April 25, 2013
An important first step in preparing a government budget is the preparation and publication of revenue estimates for the upcoming fiscal year. The estimates provide the basis for the spending decisions that are subsequently incorporated into the budget.
Under Illinois law, the Governor begins the budget process by proposing a budget based on a revenue estimate for the coming fiscal year and the General Assembly then establishes its own estimate of available funds. For the past three fiscal years, the General Assembly has adopted official resolutions with revenue estimates that differed from the Governor's and used these estimates as the basis for its annual spending plans. This has resulted in an ongoing dispute over which branch of government's revenue estimates to use in developing the budget. Illinois' process is in contrast to many states where the executive and legislative branches develop a consensus revenue estimate that guides the development of the Governor’s budget.
Differing Executive and Legislative Revenue Estimates
In FY2012 and FY2013, the Illinois budget approved by the General Assembly used revenue estimates originating in the House of Representatives rather than the Governor’s Office. The stated purpose of this move was to set spending caps based on the House revenue forecasts.
The legislature’s revenue estimates were established after the Governor had proposed his budget in FY2012 and FY2013. However, this year for the FY2014 budget, the Illinois House approved a revenue projection that was significantly below the Governor’s revenue estimates one day before the Governor issued his recommended budget. The House adopted House Resolution 83 on March 5, 2013 by a vote of 100 to 15. During the discussion of HR83 on the House floor, it was noted that the Governor’s revenue number was expected to be above the House projection and that approval of the measure would put the House at odds with the Governor’s spending plan.
The Governor’s budget recommendation is based on projected FY2014 General Funds revenues of $35.6 billion. The House estimated that General Funds revenues in FY2014 would be $549 million lower at $35.1 billion.
Best Practices in Developing a Revenue Estimate Consensus
The National Advisory Council on State and Local Budgeting (NACSLB) recommends that governments develop a process for achieving consensus on revenue estimates prior to budget development. This removes forecasts from being an object of dispute and ensures the implementation of a more efficient, stable budget process. A formal consensus process also ensures a critical review of the assumptions underlying forecasts. The development of a consensus forecast requires a process that is transparent, consistent and trusted by all parties involved.
The NACSLB notes that the process for achieving a revenue forecast will vary by government. Options include collaboration between the executive and legislative branches, using academic or private sector economists to develop the forecast or some combination of both approaches.[1]
Governor Quinn’s Budgeting for Results Commission stated in its November 2012 report that it will survey consensus revenue forecasting practices in other states in order to recommend a similar process for Illinois.
Executive-Legislative Consensus Forecasting Processes in Selected States
According to the National Conference of State Legislatures, 22 states develop a consensus revenue forecast that usually includes representation from the executive and legislative branches. In 17 states the executive branch alone prepares the revenue forecasts and in the remaining 11 states there are varying degrees of executive-legislative cooperation in producing the estimates. Four examples of states that have developed a formal consensus revenue forecast process involving both the executive and legislative branches are briefly described below. They are Connecticut, Kansas, Michigan and Wyoming.
Connecticut
The Governor’s Office of Policy and Management (OPM) Secretary and the General Assembly’s Office of Fiscal Analysis (OFA) Director are required by statute to agree on and issue consensus revenue estimates each year by November 10th and to issue any necessary consensus revisions of those estimates in January and April. The estimates must cover the current biennium and the three following years. If OPM and OFA are unable to agree on a consensus estimate, the Act requires both offices to issue separate estimates. The State Comptroller is then empowered to issue the consensus estimate, which must be based on the separate estimates from the two offices and be equal to or fall between the two.
The consensus revenue estimates and revised estimates must (1) serve as the basis for the Governor's proposed budget and for the revenue statement included in the final budget act passed by the Legislature to indicate that the budget is balanced, and (2) be included in the annual fiscal accountability reports submitted to the Legislature's fiscal committees each November.
