RESEARCH Business Economy

ILLINOIS BUDGET
Passage of 'rainy day' fund cited as vitally important by fiscal expert

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

6/1/2000

CHAMPAIGN, Ill. -- The establishment of a "rainy day" fund by the Illinois Legislature for the next state budget is a valuable first step that will need fine-tuning in the future, according to a leading state fiscal expert.

J. Fred Giertz, an economist at the University of Illinois Institute of Government and Public Affairs, called the approval of the contingency fund the most noteworthy act by the General Assembly during its recent legislative session. It follows years of discussion of how best to meet unexpected revenue shortfalls, a problem that plagued the state after the 1990-91 national recession.

"The establishment of a rainy day fund has been a goal of fiscal reformers for many years," Giertz noted. A total of $225 million will be used to start the fund from the state's share in the national tobacco lawsuit settlement. Last December, Illinois received $140 million from the settlement, the first of a projected $9.1 billion to be paid by tobacco companies to the state during the next 25 years for smoking-related health costs.

Giertz said, however, that the fund as constituted has some deficiencies. "In particular, there is no automatic funding mechanism to build up reserves. Most observers believe that a fund from $500 million to $1 billion in size is needed in Illinois."

In addition, there are no legislative guidelines for triggering the use of the funds for a "rainy day."

Overall, the fiscal 2001 budget is "cautious and conservative," according to Giertz, with Gov. George Ryan and the General Assembly resisting "the temptation" to enact large and continuing tax cuts. Based on Giertz's published analysis, the state should emerge "in good fiscal health" at the end of fiscal 2001 unless there is a major downturn in the national economy.

The approved state budget provides an increase of $327 million in state aid to primary and secondary public schools and $130 million for higher education. The budget also contains $350 million in tax relief, much of it temporary. The largest portion of the relief ($280 million) is a one-time doubling of the 5 percent property-tax credit claimed on state income-tax returns. This will be paid in the form of a rebate to taxpayers this fall.

A credit for low-income working families tied to the federal earned-income tax is expected to benefit 270,000 low-income families at a cost of $35 million a year. The program will end after three years unless renewed. The final portion of the tax-relief package is an increase in the income eligibility level for state circuit-breaker relief for low-income elderly residents.

State revenues for the current budget year are expected to exceed earlier estimates by more than $500 million. Giertz predicted that the state will end the budget year on June 30 with a general funds balance of well over $1 billion.