igpa.uillinois.edu/budget-toolbox
TOOLS TO ADDRESS SPENDING
Tools to Address Spending
Ameliorating Illinois’ Structural Deficit
by Bending the Cost Curve
Richard J. Winkel, Jr., Director, Office of Public Leadership
University of Illinois Institute of Government and Public Affairs
February 18, 2014
Illinois policymakers could be faced once again with
painful budget choices that include not only whether
state spending cuts will be targeted or general,
but also whether those cuts will be immediate or
gradual. This short article is about austerity policies
recently enacted by Illinois policymakers and what
additional actions they could take to ameliorate
Illinois’ structural deficit by “bending the cost curve.”
When facing budget deficits, policymakers often find
that plans to cut current benefit programs create strong
and immediate backlash from recipients and other
interest groups. Those beneficiaries may have been
counting on those state expenditure programs, and
they may feel that the state is “changing the rules in
the middle of the game.” Fairness may require giving
them more time to adjust.
Even without immediate cuts in spending, however,
policymakers can help reduce future deficits if they
can reduce the growth of spending. They might
be able to “bend the curve” for the growth of state
expenditures, so that outlays do not grow as fast as
currently projected. However, the use of that metaphor
by experts to analyze the pros and cons of decisions
by policymakers has its critics.1 Notwithstanding
the critics and caveats, and without resolving the
controversy, the use of the metaphor is apparently
here to stay. Therefore, the question considered here
is whether Illinois can ameliorate the structural deficit
by bending the cost curve. The short answer is yes;
even without actually cutting state spending, Illinois
policymakers can reduce the budget deficit by slower
growth in future spending.
Illinois policymakers are currently confronting the
harsh reality that they have “two huge fiscal problems:
a large and growing gap between sustainable
revenues and projected spending levels; and a
Safire, William. (September 11, 2009). On language: Bending
the curve. New York Times. Available at http://www.nytimes.
com/2009/09/13/magazine/13FOB-OnLanguage-t.html?_r=0
1
White, Joseph. (October 1, 2011). ‘Bending the cost curve’ and the
politics of cost control. Journal of Health Services Research & Policy,
16(195). http://hsr.sagepub.com/content/16/4/195.full.pdf+html.
White warned, “‘Bending the curve’ is a dangerous metaphor
because it suggests policy has more control of the future than
it can; because it directs attention to situations about which we
know and can do less (the future) rather than when we know and
can do more (the present); and because… it favors speculative
ideas over measures with which there is more experience.”
1
largest-in-the-nation unfunded pension liability.”2
Illinois policymakers deserve much credit for taking
the necessary and difficult first steps through a tax
increase and pension reform. However, they still have
many miles to go on the road to solving the structural
budget gap and restoring fiscal sustainability.3
“Bending the curve” focuses on future or projected
costs. Thus, Illinois policymakers might logically
consider adopting austerity measures to change the
future cost trend and avoid the fiscal imbalance. In
fact, Illinois policymakers have already undertaken to
bend the curve in the past three years.
Effective January 1, 2011, Illinois policymakers
enacted temporary increases in the personal and
corporate income tax rates and capped the growth of
General Funds spending. They increased the personal
income tax rate from 3.0 percent to 5.0 percent and
the corporate tax rate from 4.8 percent to 7.0 percent.
General Funds spending was capped at 2 percent per
year for 2012-2015. The income tax rate increases will
phase-out beginning January 1, 2015.
In an effort to save the Medicaid program, the
Governor approved a legislative package on June 14,
2012 that increases the cigarette tax by $1.00 per pack
to $1.98 and increases the number of tobacco products
under the tax, which will raise about $675 million in
new revenues for Medicaid. At the same time, they
enacted cuts and efficiencies in the Medicaid program
that will save an estimated $1.6 billion in fiscal year
2013.
Finally, over the last three years, Illinois policymakers
also adopted some reforms to the budget process that
could result in future cost savings. For example, they
(1) created the new Budgeting for Results Commission
and spending reforms that require the Illinois to live
within its means and focus on performance effective
since July 1, 2010, (2) enacted a new requirement
effective beginning January 1, 2014 that the Governor’s
Office of Management and Budget shall publish to its
Dye, Richard, Hudspeth, Nancy and Merriman, David. (January
2014). Illinois still has serious fiscal problems after December 2013
pension law changes. University of Illinois Institute of Government
and Public Affairs. Available at http://igpa.uillinois.edu/system/
files/Pension-Reform-Will-Not-Fix-Deficit.pdf. This paper is
quoted and summarized throughout this paper.
2
See generally, Dye, Richard, Merriman, David, Hudspeth, Nancy
and Crosby, Andrew. (January 2013). And miles to go before it’s
balanced: Illinois still faces tough budget choices. The Illinois
Report 2013. University of Illinois Institute of Government and
Public Affairs. Available at http://igpa.uillinois.edu/IR13/pdfs/
IR13_CH2c_Fiscal.pdf. This report is quoted and summarized
throughout this paper.
3
2
website the budget of the State of Illinois for the coming
fiscal year in its entirety in an accessible format, and
(3) authorized an ongoing study that is due December
2014 on how to make the Illinois budget process the
most transparent in the nation.
