state support for public services such as education, health care, human services, and ... sources include public utility
FISCAL POLICY 101 BRIEF March 2013
Understanding the State Budget Trail Where the Money Comes From and Where It Goes Manya Khan Each year, state policymakers make complex choices about revenue and spending that impact all Illinoisans. For example, the state budget affects our children’s education, health care for vulnerable populations, the quality of the roads we drive on, and numerous other aspects of our lives and the state’s economy. Given everything at stake in those decisions, it is critical to understand the connection between our tax dollars and the essential services that help our communities thrive and prosper. This brief provides an overview of where the money in the state budget comes from and where it goes. The primary emphasis is the General Funds, which provide the majority of state support for public services such as education, health care, human services, and public safety. The General Funds constitute about half of the total state budget and are the main focus of the annual appropriations process.
Budget Basics The total state budget is comprised of over 700 funds from which appropriations are made. Each fund's name corresponds with either the purpose of the appropriation or the major source of the fund’s receipts. Individual funds are grouped into larger fund categories, which include the General Funds, Highway Funds, Special State Funds, and Federal Trust Funds. General Funds The General Funds include the General Revenue Fund, the Common School Fund, and the Education Assistance Fund. The General Revenue Fund receives most of its revenue from income taxes, sales taxes, and various other state taxes and fees. The Common School Fund gets revenue from sales taxes, cigarette taxes, the state lottery, riverboat gambling, and bingo game receipts. These funds are used to support elementary and secondary education, including the State Board of Education and the Teachers’ Retirement System. The Education Assistance Fund, which is used for both elementary-secondary and higher education, receives a share of income tax revenue as well as proceeds from riverboat gambling.
Highway Funds Highway Funds include the Road Fund, the Motor Fuel Tax Fund, and several smaller funds. The Road Fund, with $2.9 billion in expenditures in FY 2012, is the single largest fund outside the General Funds. Revenue sources for the Road Fund include federal grants, driver’s license and motor vehicle registration fees, and transfers from the Motor Fuel Tax Fund. Special State Funds Revenues for Special State Funds come from earmarked state taxes and fees, transfers from the General Revenue Fund, and federal grants. Some of the larger Special State Funds include the Income Tax Refund Fund, Hospital Provider Fund, State Lottery Fund, and Community Mental Health Medicaid Trust Fund. Federal Trust Funds Revenues from Federal Trust Funds are designated by the U.S. government for specific purposes. These funds support a wide range of programs in education, human services, community development, and other areas. Examples include the Federal Department of Education Fund, Maternal and Child Health Services Block Grant Fund, and Low Income Home Energy Assistance Block Grant Fund.
General Funds Revenue Over half of the revenue for the General Funds comes from state income and sales taxes. The majority of the remaining revenue is from the federal government. Other state sources include public utility taxes, cigarette taxes, and lottery revenue. In FY 2012, General Funds revenue totaled $33.8 billion, with individual and corporate income taxes representing more than half of the total (see Exhibit 1). In January 2011, the individual rate was raised to 5 percent from 3 percent, and the corporate rate was raised to 7 percent from 4.8 percent. Sales taxes represent about one-fifth of General Funds revenue. The statewide sales tax rate is 6.25 percent of the purchase price of tangible goods, with 5 percent going to the state and the remainder returned to local governments based on their share of overall sales. A lower rate of 1 percent is applied to food for home consumption, medications, and medical appliances. Consumer services are largely exempt from sales taxes in Illinois. Federal grants comprise about one-tenth of all General Funds revenue. In FY 2012, most of this revenue came from federal matching funds for Medicaid and the Children’s Health Insurance Program.
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General Funds Spending In FY 2012, General Funds spending totaled $34.4 billion (see Exhibit 2). About twothirds consisted of state agency appropriations for education, health care, human services, public safety, and other services. Education In FY 2012, about one-fourth of General Funds spending went to education, including elementary and secondary education as well as higher education. The Illinois State Board of Education (ISBE) provides resources for more than 2 million public school children. About two-thirds of its budget consists of General State Aid to more than 860 local school districts. ISBE also distributes grants for special education, transportation, early childhood education, bilingual education, and various other purposes.
