RESEARCH Business Economy

ILLINOIS ECONOMY
Illinois fiscal picture turned cloudy well before attacks of Sept. 11

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

2/1/02

Photo by Bill Wiegand UI Economist J. Fred Giertz says the shortfall in Illinois tax revenues was apparent long before the terrorist attacks of Sept. 11.

CHAMPAIGN, Ill. — Don't blame the terrorists.

The shortfall in Illinois tax revenues – which has caused Gov. George Ryan to call for $500 million in budget cuts midway through the fiscal year – was apparent long before the terrorist attacks of Sept. 11, according to University of Illinois economists J. Fred Giertz and Therese J. McGuire.

"The state's current plight is often attributed to the economic weakness following the terrorist attacks," Giertz and McGuire write in their annual review of state finances. "In fact, the shortfall was an accident waiting to happen from the very beginning of the fiscal year."

Lulled by years of revenue growth fueled by the economic boom, the General Assembly approved a record-setting $25-billion budget last year. While forecasts of rising revenues were "at least barely plausible" when the budget was submitted by Ryan last February, "it was clear near the beginning of the fiscal year that the economy had weakened significantly and that the revenue projections were highly suspect," the economists wrote.

Tax revenues promptly dropped below projections once the fiscal year started last July. As the overall economy skidded into recession, the state’s revenue shortfall was $500 million "even before the effects of the terrorist attacks were felt." Revenues currently are expected to be $600 million to
$800 million below the budget target for the year.

How to get out of the fiscal squeeze will preoccupy Springfield over the coming months. With statewide elections looming this year, neither the governor nor legislative leaders (from either political party) has broached the idea of tax increases, which could restore the diminished revenue stream. Instead, Ryan has proposed cuts in Medicaid, reduced aid to state universities and mandatory furloughs for state employees.

"Whether these cuts will actually be accomplished is still uncertain," Giertz and McGuire wrote, noting that such cutbacks will cause hardship on institutions that made commitments based on prior appropriations. State budget rescissions could further affect federal matching grants in some programs.

Fortunately, Illinois has liquid reserves – a "funds balance" and a "rainy day" account – to cushion the revenue falloff. Dipping into these funds would maintain state functions at their appropriated level for the rest of the year, "but would significantly reduce the state’s reserves and would put extreme pressure on next year’s budget" beginning July 1.

So the economists predict a combination of cutbacks and reserve-fund allocations to handle the immediate crisis.
However, Illinois government will face at least 18 months of fiscal austerity, even if the national recession ends shortly, which is far from certain.