In an October 2013 analysis of the state’s fiscal
condition, the Fiscal Futures Project at the University
of Illinois Institute of Government and Public Affairs
(IGPA) observed that Illinois policymakers have made
progress. They noted policies implementing cost
reductions and increasing revenue; on the other hand,
they also noted that the state has over $5 billion in
unpaid obligations from prior years and historically
rising Medicaid expenditures that continue to be a
serious concern.
Using the Fiscal Futures Model, the researchers
demonstrated that the combination of increased
income tax, large cuts in spending, and the effect of
a gradually improving economy would decrease the
deficit to an estimated $4.9 billion in FY2013, and
that the deficit would still be $1.6 billion in FY2014.
If the income tax increases are phased out after 2014,
then the deficit would grow to $6 billion by FY2016.
They concluded that while Illinois policymakers took
important steps to deal with its fiscal challenges, more
they would need to take more action.
The Fiscal Futures project has shown that this is a
chronic problem—not just a short-term crisis. It is a
problem that compounds over time, putting us so far
in the hole that we won’t be able to rely on economic
growth—or singular policy changes—to dig ourselves
out. In early December 2013, Illinois enacted a major
pension cost reduction bill. While the new pension
law, if upheld in the courts, would reduce the state’s
unfunded pension liabilities in 25 or 30 years, it
evidently does not come close to bending the cost
curve sufficiently to balance the budget. Indeed, a
January 2014 analysis of the pension law changes
by the Fiscal Futures Project found that even if we
combine the change in pension laws with higher tax
rates, the structural deficit still grows.
In early December 2013, Illinois enacted a major
pension cost reduction bill.4 In particular, if it is
upheld in the courts, the new pension law would not
change any current state spending but instead reduce
unfunded pension liability in 25 or 30 years, a prime
example of bending the expected future cost curve.
However, it evidently does not come close to bending
the cost curve sufficiently to balance the budget. As the
Public Act 98-0599, effective June 1, 2014.
4
Fiscal Future Project researchers explained, “Illinois
has a chronic, structural fiscal problem so huge that it
cannot be eliminated by increases in economic growth
alone, increases in taxes alone, or—alas—aggressive
pension changes alone.” Indeed, the researchers
concluded, even if we combine the change in pension
laws with higher tax rates, the structural deficit still
grows.
So, what more can Illinois do to bend the curve toward
balance in the budget? The Fiscal Futures Project
researchers recommended options that could reduce
the growth of spending by dealing with the specific
elements of its current fiscal imbalance. Illinois
policymakers could attempt to bend the cost curve by
making permanent adjustments to Medicaid benefits
to slow the cost of the program and adopt policies to
increase revenue that coincide with projected increases
in the Medicaid program and the phase-in of the ACA.
In addition, they could use the Budgeting for Results
Commission to identify costly inefficiencies in state
government programs for corrective legislative action.
The Fiscal Futures Project researchers also suggested
additional budget process reforms. Illinois could
change the way it calculates and reports its revenue,
expenses and liabilities, including “technical changes
such as timely reporting, multi-year forecasting,
consolidated budget reporting, and apolitical revenue
estimates.” However, they recognized that, though
easy and inexpensive to do, implementation of these
changes would be difficult because “they have the
greatest potential to alter the information used in
fiscal decision making on an ongoing basis, and
thus the greatest potential to fundamentally change
budgeting.”5
Nonetheless, legislators might consider using the
Budgeting for Results Commission to study and
develop a comprehensive overhaul of the budget
process. Policymakers and interested observers need
accurate, easily understood, and consistent reports
without political bias, and they need timely access
to the reports and data. Making these changes in
the budget process would open the process up to
independent review and analysis. Such reform would
not only make the process more open, consistent, and
straightforward, it could even bend the cost curve:
it would not change current spending but instead
cut future costs by pleasing “credit-rating agencies
enough to lower Illinois’ borrowing costs.”
The take away is that Illinois policymakers can reduce
future growth in spending. They could deal directly
with elements of the current fiscal imbalance or further
reform the budget process, or both. Such measures
could ameliorate Illinois’ structural deficit by bending
the cost curve. Doing so could reduce the necessity
for immediate and therefore more painful across-theboard program cuts, while improving the quality of
state services for people who need them.
Further Reading
National Association of State Budget Officers.
(2013). State budgeting and lessons learned from
the economic downturn. Available at http://www.
nasbo.org/sites/default/files/State%20Budgeting%20
and%20Lessons%20Learned%20from%20the%20
Economic%20Downturn-final.pdf
Poterba, James M. (May, 1993). State responses to
fiscal crisis: The effects of budgetary institutions and
politics, Working Paper No. 4375. National Bureau
of Economic Research. Available at http://www.nber.
org/papers/w4375
The Illinois Budget Policy Toolbox is a project by the University
of Illinois Institute of Government and Public Affairs. IGPA
is a public policy research organization striving to improve
public policy and government performance by: producing
and distributing cutting-edge research and analysis, engaging
the public in dialogue and education, and providing practical
assistance in decision making to government and policymakers.
Learn more at igpa.uillinois.edu
Thus the political nature of “bending the cost curve” suggested
by Professor White’s article. See footnote 2, above.
5
3