Wed April 2, 2014
Expert Says State Of Illinois Needs Better Financial Planning
Originally published on Wed April 2, 2014 10:42 am
Illinois is like most states when it comes to budget challenges. Leaders must decide how to use tax dollars to pay for a variety of services.
But Illinois ranks low when it comes to financial planning. Nancy Hudspeth says some changes are needed. She's the Associate Director of the Fiscal Futures Project at the University of Illinois Institute of Government and Public Affairs.
Hudspeth wrote an article on the subject that appears below:
Better fiscal planning tools could improve Illinois’ budget process
Everyone knows that the state of Illinois faces a dire fiscal situation. This is often blamed on elected officials’ mismanagement and short-term thinking. But what most people don’t realize is that a significant cause of Illinois’ worst-in-the-nation budget crisis is more mundane than that: poor budget practices.
Over the years, unsatisfactory budget techniques have contributed to confusion about the severity of Illinois’ deficits, allowing the state to fall into deep fiscal imbalance. To help resolve Illinois’ deficits, better budget practices—which are well-established in many states—should be adopted to help make the difficult choices needed to achieve fiscal sustainability.
Don’t just take my word for it. In 2012 the State Budget Crisis Task Force, headed by former Chairman of the Federal Reserve System Paul Volcker and former New York Lieutenant Governor Richard Ravitch, advocated that Illinois “revamp [its] fiscal toolkit.” In a study of state tax incentives, the Pew Center on the States found that Illinois was unable to predict and control program costs. The Center on Budget and Policy Priorities (CBPP) recently compared the 50 states’ budget practices; Illinois scored near the bottom.
Sound budgeting practices can warn of long-term deficits and hidden costs. Without these techniques, budgets are “balanced” by moving money around and paying bills late; a climate of uncertainty prevails; and bond ratings drop. Sound familiar?
So what should Illinois do to bring its budgetary process up to the national standard? These five reforms would be a good start:
Long-term forecasts (for 10+ years) estimate how the historical trends of various revenues and expenditures relate to factors such as growth in personal income and demographics, and project these trends into the future. Without long-term planning for fiscal sustainability, big deficits can sneak up on policymakers.
Current services baseline projections of the cost of continuing a program in its existing form are needed to understand the cost of not changing the budget. These projections account for inflation and anticipated changes in service demand, allowing policymakers to see whether a proposed budget represents a spending increase or cut in real terms.
Consensus revenue forecasts endorsed by both branches of government are needed to take the politics out of this crucial aspect of budget-making. Currently in Illinois, each branch of government—through the Governor’s Office of Management and Budget and the legislature’s Commission on Government Forecasting and Accountability —prepares its own revenue estimates. This encourages political gamesmanship rather than accuracy.
Fiscal notes are statements that accompany a bill and detail the costs, savings, or revenues associated with bills the legislature is considering. These force lawmakers to confront the fiscal implications of their legislative decisions. Unlike in most states, these are rarely used in the Illinois General Assembly.
Rainy day funds are cash reserves that can be used to stabilize a state’s finances in an economic downturn. Illinois has a Budget Stabilization Fund, but its balance is less than 1 percent of the state’s total budget. In contrast, the CBPP recommends that a state’s rainy day reserves equal about 15 percent of its budget.
Faced with the daunting challenges that continue to plague Illinois, improving the state’s budgetary practices would be a relatively simple way to improve its fiscal outcome going forward, and ensure that we never again fall into this deep hole. Systems can be put in place that force Illinois policymakers to plan for economic cycles and changing demographics over time, in order to not get caught unaware when they occur. Better financial information, clearly presented, is essential to intelligent, thoughtful planning for Illinois’ future.