Category Archives: Fiscal Policy

The Fiscal Performance of Seventh District States in the 2000s

In a recent Chicago Fed Letter, Thom Walstrum examined the fiscal performance of Illinois’s state and local governments beginning in the late 1980s. His analysis showed that since at least the late 1980s, Illinois’s governments (as a whole) have consistently run a budget deficit. His analysis also revealed that the degree of overspending (or alternatively, undertaxing) by Illinois was greater than that of the average U.S. state and that growing pension liabilities have contributed significantly to Illinois’s budget deficit.

In this blog post, we expand the analysis to the other states in the Seventh Federal Reserve District.[1] Specifically, we document the expenditure and revenue patterns of District states since the early 2000s and compare them to those of the typical U.S. state.[2] We also examine the effect of the Great Recession on the fiscal performance of District states because it plays an outsized role in the overall fiscal performance of certain states over the period we examine.

As in the Fed Letter, we combine the expenditure and revenue data for state and local governments because states differ in which activities they fund at the state or local level. Also, as in the Fed Letter, to account for differences in the sizes of states’ economies, we report expenditure figures as percentages of gross state product (GSP) and revenues.[3]

Our analysis yields a number of interesting results. First, we find that the size of state and local governments (in terms of spending as a percentage of GSP) varies quite a bit among District states. Second, we find that the fiscal performance of state and local governments (in terms of spending as a percentage of revenues) also varies quite a bit. And finally, we find that though the Great Recession had a large negative impact on the fiscal performances of all District states, Illinois and Wisconsin were especially affected, primarily because the value of their pension systems’ assets declined sharply.

We first look at the size of state and local governments in District states in terms of spending as a percentage of GSP. Figure 1 shows total government expenditures as a percentage of GSP for the average U.S. state and for Seventh District states during fiscal years (FY) 2002–13. Indiana is consistently the lowest spender during this span, and it is well below the U.S. average. Iowa and Illinois are also below the national average for most of this period, though they catch up to it by FY2012. In contrast, Wisconsin’s spending is roughly the same as the typical U.S. state. Michigan tracked the national average closely until FY2007, but has been consistently above average since then. Figure 1 also shows a ramp-up in spending across all states in FY2010–11. This is the largely the result of states spending federal funds received through the American Recovery and Reinvestment Act.

fiscalperformance_figure1

Table 1 summarizes figure 1 by taking the average of the percentages over FY2002–13. It also shows a breakdown of average spending by category. We now discuss the unique features of each state’s spending (as a percentage of GSP).

  • Illinois’s total spending was below the U.S. average largely because of lower expenditures on education services and social services (and income maintenance). That said, Illinois spent more than the typical U.S. state on its insurance trust and pension liability increases, both of which are compensation for government workers, including those providing education and social services.
  • Indiana’s total spending was below the U.S. average because of lower spending on most categories, though it spent a particularly low amount on pension liability increases compared with other states.
  • Iowa’s total spending was below the national average (in spite of above-average spending on education and social services) because of below-average spending on its insurance trust and pension liability growth.
  • Michigan’s spending was above the U.S. average largely because of higher spending on education services and its insurance trust.
  • Wisconsin’s spending was quite close to the U.S. average; compared with the typical state, Wisconsin spent more on education services and its insurance trust, but less on pension liability growth.

fiscalperformance_table1

Next we look at each District state’s fiscal performance, which we define as total expenditures as a percentage of total revenues. We interpret lower percentages as better performance. It is important to note here that fiscal performance is independent of the overall size of a state’s governments, because all that matters is that the governments have enough revenues to cover their expenses. While small governments generally do not require the level of revenues that large governments do, small governments could still perform worse than their large counterparts if their revenues are not high enough. Figure 2 shows the time trends for expenditures as a percentage of revenues for each District state and the typical U.S. state. Two features of the figure stick out: First, with the exception of Illinois, District states are quite close to the U.S. average in terms of spending as a percentage of revenues. Second, while most states’ governments were hurt by the Great Recession (FY2008–09), Illinois’s and Wisconsin’s were hit particularly hard, while Indiana’s was not hit that bad.

