January 3, 2011

A Bright Tomorrow
How a spending growth index
will help Illinois

Introduction
Controlling the future growth of government their underlying goals of promoting fiscal sta-
spending is key to solving the state’s budget bility and responsibility.
crisis and turning Illinois’s economy around.
Tax & Budget Brief

Two spending limit proposals before the Illinois

Tax and expenditure limits can be a good way
to ensure that government outlays do not grow
faster than the public’s ability to pay.
All spending limits are not created equal, how-
ever. How they are written and implemented
goes a long way in determining if they’ll meet
General Assembly include HJRCA 59 (intro-
duced by State Representative Keith Farnham)
and the Pension Funding & Fairness Act
(developed by the Illinois Policy Institute). Both
measures seek to limit state spending growth to
a reasonable level.

Detailed Analysis of Spending Limits

Graphic 1. Side-by-Side Comparison of HJRCA 59 and
Pension Funding & Fairness Act

HJRCA 59 Pension Funding & Fairness Act

Effective Date Fiscal Year 2014 and thereafter. Fiscal year after Act takes effect.
Expenditures Aggregate appropriations and trans- General Fund, Road Fund, other funds (calculated
Affected fers from the general funds. separately).
Amounts returned to taxpayers as refunds, federal
funds, funds collected on behalf of another level of
Re-appropriations from previous
Expenditures government, pension contributions by employees and
years, debt service, and funds depos-
Excluded pension earnings, pension and disability payments to
ited in budget stabilization fund(s).
former government employees, gifts/grants/donations,
court awards, and reserve transfers.
Inflation + Population. Inflation is the increase in the
Personal Income. Average annual
Chicago Metropolitan Statistical Area Consumer Price
percentage change in average per
Index for most recent calendar year as calculated by
capita personal income for Illinois
Spending Growth U.S. Department of Labor (not more than 10% or less
for most recent 5 years, defined
Index than zero). Population is average annual percentage
by U.S. Department of Commerce.
increase in population for the 3 most recent years
Government transfer payments are
available, as calculated by U.S. Department of Com-
not excluded.
merce (not less than zero).
Governor declares fiscal emergency.
With concurrence from Comp- Measure approved by 3/5 vote in House and Senate,
Spending Growth
troller and Treasurer, the General along with a majority of voters in a general or special
Index Overrides
Assembly may override spending cap election.
with a 3/5 vote in each house.

Kristina Rasmussen is Executive Vice President with the Illinois Policy Institute. J. Scott Moody is a Senior
Fellow for Budget and Tax Policy for the Illinois Policy Institute.
 Page 2 of 5
Detailed Analysis of Spending Limits
Graphic 1 (Cont’d). Side-by-Side Comparison of HJRCA 59 and
Pension Funding & Fairness Act

HJRCA 59 Pension Funding & Fairness Act

“Emergency” defined as extraordinary circumstances
“Emergency” outside the control of the General Assembly, including
Defined by governor.
Definition catastrophic events, such as natural disaster, terrorism,
fire, war, riots, or court orders.
Voters approve whether to allow spending beyond
Voter Input No provision. limit by a majority vote at next general election (or
the General Assembly may call for a special election).
Funds available over spending growth index go first
to Past Due Paydown Fund, to be used to pay off past
Past Due Paydown
No provision. due debt. Fund closes when past due operating debt is
Fund
paid off. Excess revenues then go to Budget Stabiliza-
tion Fund.
Excess funds over spending limit
Once the Past Due Paydown Fund is filled, excess
must be deposited into budget stabi-
Budget Stabilization revenues go to Budget Stabilization Fund; up to 8
lization fund(s); up to 10 percent of
Fund percent of budget. Used when state revenues are less
budget. Not specified when and how
than allowed spending.
funds can be used.
Once the Past Due Paydown Fund and Budget Stabili-
zation Fund is filled, excess revenues to go to Taxpayer
Relief Fund. If amount in Fund exceeds 1% of general
Allows certain excess funds to be
fund expenditures, General Assembly authorizes
Taxpayer Relief “refunded”; to whom and how not
temporary or permanent broad-based tax rate reduc-
specified.
tions. If legislature fails to act, rebates are provided to
taxpayers based on the number of exemptions claimed
in the previous year.
First appropriation must be the full pension payment,
Pension Payment
No provision. as defined by the Commission on Government Fore-
Required
casting and Accountability.
Increases in state revenue (new tax, increased rate,
expanded base, exemption/credit/refund repeal,
extension of expiration date) must be approved by
Revenue Increase 3/5 majority in each chamber and a majority of voters.
No provision.
Provision Voter approval not necessary if available revenue is
less than annual payments on general obligation bonds,
pension payments, final court judgments, or if it is an
emergency tax.
Emergency taxes may be levied for a specified time
period with 3/5 vote of the House and Senate only af-
ter other reserves are depleted, and must be refunded
after 180 days if the emergency ends and the money is
Emergency Taxes No provision.
not spent on the emergency. Emergency taxes must be
submitted for approval by voters at the next regular
election; if not approved, tax expires 30 days after
election.
 Page 3 of 5

