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BUDGET IMPASS
The Illinois General Assembly is
engaged in an overtime session after having failed to conclude its
business by the May 31 adjournment target. While it is true each
session has its share of substantive law changes that are sought by
interest groups and government officials, the fundamental objective
of the annual gathering of legislators is to determine how the
public’s funds will be spent in the coming fiscal year.
This
year’s impasse is not unlike prior years. Some state officials want
to spend more money than the projected revenue suggests is
available. This year’s situation is exacerbated by the fact that in
recent years the state’s budget has been financed by borrowing,
raiding special funds, one-time revenues and avoiding the huge,
backlogged public employee pension obligation the state is
attempting to manage by meeting a multi-year payment program. The
pension payment schedule begs for over half of the revenue growth
the state expects to receive in the new fiscal year.
If the
pension obligation of over a half billion dollars is met in full,
budget makers have little new money left to satisfy expectations for
increased spending for healthcare obligations primarily in Medicaid
payments to Illinois’ indigent population. The cost of healthcare
continues to outpace inflation and influences Medicaid expenses.
This is an annual escalation that is anticipated to cost another
half billion dollars even without adopting any of Governor
Blagojevich’s healthcare expansion plans.
The cost of human
services already consumes more than half of the state’s budget.
Governor Blagojevich did the legislators no favors when he
unilaterally launched a campaign to expand government healthcare to
cover more than a million additional people and increase taxes on
employers by billions. Fortunately, most members of the General
Assembly rejected the Governor’s ill-conceived folly. Unfortunately,
the Governor continues to press the agenda and thereby defies
progress towards crafting a fiscal year 2008 budget that does not
accommodate his desire for healthcare spending.
The
Governor’s focus on government-managed and taxpayer-financed
universal healthcare has displaced education funding as the
traditional budget priority. Meanwhile, legislators have stated they
would prefer to keep their attention on issues they ran for
re-election on, like schools and long neglected infrastructure
needs.
REVENUES
The General Assembly has rejected
the Governor’s proposed gross receipts tax on employers. The
Governor has rejected any income or sales tax increases to
supplement the state treasury, so tax proposals that would generate
billions in new revenues are presumably off the table. Even so, as
long as the General Assembly is in session, tax proposals that
generate billions of dollars are still in play.
In order to
boost state receipts, the Democratic majorities moved swiftly in the
closing hours prior to the May 31 deadline and passed a poorly
crafted measure, SB1544, with no regard for objection, debate or
input. The bill the House Democrats put together contained a series
of tax increases on employers that primarily falls upon financial
institutions and transportation companies. Especially put upon are
vehicle rental companies. Business structures traditionally used by
small employers such as S Corporations and LLCs also will be facing
new administrative burdens under the proposal. Legislators knew this
measure was flawed, but the sponsors and the majority party caucuses
were of a single purpose. Hopefully, legislators can be persuaded to
revisit the statute and correct the errors prior to the January 2008
effective date.
It was obvious to all observers the members
of the majority party did not care about the quality of the
legislation they approved and sent to the Governor. Their action
reflected two objectives: first, the bill was intended to increase
revenue by over $200 million to help budget making; second, it was a
public relations and political move to demonstrate the legislature
was responsive to the Governor’s continued assault on so-called
“corporate tax loopholes”.
The way SB1544 was crafted and
passed without legitimate public review and participation is a
perfect example of how the legislative process has broken down in
Illinois. Illinois Democrats demonstrated once again that corporate
America cannot expect reasonable, reliable, stable, predictable or
fair tax policy out of Springfield. The House revenue committee gave
this bill eight minutes. The Senate revenue committee did not even
convene a hearing.
GAMING
The only “big dollar”
revenue source still appealing to a legislature that finds tax
increases politically unacceptable is gaming. Despite issues
surrounding morality, social costs, community competition for
investments, and economic interests of the betting industries,
politicians generally see gaming receipts as voluntary
contributions. Receiving more revenue for the state treasury through
expanded gaming appears more palatable than raising taxes or highway
user fees.