fiscalperformance_figure2

The first row of table 2 summarizes figure 2 by taking the average of the percentages over FY2002–13. Illinois and Wisconsin spent more out of their revenues than the typical U.S. state during this period, while Indiana, Iowa, and Michigan spent less. Because FY2009 was such an anomaly on account of the Great Recession, we also calculate the averages excluding it (second row). This changes the story quite a bit for Wisconsin governments, which then perform better than the U.S. average. (With this adjustment, Michigan governments perform slightly worse than the U.S. average.)

Table 2 also shows the percentage of total revenues that each spending category represents (calculated excluding FY2009). Examining expenditures in terms of revenue, as opposed to GSP, tells a different story for several states.

  • Illinois’s total expenditures percentage is well above the U.S. average. Spending out of revenues on education is above that of the typical U.S. state, though it remains below that of the other District states. Illinois also spends more than the national average on public safety, environment and housing, interest on general government debt, its insurance trust, and pension liability growth.
  • Indiana’s total expenditures percentage is below the U.S. average. It spends less than the national average on transportation, utilities, its insurance trust, and pension liability growth.
  • Iowa’s total expenditures percentage is not only below the U.S. average but also the lowest among District states. Notably, its spending on public safety, utilities, its insurance trust, and pension liability growth is lower relative to the national average.
  • Michigan’s total expenditures percentage is slightly above the U.S. average. Its education spending is the highest among District states and markedly higher than that of the typical U.S. state. But its spending on transportation, utilities, and pension liability growth is lower than the national average.
  • Wisconsin’s total expenditures percentage is below the U.S. average. While its expenditures for education, public safety, and its insurance trust are above average, its expenditures for pension liability growth are below average.

fiscalperformance_table2

Table 2 shows that Illinois and Wisconsin were hit hardest by the Great Recession. After excluding FY2009, Illinois’s spending as a percentage of revenue decreases 6 percentage points and Wisconsin’s decreases 11 percentage points. These decreases are much larger than those for other District states and the typical U.S. state, which range from 1 to 4 percentage points. What is behind the substantial differences in fiscal performances in FY2009? We found that the source was not changes in expenditures, but changes in revenues. Table 3 shows revenues as a percentage of GSP for the typical U.S. state and states in the Seventh District. The first row is the average value during FY2002–13 excluding FY2009, the second row is the value for only FY2009, and the third row is the difference between the two. All states had lower-than-normal revenues in FY2009, but Illinois and Wisconsin fared particularly poorly. To understand why, we calculated the difference between FY2009 values and the average values of the other fiscal years for all revenue categories. General revenues were actually higher in FY2009 for the typical U.S. state and all District states. The source of the revenue declines was states’ insurance trusts. Most states saw the value of the assets in their insurance trusts fall during the Great Recession, and such declines are treated as negative revenues in the U.S. Census’s accounting framework. The insurance trust funds for Illinois and Wisconsin fared particularly badly in FY2009, which is why their expenditures-to-revenues ratios were so high over the period FY2002–13 (see the first row of table 2). That one bad year made a huge difference in Wisconsin’s overall fiscal performance over the period FY2002–13.

fiscalperformance_table3

Our exploration of the size and performance of District state governments reveals a surprising number of differences among them. There are states with relatively small governments that perform poorly (Illinois) and well (Indiana) and states with relatively large governments that perform poorly (Wisconsin) and well (Michigan). Some states were hit much harder than others during the Great Recession (compare Wisconsin and Indiana), and Wisconsin’s terrible performance in FY2009 shifted the state from being a good fiscal performer to being a bad one over our study period (FY2002–13). The most important reason for the differences in fiscal performance across states is differences in pension system management. Illinois would be closer in performance to the national average if its pension spending matched the national average, and Wisconsin would be better than average if its pension system’s assets hadn’t lost so much value during the Great Recession.