Recommendations for Improvement

Amending HJCRA 59 with provisions from
Graphic 2. Allowable Spending
Growth, Average Annual Percentage
Another
the Pension Funding & Fairness Act will help
achieve the ultimate goal of a balanced and reli-
Change in Average Per Capita route would
Personal Income for Illinois for Most
able state budget.
Recent 5 Years be to limit
1. Strengthen the spending cap. spending
HJRCA 59 relies on a spending limit tied to Spending Growth
personal income growth. In particular, it limits
Fiscal Year
Percent Increase to the
spending growth to the average annual per- 1998
1999
4
4.2
combination
centage change in average per capita personal
income for Illinois for most recent 5 years, as 2000 3.8 of the growth
defined by U.S. Department of Commerce. 2001 4
2002 3.4
in inflation
Had this limit been in place from fiscal years 2003 2.5 plus the
1997 to 2009, Illinois would have saved a 2004 2.5
cumulative $29.392 billion over actual general 2005 2 growth in
revenue fund spending. Fiscal year 2009 spend-
ing would have totaled $27.335 billion, or $1.8
2006 2.3 population.
2007 3.3
billion less than available revenues. 2008 3.8 Had this
While the per capita income growth index is a
2009 3.7
measure been
good measure, removing government transfer Source: Illinois Policy Institute, U.S. Department of Commerce in place from
payments and compensation from personal
income calculations can strengthen this limit. Another route would be to limit spending to fiscal years
This would ensure that government payments the combination of the growth in inflation plus
to individuals don’t drive more government the growth in population. Had this measure
1997 to
spending by upping personal income statistics. been in place from fiscal years 1997 to 2009, to- 2009, total
Had this measure been in place, the fiscal year tal savings would have equaled $37.376 billion.
2009 budget would have been $27.323 billion. The fiscal year 2009 budget would have been savings would
have equaled
Graphic 3. Growth in General Fund Expenditures, Fiscal Years 1997 to 2009
$37.376
billion.
 Page 4 of 5

Graphic 4. General Graphic 5. General Graphic 6. General Fund

Fund Forecast using Fund Forecast using Forecast using 5-Year
5-Year Annual 5-Year Annual Average Annual Average Per
Average Per Capita Per Capita Personal Capita Personal Income
Personal Income Income Growth Growth Formula
Growth Formula Formula
Fiscal Years Fiscal Years Fiscal Years
1997 Base Year Actual Forecast Actual Forecast
2009 2010 2011 2009 2010 2011 2010 2011 2012

By embracing 27,335 27,986 28,351

Source: Commission on Government
32,959 33,745
Source: Commission on Government
34,185 29,145 29,525
Source: Commission on Government Fore-
29,731

a strong Forecasting and Accountability and

Illinois Policy Institute.
Forecasting and Accountability and Il-
linois Policy Institute.
casting and Accountability, Office of Manage-
ment and Budget  and Illinois Policy Institute.

