Now that Illinois voters rejected the Graduated Income Tax Amendment, the next logical question is how the state will balance its budget for fiscal year 2021 and beyond. Recently released estimates from the Commission on Government Forecasting and Accountability show the likelihood of a FY 21 General Funds deficit in the $4.1 billion range. While there is room in the state’s borrowing authority with the Federal Reserve under the Municipal Liquidity Facility (MLF), a larger concern is that much of this deficit is not due to COVID-19 related revenues and expenditures, but due to a long standing mismatch between state revenues and expenditures, a problem that the graduated income tax proposal was supposed to address. Further, the MLF is a short-term lending facility, meaning that the state must repay any borrowing within a year. Borrowing this way would get the state through the immediate budgetary challenge, it would at once face another one in FY 22.
Article VII, Section 2 requires the Governor to submit and the General Assembly to pass a budget that is balanced, given “funds estimated” to be available to the state during the fiscal year and is not allowed to borrow in the long-term to finance operational deficits. As a result, the choices to balance the state budget include tax increases, spending cuts, or both. Since they rejected the graduated income tax proposal, it is fair to assume that the support of Illinois’ citizens is not present for income tax increases. The other major General Fund revenue source is the retail sales tax. Increasing it may create other problems, such as increasing the regressivity of the state tax system. Furthermore, by the time the General Assembly could vote on any tax rate changes, most of the fiscal year will have passed.
This leaves budget cuts as the most practical (if potentially harmful) way of balancing the budget. This will require cuts in operational spending through program cuts or termination. Some mandatory programs such as unemployment compensation will be shielded as they are required by law to provide the services to all eligible recipients (mandatory spending). And unfortunately, during this time demands for mandatory spending programs are rising because of the sluggish pandemic economy. This leaves programmatic cuts as the most workable option for policy makers.
In this blog post, I will examine what budget theory developed over the past one hundred years tells us about how cuts should be made and will discuss a relatively new technique that can be used to target cuts. I will admit at the onset of the discussion that due to how Illinois has created its budgets, this will be a more difficult exercise than it could be. But we can and should make better budget decisions and this effort can be informed by prior studies on the most effective ways to make these decisions.
One of the fundamental tenets of public budgeting theory is that budget formats influence the way that decision makers think about budget choices. Illinois, like many other states, has for years employed a line-item budget as its basic management tool. This type of budget lists program inputs such as personnel, supplies, and materials. The focus is on controlling program spending. This type of budget is the starting point in preparing any government budget. However, when it comes to making decisions in times of deficits, this budget type tends to lead decision makers to opt for “across-the-board” cuts where all programs and departments get similar percentage cuts. This tends to be more politically acceptable as nobody’s “ox is gored” too much. But in this strategy, decision makers cut programs that are effective and efficient along with ones that are not. This is obviously problematic for long-run costs and efficiency of state government.
There are two major alternatives to line-item budgeting, which would help decision makers make more effective budgets in general and help make decisions on cuts during times of crisis.
- The first type is program budgeting, setting budget limits or targets for each program – broad area of public spending. This type of budget helps decision-makers directly see the cost of committing to programs, such as how much the state is spending on health services for the poor. This budget type also helps give discretionary power to program managers in a certain area to figure out whether and how they can save money. Unlike line-item budgets, which focus on what is being spent, program budgets focus on how much is being spent on a given area of government action. Typically, governments set spending priorities among and within service areas. Decision makers can use these priorities to target cuts to lower priority programs.
- Performance budgets are the other possibility. Like program budgets, this budget format lists program activities and calculates costs. But it also tracks and sets targets for program outputs, such as the number of applications processed, number of arrests, or miles of roadway resurfaced. This type of budget helps improve efficiency since it reveals the cost of creating program outputs. Program managers can use cost and performance information to decide how to improve efficiency. Decision makers can use cost information to make decisions on budget allocation as well as whether outsourcing may save money. And in times of crisis, decision makers can target cuts toward areas with lower cost efficiency.
Efficiency analysis tools can also help the state target cuts. My recent white paper, published by the Institute for Illinois Public Finance (IIPF), shows how budget efficiency analysis could help a state government set budget targets for service areas. In this study I examined efficiencies across seven program areas of state governments, using a tool that compares Illinois’ cost of producing outputs to the other forty-nine states, controlling for factors like population and cost of living differences. This technique produces a set of “benchmark” state performers in each program area who produce high outputs while having lower costs and resource usage. In the study Illinois performs exceptionally well in higher education, environment and housing, and infrastructure programs (excluding transportation). It is one of the benchmark states, therefore the suggestion would be that state leaders should minimize cuts in these service areas. However, the State performs worse in transportation, and health and hospital services. By cutting inefficiencies in these areas, the state may be able to save a large amount of resources with relatively little impact on service delivery. The study also suggests ways that cuts can be made through purchasing, substituting capital for labor (using technology and other means), and outsourcing (or in-sourcing in some cases).
Whatever decision makers choose as a tool to cut budgets, they should follow the general principles of efficiency and priority targeting for cuts and avoid easy across the board strategies. They can certainly consider other goals such as minimizing the impact on vulnerable communities, but these goals should be informed by data, and decision makers should assess the effects of adopting this goal on efficiency and priority setting. The state can, and in some sense must, make decisions on budget cuts with the focus on improving the financial and economic condition of the state in the long run.
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Dr. Arwi Srithongrung-Kriz is a Visiting Research Fellow in the Illinois Institute of Public Finance at the UIS Center for State Policy and Leadership. Dr. Srithongrung-Kriz received her Doctor of Public Administration (DPA) from University of Illinois-Springfield. Prior to joining Illinois Institute of Public Finance, she was an Associate Professor (with Tenure) at Wichita State University (2013-2018) and University of Nebraska- Omaha (2006-2013). Dr. Srithongrung-Kriz has expertise in public budgeting and finance, fiscal policies, economic growth, and performance measurement.