April 18, 2014
Although the budget recommended by Governor Pat Quinn for FY2015 proposes extending current income tax rates to avoid a massive revenue cliff, it also relies on borrowing $650 million to close a budget gap and pay down a portion of the State’s backlog of unpaid bills.
Despite the additional income tax revenues, total General Funds revenues from State taxes and fees combined with federal resources do not cover all the expenditures proposed by the Governor. As shown in this table, the Governor’s recommended FY2015 budget shows revenues totaling $37.9 billion compared to recommended expenditures of $38.1 billion, creating an operating deficit of $169 million without the borrowing plan.
The budget proposes borrowing $650 million from the State’s special funds to eliminate the budget gap and using the remaining $481 million to pay down the State’s backlog of unpaid bills, which would still total $5.0 billion at the end of FY2015. Without the borrowed funds, the State’s backlog of bills would not be reduced from $5.3 billion at the end of FY2014 and would likely grow by the operating deficit of $169 million.
The State has in excess of 600 special funds that are intended for designated purposes outside of its General Funds operations. These accounts receive revenues through designated fees, grants or payments from other governments. If the interfund borrowing is approved by the General Assembly for FY2015, this would be the second time Governor Pat Quinn will have used interfund borrowing to shore up the General Funds budget since taking office in 2009.
In FY2011 the General Assembly authorized the Governor to borrow nearly $1.0 billion from the State’s special funds to pay for its General Funds operating costs. The State had transferred excess balances out of these funds to pay for operations in the past, a practice known as fund sweeps, but this was the first time the State was required to repay the amounts taken from the special funds. The State was also required to reimburse the special funds for any interest that would have otherwise accrued if the funds had not been borrowed or pay any penalties incurred due to a lack of funds in the accounts. Interfund borrowing in FY2011 totaled $496 million from nearly 200 funds, which were repaid over 18 months and at an interest cost of $878,187, according to quarterly reports published by the Governor’s Office of Management and Budget.
The cost of interfund borrowing is relatively low, totaling only 0.17% in interest paid. However, by using borrowed funds to provide for General Funds operations, the State pushed FY2011 operating liabilities into future years, increasing the total operating expenses in FY2012 and FY2013 due to the required repayments of $356 million and $132 million respectively. Borrowed funds are also one-time resources that create gaps in future operating budgets and must be replaced by additional borrowing, budget cuts or revenues in future years.
Interfund borrowing was not the only borrowing for operations used to balance the FY2011 General Funds budget. Due to a massive budget shortfall in FY2011, the State also borrowed $3.7 billion to pay for its required annual pension contributions and $1.5 billion in Tobacco Settlement Bonds to pay for General Funds operating costs. However, the General Assembly passed the temporary income tax rate increases halfway through the fiscal year, increasing the individual income tax rate from 3.0% to 5.0% and the corporate income tax rate from 4.8% to 7.0%. The additional revenues from the income tax increases replaced the borrowed resources in the following years and helped pay for the ensuing debt service on the pension bonds and repayment of the interfund borrowing. The Tobacco Settlement bonds are repaid through resources outside the General Funds. In the last three budget years since the income tax rates were increased, the State has not borrowed for operations.
As previously discussed here, the State faces a loss of annual operating revenues totaling nearly $4.0 billion by the end of FY2016 due to the partial rollback of income tax rates on January 1, 2015 as scheduled under State law. When the higher rates were passed in 2011, the law included a partial sunset to 3.75% from 5.0% for the individual income tax and to 5.25% from 7.0% for the corporate income tax on January 1, 2015, halfway through the fiscal year. Without the extension of the income tax rates, the State’s General Funds revenues will decline by $1.8 billion to $34.9 billion in FY2015 from $36.7 billion in FY2014, according to the Governor’s budget.
If the current rates were extended, the State’s General Funds revenues instead would increase by $1.2 billion. The budget does show the implications of both scenarios, labeling the budget with the tax rate extensions as “recommended” and the budget with the scheduled rollback as “not recommended.” The Governor’s recommended budget has $3.0 billion more in State resources than the not recommended budget.
However, even after accounting for the extension of the income tax rates, the FY2015 revenues are not enough to balance the Governor’s recommended budget, leading to the need for the $650 million of new interfund borrowing. The recommended budget shows expenditures increasing by $2.2 billion to $38.1 billion in FY2015 from $35.9 billion in FY2014. This does not include $773 million in proposed but not enacted supplemental appropriations for FY2014. As discussed here, one of the largest new expenses in the budget is the Governor’s proposal for a new property tax credit, which is expected to cost an additional $715 million in FY2015.