Executive decisions

Rod Blagojevich won his race for governor handily.
Now he has primary responsibility for eliminating the state's red ink.
The fiscal and political bills are about to come due

by Aaron Chambers

Rod Blagojevich spent last year promising pretty much everything to everybody. So when he’s sworn in this month as Illinois’ chief executive, there’s no doubt the occasion will be marked by a massive celebration.

But the mood is likely to turn sour all too soon. Over the next 18 months, the new Democratic governor will face a hole in the state budget that’s been pegged by some at more than $3 billion because anticipated revenues aren’t covering anticipated spending.

Blagojevich, who won election handily, now has primary responsibility for eliminating that red ink.

The fiscal and political bills are about to come due.

“There are only three options that I can see,” says state Treasurer Judy Baar Topinka, the only Republican constitutional officer. “You raise taxes, you make severe cuts or you do a combination of both.”

Those options didn’t make it into Blagojevich’s campaign brochures. He ruled out tax hikes, but not spending reductions. In fact, he promised to reopen several state facilities that were closed last spring as part of a cost-saving move. He also called for additional spending in such programs as prescription drug coverage for seniors. To accomplish these goals he said he will “reprioritize” state spending.

Beyond that, Blagojevich hasn’t played his hand and is not required to do so until February 19, when he must submit his first proposed budget to the General Assembly. He and the nation’s other governors, many of whom face the same fiscal problems, don’t have the kind of leeway granted federal budgeteers. Virtually all states are required to balance their budgets.

In the weeks since the election, the new administration has shared few details about its plans.

Blagojevich has, however, formed a committee to study the state’s budget situation and assist him with shaping a budget. Revenue considerations on the table include extending the state sales tax to cover such services as haircuts and auto repair, as well as short-term borrowing. Cost-saving possibilities include trimming boards and commissions, releasing nonviolent offenders from prison, delaying the state’s bill-paying cycle and not filling thousands of state jobs vacated by those taking early retirement.

As for spending, the Blagojevich team is playing just as close to the vest. The Chicago Tribune pegged Blagojevich’s campaign spending proposals at $805,027,056, citing as its sources media reports, Blagojevich’s Web site and Tribune questionnaires. But Billy Weinberg, Blagojevich’s press secretary, calls the Tribune estimate inflated.

“I hope that the Tribune Co. uses different accountants for the company than they do for the editorial page,” Weinberg said shortly after the election. “Otherwise, they’re going to end up paying Dusty Baker triple what they intend to.” He was referring to the new manager of the Chicago Cubs, which the Tribune Co. owns.

Weinberg also e-mailed to Illinois Issues a statement contending the Tribune had double- and in some cases triple-counted key elements of Blagojevich’s spending plan. He cited Blagojevich’s education proposal. The newspaper, Weinberg says, estimated the total at $315 million, then counted some components of that proposal separately, including an early childhood development plan, estimated at $100 million, and a plan to award scholarships to students planning to teach, estimated at $45 million.

The statement also contended estimated costs associated with expanding the state’s prescription drug program should take into account “savings” incurred when seniors don’t require as much in-patient care because they will have adequate preventive medicine.

The statement did not address any of Blagojevich’s other proposed spending, such as reopening the Sheridan Correctional Center and the Lincoln Developmental Center. It also did not include an estimated spending total.

It did, however, suggest that any accounting of spending proposals should coincide with a list of additional state revenues that would flow from Blagojevich’s economic development plan and such proposals as eliminating state subsidies to the horse racing industry. Last year, the industry received more than $25 million in subsidies and tax breaks.

Blagojevich has hinted that certain areas of spending are headed for the chopping block, though. He said during the campaign that the state Department of Commerce and Community Affairs and the Illinois State Board of Education would be good places to cut bureaucracy. He said he would eliminate legislative member initiatives, projects designated for home districts that have directed state funding to everything from local firetrucks to bike paths for community parks. He also formed a committee to study the governor’s 400 or so boards and commissions that cost the state at least $6.9 million a year. He hinted there could be plenty to cut there.