[1] The Seventh Federal Reserve District (which is served by the Chicago Fed) comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. In this blog post, we analyze the entirety of each state that falls within the District.

[2] Unlike for the analysis of just Illinois, we are limited to the period after 1999 because we do not have pension system data for other states before 2000.

[3] For more details on the methodology, see the Fed Letter. Note that data on pension liabilities for the Seventh District states, excluding those for Illinois, come from the Board of Governors of the Federal Reserve System.

Measuring Tax Capacity for Municipalities in Cook County

Illinois’s fiscal situation will likely require tax and revenue increases. How might we assess a municipality’s tax capacity, or ability to “absorb” a larger tax bill? In our previous blog, we reviewed various methods of assessing tax capacity. Now, we use the municipal-gap method to estimate tax capacities for Cook County municipalities.

The municipal gap is the difference between revenue capacity and expected expenditures. We estimate revenue capacity by multiplying the total equalized assessed property values (EAVs) in each municipality by a standard tax rate-the rate required to bring the total property tax revenues of Cook County municipalities in line with their total expenditures on non-school municipal services. Our measure of (own-source) revenue capacity excludes intergovernmental transfers. We predict expected expenditures based on estimates of each municipality’s socioeconomic and physical characteristics. Finally, we subtract expected expenditures from revenue capacity to get the municipal gap. A positive gap implies that a municipality has a larger tax capacity, and a negative gap implies a smaller tax capacity.

In practice, this analysis need not be restricted to municipalities located within one county. However, differences across counties in property assessment practices, as well as the quality and composition of services provided, may distort differences in the municipal gap. Restricting the sample to Cook County municipalities should limit differences due to these extraneous characteristics. To this end, we also exclude municipalities with smaller populations (those with populations below the 25th percentile for Cook County). Consequently, results from our analysis can be generalized to a subset of Cook County municipalities and expenditures, namely general government, which largely consists of public safety expenditures.

Data Sources and Calculations

Non-school municipal expenditures and EAVs were obtained from the Illinois Comptroller’s Fiscal Year 2014 Annual Financial Report.1 In the report, expenditures are categorized according to their reported functions (e.g., public safety) and governmental fund (e.g., general fund). We calculated non-school expenditures by combining all reported expenses across functions and funds. Revenue capacity was calculated by multiplying each municipality’s EAVs by a standard tax rate, which is the aggregate Cook County expenditures divided by aggregate EAVs; the resulting rate is 12.8%. Both expenditures and revenue capacity are normalized across municipalities by expressing them in dollars per capita.

Estimates of socioeconomic and physical characteristics were obtained from the Census Bureau 2014 American Community Survey 5-year estimates.2 We separated characteristics into two groups: environmental and control variables. Environmental variables are assumed to be more exogenous to the choices of local officials and are used to predict expected expenditures. They include the unemployment rate, poverty rate, population density, and population (logged). In contrast, control variables are assumed to be less exogenous, and either failing to control for these factors or using them to predict expenditures may bias our predictions of expected expenditures. Control variables include the percentage of the population ages 25 and older with a bachelor’s degree or higher, income per capita, the percentage of housing units that are owner-occupied, the median age of the population, and whether the municipality owns or operates a public utility company (this last measure comes from the Comptroller’s report).

Brief Data Summary

Table 1 provides descriptive statistics on expenditures, revenue capacity, and the environmental and control variables. On average, a municipality spends $2,545 per capita on non-school services. Cook County municipalities allocate, on average, 33% of non-school expenditures to public safety, and only 2% to social services. The large gap between average revenue capacity ($4,199 per capita) and average expenditures underscores the fact that we exclude a large portion of all expenditures municipalities face, such as those appropriated to overlapping governments. The sizes of standard deviations reflect substantial heterogeneity in the compositions of expenditures across municipalities, in particular for debt and capital outlay. The minimum value for the other expenditures/expenses category in part reflects reimbursements.

table1_descriptivestatistics

Calculating Municipal Gaps

We use regression analysis to derive expected expenditures. First, we estimate the effects of environmental variables on the dependent variable, actual municipal expenditures, while holding constant the control variables. Second, we predict expected expenditures using a municipality’s actual values of the environmental variables and the estimated effects.

