Fiscal feud

The last thing the dysfunctional family known as the Illinois General Assembly and Gov. Rod Blagojevich needs now is a big fight over finances. Even in the closest of clans, it's no fun to tell the kid she's going to have to give up piano lessons and the old man that he'll have to hold off on the new plasma TV because money is tight.

So, of course, a major budget war — potentially a doozy of a budget war — is exactly what the Springfield kiddies are heading for when Mr. Blagojevich unveils his proposed fiscal 2009 spending plan on Wednesday. Keep your pith helmets close, folks.

It's already been reported that the state faces a $600-million to $800-million hole in this year's budget, with investment income off by almost $250 million — the latter according to Treasurer Alexi Giannoulias. In fact, the numbers are worse.

Adding the carry-over deficit, plus new spending needed for Medicaid and pensions, the state will be short $1.5 billion to $2 billion, and that's if the economy doesn't get worse, says Steve Schnorf, who was Gov. George Ryan's budget director and knows a big hole when he sees it.

Another numbers guru, the Center for Tax and Budget Accountability's executive director, Ralph Martire, puts the likely hole at $3 billion — "conservatively." And that's before Mr. Blagojevich renews his ambitious (and expensive) campaign for universal health care, something he'll almost certainly do, at least incrementally.

So, where are they going to get the loot or make the cuts? To put it another way, who has most reason to worry?

Much recent buzz has been that, on the heels of his spectacular failure to pass a corporate gross-receipts tax last year, Mr. Blagojevich will give another try at whacking the business community, perhaps with a twist. Among ideas being discussed are a tax on gross personal assets, a carbon tax on polluting industries or a variation on the latter: a state cap and trade system for pollutants in which companies would effectively pay the state more as their emissions climbed.

All of those ideas have problems in Springfield, and sources who should know say, as of this writing, none is likely to proceed.

A better bet would be asset sales — the lottery or tollway — or another pension obligation bond issue like the one in the guv's first term that enabled him to close a big post-Sept. 11 budget hole.

A POB essentially is an arbitrage play, a bet that money borrowed at one interest rate will over many years earn more if invested at a higher rate, yielding a profit. Team Blagojevich's market timing on the last POB was exquisite, with the deal apparently making money.

The problem is that instead of leaving the POB profits in the pension funds, the governor used them to sharply reduce normal state payments to the funds. Ultimately, the pension funds are no better off.

Key lawmakers do not seem inclined to sign off on a similar deal, even though interest rates are low. "We'd be very insistent that the money go toward long-term debt relief," not short-term budget-hole filling, says House Majority Leader Barbara Flynn Currie.

A hike in the tobacco tax seems likely but will bring in just a few hundred million. There's always the much-discussed but never-passed Big Casino Deal, but it seems to be always, um, much discussed and never passed.

That leaves the old standbys: extending the sales tax to cover services and boosting the income tax.

The guv's flip-flop on the transit tax opens just a crack of possibility that something might be possible. Another crack comes from sources close to Senate President Emil Jones who say that, unlike last year, he's willing to consider an income tax hike rather than a gaming expansion as a revenue raiser.

We'll see. Meanwhile, given recent experience, expect to see delayed bill payments, borrowing, shifting funds among accounts and other shenanigans, otherwise known as cooking the books. After all, it is an election year.

©2008 by Crain Communications Inc.

February 18, 2008