Illinois Law Requires New Revenue Diversions from General Funds in FY2015

February 20, 2014

It is widely known that the State of Illinois faces a dramatic reduction in general operating revenue starting on January 1, 2015, when temporary income tax rate increases enacted in 2011 are scheduled to partially roll back.

General Funds income tax receipts will also decline around the same time for another reason: beginning on February 1, 2015, a portion of individual income tax collections will be diverted from General Funds to fund education and human services.

This revenue will not be lost to the State, but it will not be available to the Illinois General Assembly when it allocates general operating resources during its annual budget process. As a result, it will escape the scrutiny applied to General Funds revenues.

The diversion was highlighted in Governor Quinn’s economic and fiscal policy report, which was issued on January 1, 2014. According to that report, the diversion will reduce General Funds receipts by $443 million in FY2015, $887 million in FY2016 and $904 million in FY2017. These projections were based on revenue estimates when the report was issued and will change as revenue estimates are updated.

The diversion requirement is contained in a little-noticed provision of the law enacted on January 13, 2011  that temporarily increased income tax rates to 5.0% from 3.0% for individuals and to 7.0% from 4.8% for corporations (not including the Personal Property Replacement Tax of 2.5%). The individual income tax rate declines to 3.75% on January 1, 2015 and the corporate income tax rate declines to 5.25%.

Currently all of the individual income taxes collected by the State are deposited into General Funds, with one exception. A share of individual income tax revenues is diverted into a separate fund—the Income Tax Refund Fund—to pay income tax refunds. The remaining net revenues are deposited into General Funds.

Under the new requirement, a portion of net revenues will be diverted to two new funds: the Fund for the Advancement of Education and the Commitment to Human Services Fund. Each of the new funds will receive 1/30 (about 3.33%) of net individual income tax revenues annually through FY2024; in February 2025 the share increases to 1/26 (about 3.85%).

According to the law, money deposited into the Fund for the Advancement of Education will be appropriated to provide financial assistance to education programs. Money deposited into the Commitment to Human Services Fund will be appropriated to provide financial assistance for community-based human service providers and for State-funded human service programs.

The new deposits are intended to be in addition to current levels of funding for human services and education. Appropriations from the new funds “shall supplement and not supplant” the current level of funding, according to the law. 

The State’s annual budget process is focused on the allocation of General Funds resources. Diverting revenues from General Funds essentially hides resources from public view, making the budget process less transparent. The statutory diversions also make it more difficult for lawmakers to ensure that resources are allocated each year to the most critical priorities.

For similar reasons, the Civic Federation has long recommended that special State funds should be reviewed annually and consolidated and/or eliminated except in high-priority situations. Special State funds consist of all State funds except General Funds, bond-financed funds, debt service funds, federal trust funds and State trust funds. The vast majority of the approximately 550 special State funds were created to receive earmarked revenues that are only used for a designated purpose.