DETAILS MATTER by Bob Ginsburg August 3, 2021
Budget Season in Illinois: The hidden flexibility in government budgets and how this affects the creation and implementation of new programs.
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Budget Season in Illinois: The hidden flexibility in government budgets and how this affects the creation and implementation of new programs .
‘The devil is in the details’
The last three weeks have been a curious blend of mystery, discovery, revelations and wishful thinking in the reporting on government financing in Illinois.
· Moody’s revised Chicago’s bond rating to “stable” citing “healthy liquidity, massive economy, very high leverage and recovering revenue. ”The City of Chicago and Police union settled their contract and the $600M cost with $365M of that for retroactive pay due in the first year. The City stated that they had set aside enough funds ($103M) to cover the increase and bond refinancing would cover the rest. Pretty good for a City facing a $1-2Billion budget deficit next year.
· Chicago Public Schools new budget has an increase of over $1Billion this year and even more next and most of the increase is paid for with new federal funds which will end in 2024. CPS noted that they are confident they will find the additional funds to meet the new ongoing expenses.
· Finally the County is planning to spend $1B in Federal recovery funds on new programs. The County is circulating surveys listing all sorts of options for the money. The County is even indicating it is open to hiring needed staff at the hospital. Of course at the same time the County is promising no new taxes or new County fees when the federal funding runs out. Given that the last budget was “balanced” by an unusual increase in sales tax revenue, hospital layoffs, further elimination of budgeted but unfilled positions, and the use of $75Million in reserve funds, it is curious how there will be sufficient “new” revenue from existing sources in 2023 or beyond.
· The Governor’s recent budget contained a proposal to limit state contributions to municipalities from state income taxes and to public transit from state sales taxes. The proposals were withdrawn in the final budget (keeping state support for transit and municipalities flat this year) but will likely show up again. There was much relief that the budget didn’t cut local funding. Sustaining the state public health, health care, housing, and new economic development/community investment programs will need new revenues.
Furthermore, all this “good” budget news does not include stable, long-term funding new, programs and services to rebuild communities remains distant. The need for new, stable revenue has not gone away but that is a discussion for another day. That day will come sooner rather than later as at some point the federal support will ease off. Before discussing new revenue sources (and this has been discussed by me and others before) I want to answer questions I have gotten recently about how budgets with limited or no increases still manage to run existing programs and claim to have revenues for new activities. There is clearly financial flexibility in the current budgets but how much and where is it? For all these structural and long term problems, it is not obvious to many people how governments continue to function.
Some questions ask about new expenses (such as contracts, legal settlements, etc.) get paid for? Others center on where the money comes from to cover for pandemic-level or just major revenue shortfalls? Understanding where budgets have flexibility and can save money or take money to use for new expenses is important before deciding how to fund new programs or where to put new funding.
The first step is to recognize that public budgets are more estimates of spending and not fixed spending blueprints for programs that are set in stone. The flexibility in budgets after they are adopted lies in “selective” spending with decisions made out of the public eye and without paper trails. Monitoring and controlling “Selective” spending is critical in planning for and oversight of new or pilot programs.
1. Personnel account for 60-70% of the budget but Budgeted FTEs ≠ Actual employees or program staff
One of the biggest uncertainties in budgets is how many employees are actually hired. About 10 years I worked with an Alder to get a list of vacant but budgeted positions. The City supplied a list that was 6 months old but it had about 1,400 positions which I was told was pretty standard. Since the average salary and benefits for City employees is $70,000, unfilled positions amount to an annual budget savings of about $100M per year. This year (and last) the City operated with approximately 3,000 vacant budgeted positions for a savings of $200M per year. See the tables at the end of the newsletter for a breakdown of the unfilled positions. How this impacts programs is unknown. As the table shows, the unfilled positions affect all departments but some more than others.
Eliminating vacant budgeted positions has been a popular budget cutting solution for the last two years especially during the pandemic as it cuts the budget and employee totals without layoffs. However, the lack of staff will clearly affect the ability to improve services or create new programs and services. Finally, hiring new people is still rigidly controlled by the budget office and then HR. No new position can be posted until first the budget office approves filling the position and then HR has to approve posting. Executive decisions to reduce spending override departmental policy decisions without “formally” opposing new programs. Evaluating Department results depends on knowing actual funding and staffing levels –and their timing- and assigned responsibilities.
