April 8, 2010
Although some national economic indicators suggest that the global recession, which began in December 2007, is showing signs of a gradual recovery, many state budgets are more stressed than ever and have little hope for significant economic gains in the coming fiscal year.
The most recent report from the National Council of Economic Advisors, published in February, shows a turnaround in national Gross Domestic Product (GDP) beginning in the third financial quarter of 2009 and continuing in the fourth quarter, which ended December 31, 2009. The Council’s data shows that in current dollars, the GDP rose at a 6.3% annual rate in the fourth quarter and that adjusted for inflation it rose 5.3%, using 2005 dollars as a baseline. Technically, a recession is defined by two or more consecutive financial quarters of negative growth in GDP. The recent gain in GDP and the reported February increases in corporate profits and employment, combined with other ongoing improvements in January and December in the areas of personal income and manufacturing could be signs of that the national economy will experience sustained growth in the coming year.
However, the State of Illinois continues to be affected by the recession, which has contributed significantly to its poor fiscal health.
According to the U.S. Bureau of Labor Statistics, the Illinois unemployment rate has more than doubled since the beginning of the recession, rising from 5.5% in December of 2007 to 11.4% in February of 2010, with no improvement in the first two months of 2010. Due to rising unemployment and other effects of the recession, statewide personal income dropped by 1.8% from calendar year 2008 to 2009. This was the first reported annual drop in Illinois’ personal income since at least 1969, the first year the data were collected by the U.S. Bureau of Economic Analysis. Diminished personal income as well as reduced consumer confidence pulls down personal consumption. The decline in consumption affects business income and activity. Illinois’ Gross State Product declined for the first time this decade in 2009, dropping by 2.6% from $516.1 billion in 2008 to $502.7 billion, according to a study released in February by Moody’s Economy.com.
Since state tax revenue in Illinois depends heavily on personal and corporate income taxes and the state sales tax, the recession has resulted in a decline in state revenues. The following chart compares the decline in personal income tax revenue with the increase in the unemployment rate since FY2008, which began July 1, 2007, prior to the start of the recession.
The recession began in the middle of FY2008, but Illinois’ unemployment rate did not begin to increase until the end of the fiscal year. The unemployment rate rose from 5.6% during FY2008 to 8.2% during FY2009, a 2.5 percentage point increase. For the first eight months of FY2010, the unemployment rate averaged 10.9%, a 2.8 percentage point increase over FY2009. Personal income tax collections declined from $10.3 billion in FY2008 to $9.2 billion in FY2009, and the Governor projected another drop for FY2010 to $8.5 billion. In FY2010, the personal income tax is projected to generate 18.0% or $1.9 billion less revenue than in FY2008.
Illinois is not alone; most other states have experienced a drop in revenue during the recession. While Illinois’ personal income tax revenue dropped 3.3% from the second quarter of FY2009 to the second quarter of FY2010, personal income tax revenue for all U.S. states declined by a total of 4.7% during the same period. Illinois’ second quarter state sales tax revenues declined much more dramatically than the national total, falling by 11.7% between FY2009 and FY2010, while state sales tax revenues nationwide declined 2.9% during the same period.
However, many states mitigated the effects of the recession and loss of revenue by utilizing federal funds provided through the American Recovery and Reinvestment Act of 2009. These new federal revenues offset declining state revenues during FY2009 and FY2010. The loss of stimulus funding from the federal government in FY2011 will in effect extend the recession for Illinois and other states as these losses in federal support far outpace projected increases in state revenue in the coming fiscal year.
Positive economic forecasts for Illinois expect some revenue growth in FY2011. While the unemployment rate is currently at 11.4%, the rate is projected to drop during 2011 to 10.5%, according to the aforementioned report from Moody’s Economy.com. The study also projects that personal income will increase by 1.6% in the 2010 calendar year and an additional 2.7% in 2011 calendar year. The budget proposed by Gov. Pat Quinn for FY2011 estimates that personal income tax revenue will grow by 2.7% in the coming fiscal year, which runs from July 1, 2010 through June 30, 2011. In all, the Governor’s budget recommendation estimates total state-source General Funds revenues will increase by $562 million in FY2011.
However, this growth is not sufficient to offset the estimated loss of $947 million in federal stimulus funds from the General Funds in FY2011 or any of the other spending pressures that contribute to the nearly $13-billion deficit facing the State. At this rate, it would take many years of economic recovery to close the massive budget hole that now exists in Illinois. Without other substantial budgetary reform, the State’s inability to pay its bills, reliance on borrowing and annual budget deficits will continue to stress the Illinois economy.