust be deposited into budget stabi-lization fund(s); up to 10 percent of budget. Not specied when and howfunds can be used.Once the Past Due Paydown Fund is lled, excessrevenues go to Budget Stabilization Fund; up to 8percent of budget. Used when state revenues are lessthan allowed spending.Taxpayer Relief Allows certain excess funds to be“refunded”; to whom and how notspecied.Once the Past Due Paydown Fund and Budget Stabili-zation Fund is lled, excess revenues to go to TaxpayerRelief Fund. If amount in Fund exceeds 1% of generalfund expenditures, General Assembly authorizestemporary or permanent broad-based tax rate reduc-tions. If legislature fails to act, rebates are provided totaxpayers based on the number of exemptions claimedin the previous year.Pension PaymentRequiredNo provision.First appropriation must be the full pension payment,as dened by the Commission on Government Fore-casting and Accountability.Revenue IncreaseProvisionNo provision.Increases in state revenue (new tax, increased rate,expanded base, exemption/credit/refund repeal,extension of expiration date) must be approved by3/5 majority in each chamber and a majority of voters.Voter approval not necessary if available revenue isless than annual payments on general obligation bonds,pension payments, nal court judgments, or if it is anemergency tax.Emergency TaxesNo provision.Emergency taxes may be levied for a specied timeperiod with 3/5 vote of the House and Senate only af-ter other reserves are depleted, and must be refundedafter 180 days if the emergency ends and the money isnot spent on the emergency. Emergency taxes must besubmitted for approval by voters at the next regularelection; if not approved, tax expires 30 days afterelection.
Detailed Analysis of Spending Limits
Graphic 1 (Cont’d). Side-by-Side Comparison of HJRCA 59 andPension Funding & Fairness Act
Recommendations for Improvement
Amending HJCRA 59 with provisions fromthe Pension Funding & Fairness Act will helpachieve the ultimate goal of a balanced and reli-able state budget.
1.
Strengthen the spending cap.
HJRCA 59 relies on a spending limit tied topersonal income growth. In particular, it limitsspending growth to the average annual per-centage change in average per capita personalincome for Illinois for most recent 5 years, asdened by U.S. Department of Commerce.Had this limit been in place from scal years1997 to 2009, Illinois would have saved acumulative $29.392 billion over actual generalrevenue fund spending. Fiscal year 2009 spend-ing would have totaled $27.335 billion, or $1.8billion less than available revenues. While the per capita income growth index is agood measure, removing government transferpayments and compensation from personalincome calculations can strengthen this limit. This would ensure that government paymentsto individuals don’t drive more governmentspending by upping personal income statistics.Had this measure been in place, the scal year2009 budget would have been $27.323 billion.
Graphic 2. Allowable SpendingGrowth, Average Annual PercentageChange in Average Per CapitaPersonal Income for Illinois for MostRecent 5 Years
Fiscal YearSpending GrowthPercent Increase
1998419994.220003.82001420023.420032.520042.52005220062.320073.320083.820093.7
Source: Illinois Policy Institute, U.S. Department of Commerce
Another route would be to limit spending tothe combination of the growth in ination plusthe growth in population. Had this measurebeen in place from scal years 1997 to 2009, to-tal savings would have equaled $37.376 billion. The scal year 2009 budget would have been
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Graphic 3. Growth in General Fund Expenditures, Fiscal Years 1997 to 2009
Another route would be to limit spending to the combination of the growth in ination plus the growth in population.Had this measure been in place from scal years 1997 to2009, total savings would have equaled $37.376 billion.
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