spending Graphic 7. Growth in General Fund Shifts into

growth index, Other Funds after Maine’s LD 1 Enacted

Illinois  
General
Fund
will be able
Average Annual Growth 0.8%
to control Source: Maine Office of Fiscal and Program Review, Illinois Policy Institute.
spending
$26.185 billion, or roughly $3 billion under
excesses, available revenues.
budget 2. Apply to funds beyond general revenue.
responsibly, HJRCA 59 applies to aggregate appropriations
and transfers from the general funds. Addition-
and fully al spending out of other funds could skirt the
fund the intent of the measure.
annual For example, the state of Maine sought to
impose fiscal responsibility on their budget
required with LD 1, which focused on limiting gen-
pension eral fund spending. After it’s implementation
the state saw greater spending out growth of
payment other funds between fiscal years 2005 and
2010, thereby skirting the original intent. To
avoid this problem, HJRCA 59 could apply the
spending growth index to other funds.
3. Define “emergency.”
HJRCA 59 allows the governor to define a
fiscal emergency. This provides a large amount
of leeway; “emergency” should be defined as
extraordinary circumstances outside the control
of the General Assembly, including catastroph-
ic events, such as natural disaster, terrorism,
fire, war, riots, or court orders.
Also, HJRCA 59 doesn’t indicate if an “emer-
gency” year with higher expenditures resets
the baseline for future years. This could be
Highway Other Federal Total
Fund Funds Funds Expenditures
-0.5% 5.6% 5.7% 3.4%
used as a loophole and destroy the spending
limit’s “slow but steady” growth rate target. It
should therefore be clarified, preferably for the
baseline to return to the prior non-emergency
year spending adjusted for per capita personal
income growth.
4. Require voter approval for spending limit over-
rides.
HJRCA 59 includes no provision for voter
approval on the decision to spend beyond the
cap. Voters should have a say if the spend-
ing growth index is lifted, especially because
they may be asked to pay higher taxes to fund
higher levels of spending. The decision to pass
a spending cap lift should be approved by a
majority of voters, either at the next general
election or a special election.
5. Define Budget Stabilization Fund.
HJRCA 59 should better define how Budget
Stabilization Funds are set up, funded, and
used. For example, the funds could be directed
first to pay down “past due” debt, and then
may only be used when revenues available do
not match the amount of spending permitted
by the spending growth limit.
6. Define taxpayer refunds.
HJRCA 59 indicates that excess revenues “shall
be refunded in a manner and in amounts deter-
 Page 5 of 5

mined by the General Assembly.” The pro- while launching a new period of growth and
cess and timeline for issuing taxpayer refunds government accountability in Illinois.
should be explicit. For example, refunds could
take the form of permanent broad-based rate
reductions, or they could be issued annually to
Illinois taxpayers according to the number of
exemptions filed on their most recent tax re-
turns. Either way, should the General Assembly
fail to lower rates, the Department of Revenue
should be instructed to issue taxpayer rebates.
7. Require liability payments to be appropriated,
including pension payment.
HJRCA 59 doesn’t require the General Assem-
bly to appropriate funds for liabilities incurred.
For example, the General Assembly could fail
to make the annual pension system contribu-
tion and still abide by the spending limit totals.
It should be clear that the General Assembly
must make expected appropriations within the
spending limit.
8. Include a revenue provision.
HJRCA 59 doesn’t contain a provision limit-
ing tax increases. Should the spending growth
index allow for expenditures beyond what is
available in state coffers from natural revenue
growth, a tax increase provision is important
to ensure the spending growth index isn’t used
as an excuse to take more from residents. Tax
increases should require a 3/5 supermajority in
both the House and Senate, as well as major-
ity voter approval in the next general elections.
Provisions for “emergency taxes” can help ad-
dress situations that call for immediate, unex-
pected additional revenue.
9. Enactment via statue and constitutional amend-
ment.
HJRCA 59 is a constitutional amendment that
would go into effect in fiscal year 2014. In
the meantime, the measure should be passed
statutorily so the benefits could be recognized
immediately.

Conclusion
By embracing a strong spending growth index,
Illinois will be able to control spending excess-
es, budget responsibly, and fully fund the an-
nual required pension payment. It will help the
government honor its commitments while also
honoring its responsibility to the taxpayers—all