Table 2 provides results from estimating the effects of environmental and control variables on non-school municipal expenditures. Altogether, we could find no evidence that the environmental variables affect municipal expenditures, controlling for additional factors. In addition, the adjusted R-squared value suggests that we explain roughly 40% of the variation in expenditures (around its mean). Table 3 provides an example of calculating expected expenditures for the City of Chicago (values were rounded to 2 decimal places). Multiplying a municipality’s actual values for the environmental variables by each variable’s corresponding effect results in that variable’s contribution to expected expenditures; summing all the contributions leads to expected expenditures. The final step in the analysis is subtracting expected expenditures from revenue capacity, resulting in the municipal gap.

table2_regression

table3_examplecalc

Results and Conclusion

Table 4 displays the results for municipalities with the largest and smallest gaps. Glencoe Village is assigned the largest positive gap, with an additional $15,846 in revenue per capita available after appropriating funds for expected expenditures. In contrast, Park Forest Village would require an additional $1,802 in revenue per capita to fund its remaining expected expenditures. How do the results of the municipal gap analysis using expected expenditures compare to those using actual expenditures? Table 5 provides findings for the latter scenario. Results for all municipalities included in our study may be obtained here.

table4_expected

table5_actualgaps

Mapping the municipal gaps illustrates the geographic discrepancies in tax capacity. Figure 1 displays the municipal gaps calculated using expected expenditures. For comparison, figure 2 displays the municipal gaps calculated using actual expenditures. Results are largely consistent between the two; one primary difference is that tax capacity is larger for several southern Cook County municipalities in the analysis with actual expenditures. Perhaps one unsurprising result is that, in general, northern Cook County municipalities have greater tax capacity than more central and southern Cook County municipalities. However, there are “pockets” of municipalities with smaller tax capacity located within regions that have greater tax capacity, and vice versa.

Figure 1: Gap with Expected Expenditures

weighted-municipal-gap

Figure 2: Gap with Actual Expenditures

actual-municipal-gap

In sum, identifying the ability for municipalities to absorb larger tax bills is becoming increasingly crucial to estimating local governments’ capacity to generate additional own-source revenues. Several methods exist that rely on comparisons between each government’s revenue and expenditures under hypothetical conditions. Here, we utilized the municipal-gap method to identify tax capacities for a subset of Cook County municipalities. Among the limitations of our analysis is the fact that we exclude important information on both the revenue and expenditure sides. Our analysis relies on non-school expenditures and property values to derive expected expenditures and revenue capacity. Local officials with more complete information on expenditures (e.g., for overlapping governments and schools) and revenues from additional sources (e.g., intergovernmental transfers) may benefit from estimating tax capacity using the municipal-gap approach, or one of the other methods we talked about in our previous blog.

  1. FY2014 Annual Financial Report data procured from the financial database website.
  2. U.S. Census Bureau; 2014 American Community Survey 5-Year Estimates, http://factfinder.census.gov.

What is Illinois’s Tax Capacity?

A recent study ranked Illinois 47th among U.S. states and Puerto Rico for its fiscal health.1 Particularly concerning was the report’s finding that the combination of total debt, unfunded pension liabilities, and underfunded other post-employment benefits amounts to 61% of total state personal income. In contrast, the same figure for other Seventh District states ranges from a high of 38% in Michigan to a low of 16% in Indiana. Given the magnitude of Illinois’s debt, any plan aimed at improving the state’s fiscal solvency will likely require both expenditure cuts and tax and revenue increases.

So what is the taxable capacity of Illinois? Two broad issues arise. First is the issue of fairness: Would further taxation violate society’s notions of imposing undue burdens on those who can least afford it? Second is the issue of impairing economic activity: Would further taxation discourage economic activity or otherwise drive out taxable wealth to an unacceptable degree?