This year, expanding gaming by offering more
positions to existing casino operators and possibly authorizing up
to four additional casino locations is seen as the best option for
financing a multi-billion dollar bond authorization to provide for
transportation, school and state building programs. There has not
been a new capital program since Governor Ryan’s Illinois First was
exhausted in 2003. Transportation projects have been severely
restrained not only due to the lack of a revenue infusion, but
because of double digit growth in annual construction inflation and
the Governor’s willingness to steal highway user fee income to spend
on non-highway construction matters.
Legislators have not
yet coalesced around the particular details of a bill, so it is
impossible to speculate about the size of a new capital program.
However, given the fiscal restraint the General Assembly has
demonstrated so far, the measure will likely be inadequate to
fulfill the needs of transportation interests, let alone satisfy
school construction plans. An adequate capital program for
transportation would be expected to increase annual road and bridge
spending to $3 billion, put $500 million annually towards public
transit projects and fulfill a $100 million annual obligation to
keep the CREATE rail modernization and efficiency project on track.
Without state funding for CREATE, it will be difficult to obtain
continuing appropriations for this important program in the next
federal highway and transit bill.
There is no guarantee that
a gaming bill can be crafted to gain sufficient legislative support,
but without it the chance for a significant capital program looks
bleak.
ELECTRICITY, CABLE FRANCHISING and CTA
For
weeks, Capitol watchers have speculated the state budget would wait
on other key legislative matters to be resolved. The most
significant, especially for downstate legislators, has been to find
a way to give relief to electric consumers who have experienced
substantial increases in their utility bills since new rates took
effect in January. Discussions have been underway for weeks, but it
appears a solution may finally be at hand.
Legislation to
establish statewide service standards and cable franchising finally
passed this week. If and when resolution is reached on electricity,
it appears the General Assembly will only have money matters to
focus on.
The Chicago Transit Authority faces
well-documented fiscal shortfalls that will become obvious to
millions of commuters in a few weeks if the General Assembly does
not increase state funds for public transit. An alternative is to
authorize the Regional Transportation Authority to impose increased
sales taxes in the six county metropolitan region to support the
three operating service boards’ budgets (CTA, METRA and PACE). CTA
finances are definitely a part of the budget equation.
WHY NO BUDGET AND WHY NO END IN SIGHT?
The
Governor stubbornly holds on to a desire for expansive new
healthcare initiatives that cannot be funded without huge tax
increases that were already rejected. In addition, the Governor
continues to play at part-time governing; he toys with legislators
without demonstrating serious attention to focusing on or resolving
the true task at hand, crafting a compromise budget that does not
significantly increase taxes.
The Governor has made it
abundantly clear he is willing to continue to raise taxes, but only
if they are imposed upon employers. Democratic legislators are well
aware the Governor has already had them increase taxes and fees on
employers by hundreds of millions of dollars. They balked at adding
billions more embodied in the Governor’s gross receipts tax
proposal. They know the Governor’s tax announcement had shocking
consequences and at least some of them have had their fill of
business bashing and tax threats.
The Governor knows as long
as the General Assembly is in session, there is still the
possibility he can get a bigger budget and raise more taxes. He
spends very little time in Springfield and is not inconvenienced by
the absence of per diem support payments.
Senate President
Emil Jones is willing to raise taxes. The $200 plus million
represented in SB1544 may not be enough for President Jones, but he
has yet to present a tax scheme of his own.
President Jones
has been unequivocal about his desire to put big money into
education. The Governor’s resistance to an income tax increase and
preoccupation with billion dollar increases for healthcare are huge
barriers to President Jones’ wish. Still, President Jones is one of
a handful of legislators who will fall on their swords for the
Governor’s taxes.
President Jones’ Senate Democratic Caucus
appears less aligned with the President’s sentiments. Generally
speaking, freshman senators, downstate senators, and the Hispanic
Caucus appear far more conservative about extravagant new spending
initiatives and tax increases being proposed by their party
leadership. Indeed, only the Chicago contingent anchored by the
Black Caucus and Senator Ronen demonstrate unquestionable support
for bigger government and large tax increases. For example, many of
the caucus members have made it known they have no interest in the
Governor’s health plans, yet 29 voted aye when forced to show
allegiance. Without solid opposition on the part of the Republican
Caucus, SB5 could have passed if a single Republican had broken
ranks.