2. Total Salaries ≠ Salary Budget Lines;
Beyond the issue of unfilled positions and the reasons positions are not filled, the salary totals in the budget do not represent the total budget impact of personnel. Again, using the Chicago budget, the personnel detail for each department lists the total annual salary cost which is then reduced with “Turnover” to reduce the salary cost to be included in the budget total. For example, The Police department total for positions and salaries in the Corporate fund is listed in the Budget Recommendations at $1.24Billion BUT that was reduced by $42Million in putting in calculating budget cost. This reduction is called “Turnover.” Turnover is the estimate of how much of the salary will actually not be spent due to retirements, delays in hiring, new hires getting paid less than the previous position, etc. However, the turnover varies from department to department. For example, in 2021 the Inspector General had no Turnover reduction in one fund while the Mayor’s office estimated Turnover of 4.8%. The larger the turnover, the more positions that can be included in the budget or higher salaries that can be paid. (NB. I have not completed/reported turnover totals for each department as it requires manual totaling of totals from different sections of the budget. For example, the Mayor’s office personnel expenses are split between 8 different funds, Police and Fire personnel totals are split between 3 funds, etc.)
3. Two key and underappreciated sources of appropriations
Most of the budget discussions justifiably focus on revenue sources. Sales taxes, property tax revenues, fees, etc are the prime drivers of budgets. However, implementation of budgets often depends on two other sources of funding that provide flexibility and a lack of transparency: unspent funds from the previous year and grant income.
Examples are shown in the charts at the end of the newsletter. In 2021, Chicago used $246Million in unspent funds from the 2020 fiscal year with nearly half coming from the corporate fund budget. The source of the unspent funds is unknown as is its impact on program implementation. In 2020, unspent funds accounted for an additional 3.1% reduction in the budget. Some of the unspent funds result comes from unspent supply budgets, changes in workers comp and unemployment but much of it comes from unspent salaries and benefits and delaying new or expanded programs due to lack of funding or staff. Departments cannot put out bids for project expenses without prior approval of procurement and the budget office. As discussed previously, positions cannot be filled without approval from budget and then HR. Thus major purchases and personnel decisions for projects can be slowed down or sped up by decisions outside of departments. Money unspent in one year can be spent in many different ways in the following year depending on the source of funding. For example, Streets and Sanitation is required to use both garbage fee and Motor Fuel Tax funds for personnel and equipment but if the department has unspent funds in 2020, they can be spent differently or even in a different department in 2021. The 2021 budget discussion never included a discussion of how the $247Million from 2020 arose or how it would be applied in 2021.
Grants have also always been important to the City of Chicago as well as the State and are slowly increasing in importance at the County since 2010. In the City they have added both flexibility to the budget and significant resources generally amounting to approximately $1.5- $1.8 Billion per year. Grants are the main source of appropriations and staff for a number of departments as shown in Department Hiring and Grant data table below. Grants include state and federal funds and often have much more flexibility than budget lines funded by local revenue. For example, Most of the staff in the Public Health Department and The Department of Family and Support Services is grant funded.
Why this matters and How does this affect creation of new programs?
As the next budget season approaches and budgets are being actively developed behind the scenes, it is important to consider how legislators and citizens view the budgets. Unfilled positions, turnover, unspent funds from last year and the most flexible portion of the grant funds (such as CDBG) provide nearly $500 Million in budget resources and flexibility to the City Budget and comparable amounts at the State and County levels. Even without new revenue, there are resources and capabilities to create new and expanded programs even within the constraints of the current budgets.
For the City, the challenges are greater as the responsibilities are greater and the options for new revenues that reflect the economy are limited. Maximizing the impact and coordinated use of existing resources is critical. Until funding for municipal and County governments in Illinois are restructured, the funding crises will continue. A recent study from the National Bureau of Economic Research (NBER) looking a municipal finances, found that controlling for city fixed effects, population, and personal income, large city governments (like Chicago) shrunk by 15% between 2009 and 2018 because revenue sources have limited relationships to population and income growth which drive federal and state income..