The budget crunch stems in part from a slumping national economy, which was exacerbated by the September 11 terrorist attacks in 2001. But analysts see problems on both sides of the ledger. Clearly, Illinois isn’t the only state facing an eroding bottom line. A survey conducted in November by the National Conference of State Legislatures found that more than half of the states are facing gaps in their fiscal year 2003 budgets. Revenues have not met projected levels in two-thirds of the reporting states, the survey found, while expenditures have exceeded budgeted levels in more than half of those states.

A similar study by the National Governor’s Association concluded that plunging tax revenues combined with soaring health care costs have created the worst fiscal situation for the states since World War II. As in Illinois, income tax revenues have plummeted across the nation during the last two years, while Medicaid spending has soared.

Some Illinoisans also maintain the deficit is due to this state’s failure to prepare for an economic slowdown during the early years of Gov. George Ryan’s administration.

“Medicaid and the income tax are both just subsets of our overall revenue and expenditure problems,” says Illinois Comptroller Daniel Hynes. “If you go back four years, you will see that the state allowed itself to spend excessively during healthier economic times. We saw major increases in spending across the board, both in our general funds and overall budget.”

Everyone can agree that spending is going up. The current $52.6 billion budget, Ryan’s last, is $14 billion more than former Gov. Jim Edgar’s last budget four years ago. General funds appropriations, generated mostly from sales taxes, income taxes and federal aid, grew $2.4 billion from $19.9 billion to $22.3 billion.

Hynes suggests that some of that spending was excessive. Does the creation of a dedicated fund for legislative member initiatives qualify? He says yes. Called the Fund for Illinois’ Future, it was enacted in 1999 along with Illinois First, Ryan’s $12 billion public works program. During that year and the following two years, $560 million was transferred from the general revenue fund to the member initiative fund.

“There was over $500 million drained from the general revenue fund for the Fund for Illinois’ Future to pay for these projects,” Hynes says. “That is money that many of us wish we still had.”

The general funds umbrella includes the general revenue fund, the state’s main checking account, and some education dollars. The remainder of the budget consists mostly of state and federal funds dedicated for such projects as road construction. As it would be more difficult to raid these funds for general use, Blagojevich is expected to focus adjustments within the general funds.

The bulk of the current fiscal year’s $22.3 billion in general funds appropriations is dedicated to education, health care and public aid. Certain moneys, such as those associated with Medicaid, can’t be cut without losing dollar-for-dollar matching grants from the federal government. In budgetary terms, this generally means they’re non-discretionary. But whether these and other funds are discretionary is relative.

“You really need to define what discretionary is,” says state Budget Director Mike Colsch. “For example, you could argue that certain components of Medicaid are discretionary, but others would argue that services and rates have been pared back as far as they should be pared back. Is education discretionary? Legally, yes. But practically, as a place where you could get large budgetary reductions, I doubt it.

“Once people realize that education, Medicaid and human services make up more than 80 percent of the state budget, then they start realizing that the areas where you can practically make reductions, as opposed to legally, are limited.”

The dynamics also are complicated for legislators, who represent varied constituencies around the state. While the governor takes the lead on the budget in Illinois, he still must win approval by both chambers of the legislature.

“Everyone in the General Assembly, all 177 of us, have our own programs that may be precious to us,” says Rep. Art Tenhouse, a Liberty Republican and chief budget negotiator for the House Republican caucus. “For a rural legislator it may be agriculture or the Department of Natural Resources. For someone from the city it may be public aid or human services. What we consider discretionary and nondiscretionary is different for all 177 of us. And to try to pass a budget that makes these kinds of [presumed] cuts, putting 60 votes on it in the House and 30 in the Senate, is going to be a monumental task.”

While Blagojevich considers ways to craft a balanced budget for the fiscal year that begins July 1, he must also balance the budget that ends June 30. Taken together, that hole could approach $4 billion.

According to a budget advisory committee of Chicago Metropolis 2020, a group dedicated to promoting economic growth in the metropolitan region, the shortfall for fiscal year 2003 could reach almost $750 million while the hole in the fiscal year 2004 budget may reach $2.6 billion. That’s a combined figure of more than $3.3 billion.

Hynes estimates the combined budget shortfall could be as much as $3.8 billion if current trends continue.

Topinka, the state treasurer, says it could be as high as $4 billion. “The numbers vary but I want to play worst case scenario,” she says.