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Higher education agencies include the Board of Higher Education, nine state universities, the Illinois Student Assistance Commission, and the Illinois Community College Board. Higher education accounts for 6 percent of the General Funds budget. Health Care The Department of Healthcare and Family Services (DHFS) has principal responsibility for the state’s medical assistance programs, including Medicaid, the Children's Health Insurance Program (CHIP), and All Kids expansion. In FY 2012, DHFS medical assistance spending (including both state and federal dollars) represented one-fifth of the General
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Funds budget. Medical assistance programs serve more than 2.8 million low-income people, including children, parents, pregnant women, the elderly, and the disabled. Children represent more than 60 percent of medical assistance enrollment but only 30 percent of expenditures. Disabled and elderly recipients account for about 15 percent of enrollment but nearly half of DHFS spending for medical assistance. Human Services Human services account for about 16 percent of General Funds spending. The largest amount of funding goes to the Department of Human Services (DHS), which has a broad range of responsibilities, including developmental disability services, mental health services, homelessness prevention, maternal and child health services, and youth services. Vital safety net programs that play a key role in providing economic security for the most vulnerable Illinoisans also receive funding. For example, the Child Care Assistance Program provides low-income working families with access to affordable child care, serving more than 170,000 children per month. Temporary Assistance for Needy Families (TANF) provides income support for about 45,000 families with children each month. Other human services agencies include the Department of Children and Family Services, Department on Aging, Department of Public Health, Department of Juvenile Justice, and Department of Veterans' Affairs. Public Safety Public safety agencies account for almost 7 percent of General Funds spending. The largest agency is the Department of Corrections, which operated 27 prisons and seven adult transition centers, with a total population of about 48,000, in FY 2012. Other Services All other state agencies constitute only about 4 percent of the General Funds budget. This includes funding for numerous smaller agencies overseen by the Governor, as well as judicial agencies, the legislative branch, and statewide elected officials — Governor, Lieutenant Governor, Secretary of State, Attorney General, Comptroller, and Treasurer. Pension Obligations In FY 2012, contributions to the five state-funded retirement systems accounted for 12 percent of General Funds spending. The retirement systems cover public school teachers (outside Chicago), employees of state universities and community colleges, state government employees, judges, and members of the General Assembly. Of the more than $4.2 billion in pension contributions in FY 2012, over half went to the Teachers' Retirement System.1 In addition, debt service on pension obligation bonds was close to 5 percent of total General Funds spending. The Teachers’ Retirement System of Illinois is separate from the Chicago Teachers’ Pension Fund, which receives only a small amount of state support. 1
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Statutory Transfers Money from the General Revenue Fund that is transferred to other state funds made up a little over 7 percent of General Funds spending in FY 2012. More than half of these transfers went to the Local Government Distributive Fund, which allocates a share of income tax revenue to municipalities and county governments, based on their population. The second largest transfer was for the Public Transportation Fund, which distributes a portion of sales tax revenue to the Regional Transportation Authority.
General Funds Deficit The State Constitution requires that both the Governor and the General Assembly approve a balanced budget for each fiscal year, although there is not an effective enforcement mechanism. In FY 2012, despite $7.6 billion in new revenue from the income tax increase, as well as significant spending cuts over several years, the General Funds had a deficit of over $600 million (see Exhibit 3). A large part of the new income tax revenue ($4.2 billion) was used for mandated pension contributions, which were covered by borrowing in FY 2010 and FY 2011. At the end of FY 2012, the state had a cumulative General Funds deficit of more than $5 billion. This figure does not include a $4 billion backlog of unpaid bills for Medicaid and State Employee Group Insurance.
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Conclusion We all play important roles in contributing to the social, economic, and fiscal health of the state. Income taxes, sales taxes, fees, and other revenue support investments that benefit all Illinoisans — education for our children, access to health care, safety net programs for our most vulnerable residents, roads and highways, and public safety. Enhanced public understanding of the basic building blocks of the state budget and its major priorities can contribute to better policy decisions that reflect both fiscal and social responsibility.
ABOUT THE FISCAL POLICY CENTER The Fiscal Policy Center (FPC) at Voices for Illinois Children provides timely, credible, and accessible information and analysis on fiscal issues that affect children, families, and communities in Illinois. The FPC is a member of the State Fiscal Analysis Initiative (SFAI), a network of nonprofit organizations in more than 40 states. SFAI is coordinated by the Center on Budget and Policy Priorities, a Washington, D.C.-based research organization and strategic policy institute that works on a range of federal and state issues. The Fiscal Policy Center is funded by the Annie E. Casey Foundation, the Center on Budget and Policy Priorities, the Chicago Community Trust, and the Ford Foundation. We thank them for their support but note that the findings and conclusions presented here are those of FPC alone and do not necessarily reflect the views of these funders. For additional information on the FPC, contact Larry Joseph, Director of the Fiscal Policy Center, at
[email protected] or 312-516-5556.
208 S. LaSalle St., Suite 1490 • Chicago, IL 60604-1120 Phone: 312-456-0600 • Email:
[email protected] • Web: www.voices4kids.org _________________________________________________________
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