The Senate Democratic Caucus has been the most
interesting and difficult during the spring of 2007. With 37
members, there is no doubt about their authority to rule, ignore the
22 Republicans as superfluous, and easily muster the 30 votes
required to pass most legislation. Yet President Jones has had
difficulties. He crossed the Hispanic Caucus early with an unpopular
leadership appointment. He embarrassed Senator Forby with a
parliamentary maneuver that some thought disingenuous. He did not
defend Senator Jacobs’ integrity when there was an ugly personal
confrontation over the Governor’s lobbying tactics. He
unceremoniously dispatched Assistant Majority Leader Viverito from
leadership meetings. His caucus meetings have been reported to be
contentious with numerous members challenging the wisdom of
supporting the Governor. He has forced members of his leadership
team to make difficult votes they have been uncomfortable with
casting on matters such as the Governor’s gross receipts tax,
“Illinois Covered” healthcare initiative, a gaming bill and the
imposition of a freeze on electric rates.
In a pique over
loyalty to the troubled gross receipts tax and a show of solidarity
with the Governor in opposition to an income tax increase, President
Jones alienated other members by dropping his strong prior support
of HB750 to fund education. The President has also had to deal with
media challenges to family finances and lapses in ethics, judgment
and the appearance of impropriety. It hasn’t been an easy spring for
the Senate Democrats.
Finding comity and cohesiveness in the
Senate Democratic Caucus will be critical to reaching closure to a
contentious and extended session. Senate President Jones may well be
dependent upon his willingness to listen and faithfully represent
what the members of the caucus have to say about achieving a
reasonable, acceptable and balanced budget. The members of this
Caucus hold the key to getting home for summer vacations.
THE HOUSE OF REPRESENTATIVES
It does not have to
be as difficult as the Governor and President Jones are making it
out to be. Thanks to business tax increases already approved by the
General Assembly and the expected natural growth in revenue, the
General Assembly is looking at a little less than $1 billion
available for new spending. Increased state spending in each of
Governor Blagojevich’s prior budgets has been about $1 billion.
Speaker Madigan has crafted a budget predicated on current
revenue projections and sent it to the Senate for consideration.
Although senators dismissed the House budget in a show of bravado
last week, Madigan’s budget offers a blueprint the Governor and four
caucus leaders should be adjusting to find resolution. The
fundamentals are present. Most agency spending is held at prior year
levels while significant increases are directed towards pensions,
education and healthcare. It is a logical starting point.
The public wants state government to “live within its
means.” Most members of the House of Representatives have apparently
embraced the attitude of their constituents. Minority Leader Cross
has stated his caucus is not inclined to support any tax increases.
This is significant because, in the overtime session, bills with
immediate effective dates, like the budget, require a three-fifths
affirmative vote and that necessitates Republican votes.
Obviously lacking in this budget debate is an important
element commonly prevalent in private sector budgeting:
reallocation. We rarely hear elected officials champion the concept
of reallocation, program elimination or other business world
concepts. Instead, the routine expectation is incremental annual
increases. Effective budgeting requires discipline, choices,
efficiency, and accountability.
These concepts have been
lost in part because of the breakdown of the legislative
appropriations process. Rank and file members of the General
Assembly are no longer engaged in budget building. Instead, they
wait while the five political leaders hold budget summits and return
to their respective caucuses each year with a new state budget the
members are expected to accept without question. If Illinois
taxpayers want better budgeting and greater accountability, their
elected representatives must once again engage in the budgeting and
appropriations process.
THE SPEAKER IS OUR FRIEND
There is little doubt the Speaker of the Illinois House has been
a friend of business on a number of important fronts during the
current session. In a highly unusual move, the Speaker called for a
committee of the whole and dedicated a full day of testimony to the
Governor’s gross receipts tax proposal. The House Democratic Caucus
debated the tax proposal internally and even invited the Governor to
address the group. Subsequently, the House voted unanimously to
reject the Governor’s gross receipts tax proposal.
Indeed,
none of the major tax initiatives that other business association
executives and I anticipated confronting this year have come to
pass. The employers’ payroll tax has not been seen in the House.
SB1296, the trial lawyers’ effort to legalize pursuit of “deep
pockets” where limited liability should prevail did not come to a
vote on the floor.