The 11-member Metropolis 2020 advisory committee, packed with former state and city budget directors, based its conclusions on data provided by the governor’s Bureau of the Budget, the legislature’s Economic and Fiscal Commission, state agencies and other sources. The study was requested during last year’s campaign by both major gubernatorial candidates.

“What you see here reflects the best judgment of this group of people who were budget directors themselves,” says George Ranney, president and chief executive officer of Metropolis 2020. “But it’s all their review of what was provided by the various state agencies.”

The advisory committee noted that while Illinois’ budget problem is significant, it is proportionally less severe than shortfalls in New York and California. According to the National Conference of State Legis-latures report, New York is facing a $2.5 billion gap in fiscal year 2003, or 6.3 percent of its general funds, while California’s gap is $6.1 billion, or 7.8 percent. The projected $750 million gap for the current fiscal year in Illinois is 3 percent of general funds.

The committee projects that revenues in this fiscal year will be down $387 million due to lagging income and sales tax revenues, and that spending pressures will exceed the budget by $379 million due mostly to the needs of Medicaid, state employees group health insurance and the Illinois Department of Corrections. The committee emphasizes that more than $200 million of this additional spending is due to health care costs.

With regard to fiscal year 2004, the committee expects that revenues will decline to $23.7 billion from projected revenues of $24 billion in this fiscal year. This would mean two consecutive years of negative revenue growth — an unprecedented scenario for Illinois. As the committee anticipates $26.3 billion in expenditures for the next fiscal year, the budget shortfall would be $2.6 billion.

Though Ranney stresses that the committee was charged with analyzing the budget, not solving the budget gap, it did propose a few solutions. For example, the committee says the state could save $61 million by filling only 25 percent of the positions vacated due to the early retirement program passed last year.

The committee did not account for Blagojevich’s spending proposals. But it did encourage him to design a budget that’s geared to prevent, in the long term, the problems that spending is targeted to address. “Currently, spending projections are based on estimating, for example, how much the prison population will grow and budgeting to cover those costs,” the committee’s report says. “The budget does not focus attention on how to intervene to decrease crime so that the prison population stops growing. Similarly, the budget projects the need for transportation funds, assuming that the state continues to grow as it has in the past; yet state spending can encourage the state to grow differently, saving transportation and other resources in the long run.”

Of course, thinking in the long term presents an additional challenge for budgeteers, who will be focused first and foremost on simply pulling the state out of the red.

Yet Hynes, who has trumpeted long-term fiscal planning during his tenure, says he’s optimistic that lawmakers this year will plan for the future. “I think that these experiences the last two years, that have not been pleasant for anyone, are going to cause all of us to reflect on what might be wrong with our system and make some changes that will make everyone’s lives easier,” he says.

The quandary facing Blagojevich does evoke images of former Gov. Jim Edgar working to fill the budget hole he inherited in 1991. When he took office that January, Edgar’s transition team was forecasting a $1 billion deficit. Over the spring, as a recession kicked in, the projected hole grew another $200 million.

But Edgar managed to secure a budget by holding the line on spending. He also kept lawmakers in Springfield 19 days after the scheduled end of session. “[Blagojevich] will probably have to go back to a lot of people that he promised things to and just say, ‘I can’t do it,’” Edgar says. “There’s just no way that you can even keep the status quo with those kinds of numbers. You’ve got to really go in and make some major changes.”

Blagojevich’s budget solution, inevitably, will disappoint not-yet-identified special interests. Still, Rep. Gary Hannig, a Litchfield Democrat and chief budget negotiator for the House Democratic caucus, notes that’s nothing new.

“We always have trouble with the budget, and you’ve even got trouble with the budget in good years,” he says. “Even in the best of years we’ve got about $75 billion worth of needs and wants that we’ve got to squeeze into a $50 billion budget, and it’s just not easy to do.

“Even in the good years of George Ryan, where we had $1.5 billion or $1.6 billion in [revenue] growth, we never walked out [of the Capitol] at the end of session with people and groups happy with the spending levels. They always felt we should have gone higher or given them greater consideration.

It’s just very difficult to please the special interest groups that wander around the building seeking out taxpayers’ dollars.”

If the special interest groups aren’t disappointed this year, they certainly will be surprised.

Illinois Issues, January 2003

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