In this blog post, we describe several methods for identifying a community’s tax capacity. In general, researchers have attempted to measure and compare capacities for specific places by calculating hypotheticals that rely on norms or averages across all places. For example, how much revenue might we expect to raise in a community if we imposed average tax rates there? And how much should a community be spending on public services, given its population characteristics and its need for services? And importantly, how do the two estimates differ? Are there obvious gaps between resources and needs?

Gordon, Auxier, and Iselin (2016)2 used such a representative revenue and expenditure approach to estimate this hypothetical gap in funds a state has available for government operations. The study documents that there is enormous variation in the amount of revenue states collect and what they spend on public goods and services. To drill down to tax capacity, the study measures what each state would collect in revenues and spend on government services if it followed national averages, adjusted for state-specific economic and demographic factors. Table 1, section (1) shows the actual gap, or the difference between actual revenues and expenditures, in FY2012, assuming that states rely only on revenues that they raise themselves through taxes and fees. The gaps are sizable, but adding in federal transfers largely erases the gaps. Turning to the hypotheticals as they relate to tax capacity, Table 1, section (2) compares representative revenues, or revenues that a state would raise if it had an average tax structure, to representative expenditures, or expenditures if the state had an average spending per capita. In contrast to the actual gap, the representative gap remains even after the addition of federal transfers in all of the Seventh District states other than Iowa. In this hypothetical case, if Seventh District states (other than Iowa) adopted a nationally representative tax structure, they would not have sufficient resources even after federal transfers to provide a representative level of public expenditures.

table1

Haughwout et al. (2003)3 developed a more refined analysis, termed the “revenue-hill” method, that estimates the deterioration in tax capacity that takes place as higher tax rates discourage taxable activity. The revenue hill builds a hypothetical schedule of tax rates and revenues that demonstrates how fully a city is utilizing its tax base. The goal is to build a “Laffer Curve” that allows policymakers to estimate the economic effects of the next tax dollar (e.g., effect on employment). The closer the measure is to the top of the hill, the closer the city is to exhausting its tax capacity. Once a city is over the top of the hill, increases in tax rates will become so unproductive that revenues actually decline. These measures can be constructed for each tax base a city might use. Therefore, while a city may have reached capacity for one tax base (e.g., sales tax), it may still have capacity in another (e.g., property tax). Haughwout et al. (2003) examined four cities—New York, Philadelphia, Houston, and Minneapolis—and found that only Minneapolis was “comfortably” below its revenue hill, and thus had additional tax capacity. In the case of Minneapolis, additional taxes could provide net benefits to property owners. New York and Houston were at the top of their revenue hills, implying that additional taxes would have a negative impact on employment.

Finally, Bo Zhao and Jennifer Weiner of the Boston Fed suggested the “municipal-gap” method for measuring tax capacities across municipalities in Connecticut, by recognizing that taxable capacity can only be measured in the context of a government’s particular needs and resource costs in providing adequate services.4  For example, limited tax capacity can exist when a community faces higher costs or fewer resources for providing public services (or both). In both cases, it can be driven by economic, topographic, and demographic factors specific to the community (e.g., a relatively high rate of poverty or significant risk of extreme weather).

First, one identifies revenue capacity. Revenue capacity is defined as the ability of municipalities to raise revenue from all of the sources they are authorized to tax, even if they choose not to tax a particular base. Capacity is calculated using the “representative tax system” approach, where all communities use a standard uniform tax rate against the tax base. The rate is determined by ensuring that the statewide rate raises enough revenue to cover existing expenditures. Second, one identifies expected expenditures–the average level of spending based on the municipality’s underlying socioeconomic and physical characteristics. This number is is calculated using regression analysis to predict a municipality’s expenditures based on actual values of the underlying characteristics. One purpose of deriving expected expenditures is to remove the variation in expenditures due to the choices of local officials who may favor particular government programs.

