August 14, 2014
In the coming months, the State of Illinois will conduct a revenue volatility study to establish a basis for an adequate rainy day fund balance to protect the State from future economic downturns and other revenue variances. This analysis of historic changes in State revenues was mandated as part of the budget legislation passed for FY2015 and must be completed by the end of the current calendar year.
As discussed here previously, the State lacks a true rainy day fund, despite a law approved in 2004 intended to force the State to stash away surplus revenues at the close of each fiscal year.
The review of annual changes in the State’s revenue base was approved in Senate Bill 274 (Public Act 98-0682), which tasks the legislature’s Commission on Government Forecasting and Accountability (COGFA) with completing the study and reporting its findings to the General Assembly by December 31, 2014.
The legislation requires that the Commission examine the volatility in the Illinois tax base, economic variables that influence volatility and the adequacy of balances in the Budget Stabilization Fund. The study also will include recommendations for mechanisms that could be used to require deposits into the fund from various revenue sources based on specific volatility of each tax base as assessed under the study. Finally, the law requires that COGFA also provide an analysis based on historical revenue trends showing how a State rainy day fund would have performed if the proposed mechanisms were in place previously.
A national report by the Pew Charitable Trusts on the condition of State rainy day funds suggests that an analysis of revenues as directed under SB274 is the first step toward establishing an adequate rainy day fund balance. According to the Pew study, rainy day fund deposits and balances should be based on data specific to the various tax sources in each state and observable revenue changes rather than generic standards that may not address each state’s actual financial needs.
The report finds that Illinois is one of only four states that do not maintain a rainy day fund, along with Colorado, Kansas and Montana. Nationally, the states with the best bond ratings have strong rainy day fund policies and balances, according to the Pew study. Twelve states have policies that are based on the actual volatility of revenue sources while 38 have general rules not connected to volatility studies.
Pew also released an additional analysis specific to Illinois. The report summarizes current policy developments and reviews historical revenue trends in Illinois. The report found that Illinois’s revenue volatility ranked in the top half of all states over the last 20 years.
As previously discussed here, Illinois saw a major drop in revenues in FY2009 and FY2010 and has seen revenue growth since raising income tax rates in FY2011. However, the State did not establish a rainy day fund as revenues grew. Instead lawmakers focused on the need to pay down a massive backlog of unpaid bills that is expected to total more than $5.0 billion at the end of FY2015.
The Pew report concedes that until the State has addressed “structural fiscal challenges,” such as its backlog of unpaid bills, unfunded pension liabilities and looming revenue cliff, it will be difficult to set aside revenues in a rainy day fund. However, Pew notes that it is a positive step that the State has passed legislation requiring a revenue volatility study to develop an effective rainy day fund policy. Illinois is only one of three states to statutorily require volatility studies, along with Utah and Minnesota.
In the FY2015 Budget Roadmap, the Civic Federation included a proposal to pay down the State’s backlog of bills and establish a rainy day fund totaling at least 5.0% of total annual General Funds revenues over the next five years. However, according to the Pew research, Illinois’ historical revenue volatility from 1994 through 2012 totaled 5.9%, which suggests Illinois policymakers may need to target an even larger rainy day fund to effectively smooth out the ebb and flow of State revenues.