The Speaker’s budget proposal reflects a
much-restrained counterpoint to the budget plan introduced by the
Governor in March. While not likely to remain in its current form,
the Speaker’s approach reflects a far more reasonable, rational and
appropriate budget plan. We should hope in the coming weeks the
resolve of the House of Representatives to “live within our means”
will be demonstrated time and again by Speaker Madigan and Leader
Cross so when the 2008 budget is adopted it does not stray far from
Speaker Madigan’s outline.
BUT HE ISN’T PERFECT
There is no question that the Speaker has assumed an approach
this year to tax and fiscal policies that have been far more
compatible with employer and taxpayer interests than those sought by
the Governor or the Senate President.
By other measures, the
Speaker’s track record has not been so agreeable. The slap-dash
approach of writing and passing over $200 million worth of business
tax increases without a fair and reasonable committee process was
bad form. Likewise, loading up the Cook County Assessor’s assessment
relief bill with numerous property tax exemptions and increases
makes a mockery of the Illinois real estate tax code. It was a bad
bill that has been made worse. Yet, without the Speaker’s influence
the House would have, like the Senate, approved the Assessor’s
version of the bill which was worst of all.
The Governor’s
“loophole” demagoguery of the corporate income tax is over a mere
$200 million in what are common and reasonable exemptions in both
federal and state tax law. It is a miniscule amount when compared to
the individual income tax code that gives over a billion dollars in
“loopholes”. “Loopholes” in the property tax give individuals
billions more in tax relief.
The new bill contains so much
property tax relief that, in aggregate, relief will probably exceed
the total amount of increased appropriations for schools authorized
in the 2008 budget. School districts at their maximum rate (often
poorer districts) will receive less money from property taxes when
the assessments are reduced. Other districts with commercial and
industrial wealth will compensate by shifting tax burden to those
properties. One of the impacts of the new assessment relief bill is
to shift state aid formula money to Cook County. Popular as they may
be these actions are clearly contradictory to the often stated goal
of increased funding for education.
If we are to get serious
about property tax relief in Illinois, the focus needs to move from
the assessment charade to taxes levied by taxing authorities.
The trial bar was successful in passing legislation to
introduce non-quantifiable grief and suffering terms into the
equation for jury awards in liability cases. Business supported
legal reform legislation never got past the introduction stage.
The prize for the most insidious legislation in the House
this year was the amendment to SB1592 that I tagged as the “Hugo
Chavez Power Act”. This bill, which fortunately has not moved, takes
a page straight out of the Venezuelan President’s playbook. If
approved it would tax existing private sector power plants out of
business while creating a state power authority to build generating
facilities, as well as buy and sell energy at no profit.
Concurrent to SB1592, no doubt intended as a threat to
Illinois’ energy industry, legislators were busy browbeating
electric generating and distribution company personnel. Legislators
spent countless sessions and hundreds of hours to get corporate
officers to repent for having the gall to re-introduce electric rate
increases after giving their customers a 20% price cut and a ten
year rate freeze. Some of Ameren’s service territory had not seen a
rate increase in 25 years. Legislators were livid because many of
their constituents were livid about unexpected escalations in the
price of electric energy that some utility customers found
prohibitively expensive.
Many of today’s legislators
undoubtedly regret their predecessors ever accepted the move towards
deregulation and market based pricing. After ten years of peace,
price volatility has awakened consumers. These were brutal sessions
for business people who had foregone the right to rate increases for
a decade. They experienced tremendous change and realignment in
their companies to prepare for the new and competitive marketplace.
They successfully managed through a difficult transition with
financial restraints. Instead of the long awaited release to compete
in a market based economy, they found themselves being interrogated
and threatened with everything but thumbscrews and rubber hoses for
trying to effectively and profitably run a business with the least
amount of government regulation and interference possible.
We genuinely hope public officials and principals of
Illinois’ electric industry will reach a satisfactory solution. This
has been a long process. Illinois has been on this path for over a
decade. It is important the state honor its commitment to regulatory
freedom. We do not think business leaders intentionally abuse
customers. Nor do we think the power of government should be exerted
to coerce businesses to operate with artificial rules or distorted
market. |
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