The study focused on the costs of providing largely non-educational local services, primarily public safety. It found that large fiscal disparities in Connecticut were primarily driven by their differences in revenue raising capacity. The uneven distribution of the property tax base coupled with the relative dependence on property tax revenues in the state meant that resource-rich municipalities had, on average, per capita revenue capacity eight times that of resource-poor towns. The cost of providing municipal services was less dispersed, with the highest-cost municipalities spending 1.3 times that of the lowest-cost towns. Importantly, the study also found that non-school revenue grants from the state had limited effect in reducing fiscal disparities.

What can tax capacity studies tell us about Illinois’s fiscal problems?

Illinois has a particularly difficult choice when it comes to future tax adjustments. First, the debt overhang at the state level is so large that any future tax increases will necessarily be directed to paying down debt rather than purchasing new services. Incremental tax increases will pay for services already consumed and, as such, it is difficult to see how future taxes will provide governments with resources to support programs that enhance growth. Second, capacity studies, such as Gordon et al. (2016), suggest that Illinois has already reached its capacity limits. While it would be a stretch to adapt this to the revenue-hill concept of actual declines in revenues in response to tax hikes, it does imply that Illinois has little room to increase taxes without reducing economic activity in ways that would be damaging. The depth of the problem increases when recognizing that many Illinois municipalities also face revenue gaps that would make the compound effects of a state tax increase coupled with a local increase that much worse. As these studies show, there tends to be considerable variation in both the level of expenditures and available revenues across any state when it comes to financing government services. The question then becomes what is the geography of tax capacity in Illinois?

In a second blog, we will apply local revenue capacity and service cost to Illinois municipalities. Stay tuned to see what fiscal disparities might exist for municipalities in Cook County.

  1. Norcross, E., & Gonzalez, O. (2016). Ranking the States By Fiscal Condition.
  2. Gordon, T., Auxier, R., & Iselin, J. (2016). Assessing Fiscal Capacities of States.
  3. Haughwout, A., Inman, R., Craig, S., & Luce, T. (2003). Local Revenue Hills: Evidence from Four U.S. Cities.
  4. Zhao, B., & Weiner, J. (2015). Measuring Municipal Fiscal Disparities in Connecticut.

Can Budget Rules Help Reduce Fiscal Troubles in Illinois?

Fiscal analysts and credit rating agencies have criticized Illinois government officials for their fiscal mismanagement, especially the shifting of debt obligations incurred to pay for current services onto future generations. The growth of unfunded public employee pension obligations has been the most egregious example. Moreover, state and local governments have allowed bills for current services to grow unabated, while existing debt outstanding for capital projects has been refinanced beyond the useful life of the projects themselves.1

At first blush, remedies to such behaviors might seem to be simply a matter of mobilizing the will to balance budgets through spending reductions and tax increases. In some cases, the electorate seeks to discipline elected officials to behave responsibly. However, election discipline and public oversight often fall short. Elected officials may fail to reduce spending because they don’t want to appear to renege on campaign promises; similarly, tax hikes are seen to be too unpopular with the voting public. Accordingly, a helpful alternative is to build in budgetary procedures and practices that assist the public to oversee and discipline the fiscal actions and behaviors of their elected officials.

Given the sorry state of fiscal affairs in many Illinois governments, structural regulatory changes should be considered in order to hold officials accountable and to provide the public with clear and consistent information regarding the state’s financial condition. Regulations constraining fiscal flexibility could force policymakers to act more responsibly and limit their ability to make unrealistic financial promises and disguise questionable fiscal decisions.

In a recent paper by Richard Dye, David Merriman, and Andrew Crosby, the authors describe four fundamental principles of sound budgetary practice – advance planning, sustainability, flexibility, and transparency – all important areas of improvement for Illinois. The authors then outlined five methods by which Illinois could break its bad habits and adopt more robust budgetary practices.

