Experts Clash on Constitutionality of Borrowing to Balance State Budget
Institute CEO John Tillman was featured in a story on the state budget.
By Kaitlin Meehan
Illinois Constitution: “Appropriations for a fiscal year shall not exceed funds estimated by the General Assembly to be available during that year.”
Past borrowing by the state indicates that the proceeds of bond sales are generally incorporated into the balanced budget enacted at the beginning of each fiscal year. Most recently, Gov. Quinn’s $8.75 billion borrowing proposal–another bond sale–has stirred anger among those who oppose borrowing as a means to cover the budget deficit.
Given the Constitution’s admonition, is borrowing to balance the budget constitutional?
Opinions are divided. A balanced budget is generally understood to mean that revenues must at least equal expenditures in a state’s operating budget, but experts take sides on what counts as revenue.
Conservative lawmakers such as Sen. Chris Lauzen (R-Aurora) don’t consider borrowed money as funds “available during that year.”
“Only on the planet Pluto does this definition of balanced make sense,” Lauzen asserted. “Literally that’s taking something from the liabilities side of a balance sheet and calling it revenue. In reality, Illinois is certainly insolvent in that its debt is way more than its assets.”
But others believe there’s nothing illegal about counting borrowed funds to balance the budget. John Marshall Law School professor Ann Lousin was a research assistant at the sixth Illinois Constitutional Convention where she worked on drafting the 1970 Illinois constitution, the version still in place today.
“I know there are people who say you should never include the sale of bonds under assets, but that’s ridiculous,” Lousin said. “We’ve been issuing bonds since World War II. No one at that time would have complained that a war bond isn’t considered revenue.”
Every state except Vermont has some form of constitutional provision requiring legislators to pass a balanced budget. Alabama actually imposes a jail term for violating this rule.
Nevertheless, “When you get down to the nuts and bolts of it, a lot of these constitutional requirements are not absolutely binding or specific,” said Ron Snell, a senior fellow with the National Conference of State Legislatures.
Those who find fault with Illinois’ constitutional wording say it falls into this imprecise category for two reasons: it does not specify sources of revenue that qualify as available funds, and it does not limit the amount of debt the state can carry forward from one fiscal year to the next. The state’s fiscal year runs from July 1 to June 30.
“What the law was meant to do was provide a common-sense definition of a balanced budget,” said John Tillman, CEO of the Illinois Policy Institute, a nonpartisan research organization that studies the budget every year.
Unfortunately, he said, because the Constitution does not specify from where appropriated funds must come, the state can claim borrowing, or the proceeds from state-issued bonds, as anticipated revenue.
Tillman contends the fiscal 2011 budget was technically imbalanced by about $4 billion, as the state issued debt to make payments to its pension funds, for example. Borrowing to make annual pension contributions is one example of debt financing that has especially angered conservatives.
Nonetheless, Illinois has a history of leaning on debt financing to stay afloat.
To make pension contributions, the state issued $10 billion of bonds in 2003, $3.5 billion in 2009, $4 billion in 2010 and $3.7 billion of bonds last Wednesday to make its required fiscal 2012 contributions. The state does consider pension fund payments an operating cost, and as such, they must be included when the state enacts a balanced budget each fiscal year.
Gov. Quinn’s $8.75 billion borrowing plan is different in that the proceeds would be used partly to pay past-due bills, Tillman says. By some estimates, the state owes vendors, such as hospitals and other service providers, between $7 billion and $8 billion in late payments for service.
That is the second fault critics find with the constitutional mandate for a balanced budget: no limit on rollover debt from year to year.
According to a report Snell wrote for the National Conference of State Legislatures, two limitations stated in the Illinois Constitution, requiring a balance in the governor’s proposed budget and in the version of the budget that the legislature later approves, are the weaker two of three requirements that many states have. A third requirement, which most other states have in some form, limits the amount of debt the state can carry forth from one fiscal year to another. It is considered the strongest obligation to keep the budget balanced.
Lacking this requirement, Illinois is one of just 13 states that are legally permitted to carry over a deficit at the end of each fiscal year.
Alabama, for instance, has one of the tightest constitutional requirements. Its law restricts annual debt by stating “the governor may be authorized to negotiate temporary loans, never to exceed $300,000, to meet the deficiencies in the treasury, and until the same is paid no new loan shall be negotiated.”
But not everyone blames the Illinois government for resorting to borrowing.
Lousin said the state government has difficulty estimating expected federal funds–which are included in the state budget–because it operates on a different fiscal year than the federal government, whose year runs from October 1 to September 30.
However, Lousin conceded, “I do understand other points of view that people don’t like the idea of issuing bonds to pay for pensions, but we wouldn’t have gotten into this mess if the state had been making their pension obligations over the years. That’s not the Constitution’s fault.”
The Illinois wording “is actually relatively clean,” she said. “It’s just that it’s not judicially enforceable and it’s never really been tested.”
She contends that no other state’s requirement is judicially enforceable either.
Still, some experts believe that a more specific court interpretation of the balanced budget mandate would pressure state lawmakers to adhere strictly to the Constitutional wording, in other words, balancing without borrowing. However, such a challenge would be difficult to spark.
“What taxpayer has the kind of money he needs to sue the state for breaking the law?” said Jim Tobin, president of National Taxpayers United of Illinois. “They have a vested interest in maintaining the status quo because they don’t want to stop paying into the pensions.”
But as other states’ laws prove, a harder line is not unheard of. Once again, the Alabama 1901 constitution, which is still in effect today, demonstrates this.
Alabama Amendment 29: “Any person violating any of the provisions of this amendment shall, on conviction, be punished by a fine of not exceeding five thousand dollars, or by imprisonment in the penitentiary for not more than two years, one or both, at the discretion of the jury trying the same, and the violation of any provisions of this amendment shall also be ground for impeachment.”
Snell wrote that no Alabama state official has ever produced an unbalanced budget.