First, Illinois should refine and expand multiyear budget planning. Currently, Illinois does not have a budget plan that looks far enough into the future, or that covers a wide enough scope of projections to maximize its usefulness as a gauge of fiscal stability. Some improvements have been made; for example, budgetary projections by the Commission on Government Forecasting and Accountability (COGFA) and the Governor’s Office of Management and Budget (GOMB) now cover three years. But they would be more informative and useful if they covered five years. Plans would also better measure fiscal stability if they covered a broader scope of projections. Currently, the plans only cover the general funds, leaving out hundreds of special funds comprising over half of the state’s budget.

Budget planning for a given year could also be expanded to include projected spending from current services, even if it does not affect that year’s balance sheet. This would help the state improve its advance planning by forcing officials to look farther into the future and analyze a broader scope of areas affected by current fiscal decisions. Furthermore, it might help the state address its sustainability issue, by holding today’s politicians accountable for future payments incurred by current services, rather than deferring payment of today’s labor into the future, handing the debt to their successors.

Second, the state of Illinois should require that meaningful fiscal notes accompany any legislation with a significant impact on future revenue flows or spending obligations. Fiscal notes, which are rarely used in Illinois, would include any cost estimates for legislation over a designated period of time. These would help Illinois better document time-shifting in its revenue and expenditures and identify nonrecurring revenue in budget documents. It is much easier for government officials to justify expensive programs or policies when the revenue flow is ambiguous and when one-time revenue sources, such as asset sales, are not disclosed.

Third, the authors suggest that the state should modify cash-only budget reporting to better track significant changes in liabilities and assets. Currently, Illinois relies on single-year, cash-basis accounting, which reports only receipts and payments in the current budget year. Accrual accounting, on the other hand, also covers changes in assets or liabilities that are attributable to that budget year, but not actually implemented until a future year. A cash-only budget allows the state to disguise time-shifting consequences of current fiscal actions. Moving away from this practice would make government spending more transparent by revealing deceptive fiscal actions, such as making payments with temporary revenue sources or promising to return loans in the future without continuous revenue sources to guarantee they’ll be paid.

Along those lines, the authors’ fourth suggestion is that Illinois should identify non-sustainable or one-time revenue sources in its budget reports, allowing the public to gain a better understanding of the time horizons of various revenue sources. Additionally, if the government must label one-time revenue sources, they might be compelled to put more continuous revenue sources toward a stronger “rainy day fund,” which would enable officials to be more flexible in responding to fiscal emergencies.

Finally, the authors argue the state should adopt a broad-based budget frame with meaningful spending and revenue categories consistently defined over time. Inconsistent terminology and accounting techniques make it difficult to track financial conditions and changes over time. For example, it can be challenging to tell how much of a year-to-year change in budget is real versus due to a change in accounting practices.

The state must not only clearly communicate a fiscal plan stretching farther into the future than it currently does, but must also make information more accessible to the public. Fiscal information should be readily available on a timely basis, and online information should routinely provide budget reports, with budget components consistently defined and explanations included when there are transfers between budget categories.

While these five practices would ideally lead to a much more sustainable financial position for Illinois, there are clearly roadblocks preventing Illinois’s government from adopting them, such as political frictions and the momentum of embedded spending and programs. For elected officials, it is often the case that in order to actually deliver upon the programs or actions they campaigned upon, they would need to generate even more debt, for example by borrowing from future budgets to pay off promised pensions today. And because Illinois’s politicians have been accumulating more and more debt for decades, it is unappealing for any of them to be the first to adopt more frugal behavior, perhaps by reducing benefits or scaling down public programs.

In the end, there is no painless path out of Illinois’s current debt crisis for citizens or politicians. But implementing these fiscal practices might serve as a way to ease the transition to better fiscal management, by giving politicians no other option and by providing the public with a more complete picture of where Illinois really stands.

  1. The issues surrounding Illinois’s fiscal conditions, as well as proposed solutions, were discussed at a December 2015 conference, Transparency and Accountability in State Budgeting: Challenges for Illinois and Other States, held at the Union League Club of Chicago. The conference was summarized in a recent Chicago Fed Letter.