Kansas
The Governor and the Legislature determine State General Fund revenue by means of a projection prepared by the Consensus Revenue Estimating Group. This group is composed of representatives of the Division of the Budget, Department of Revenue, Legislative Research Department and one consulting economist each from the University of Kansas, Kansas State University, and Wichita State University. The group meets each spring and fall. Before December 4th, the group makes its initial estimate for the budget year and revises the estimate for the current year. By April 20th, the fall estimate is reviewed, along with any additional data. A revised estimate is published, which the Legislature may use in adjusting expenditures, if needed.
Michigan
Michigan uses a consensus process created by 1991 Public Act 72 to generate official revenue estimates for its budget. Consensus conference principals (voting participants) are the State Budget Director or the State Treasurer, the Director of the House Fiscal Agency (HFA) and the Director of the Senate Fiscal Agency (SFA) or their respective designees. In recent years, the State Treasurer has served as the Governor’s representative at the conference. To determine available revenue resources for the state’s budget, Michigan’s House, Senate and Executive branch participate in the consensus revenue estimating conference.
The Management and Budget Act requires consensus revenue estimating conferences be held annually. If any of the principals of the conference determines that there is sufficient cause to revise the consensus estimate, he/she can call a conference at any time during the year. Each conference establishes the official economic forecast of major variables of the national and state economies and estimates anticipated state revenues for General Fund/General Purpose (GF/GP) and the School Aid Fund (SAF) for the current and next fiscal years. At the conference, which is open to the public, economists from the HFA, SFA and Department of Treasury present their independent forecasts of the national and state economies and estimated state revenues for the current and upcoming fiscal years. Because a conference goal is to bring together the best information and insight available on the fundamentals of the economy, experts from academia and the private sector are invited to present and discuss their economic forecasts. Participants often include faculty from state universities, analysts from automotive companies and economists from various consulting firms and the Federal Reserve.
Members of the Legislature who attend the conference may question any conference participant. After reviewing agency forecasts and evaluating input from academia and private sector experts, the conference principals confer in an effort to reach agreement on consensus estimates of GF/GP and SAF revenues. Statute requires that the consensus reached must be unanimous.
Since the start of the consensus conference process (May 1992), agreement has been reached at all meetings except the very first. Once consensus is reached, the January estimates become the revenue basis for the executive budget proposal that the governor presents to the Legislature in February. The May consensus estimates become the revenue basis for the appropriations bills that the Legislature presents to the governor in June or July.
Wyoming
The Consensus Revenue Estimating Group (CREG) is the official estimating body for all revenues received by Wyoming state government. The group was created by a mutual informal agreement between the executive and legislative branches in the fall of 1983 as a means of providing a single consensus estimate of revenues to aid in the budgeting process. The leadership of CREG consists of the Administrator of the Economic Analysis Division (EAD) of the Department of Administration and Information and the Budget and Fiscal Manager from the Legislative Service Office (LSO), each serving as a co-chair of the group. Additional members of CREG include representatives from the State Auditor's Office, State Treasurer's Office, Department of Revenue, Department of Education, Wyoming Geological Survey, Wyoming Oil and Gas Conservation Commission and the University of Wyoming.
Revenues are annually estimated in October to coincide with the preparation of the Governor’s biennial and supplemental budgets. In order to consider the latest available data, a revision meeting is held in January, prior to or as close to the beginning of the legislative session as practicable. Through this timing, Wyoming’s leaders believe that decisions can be based on the best available information at each step in the budgeting process. In special cases where fundamental changes to revenue streams have been recognized or anticipated, the co-chairs may convene an official meeting to alter projections outside this typical October/January schedule. The Governor or Legislature may also request of the co-chairs an official revision or reconsideration of estimates based on changing economic conditions.
[1] See Recommended Budget Practice 9.2d: Achieve Consensus on a Revenue Forecast. National Advisory Council on State and Local Budgeting. Recommended Budget Practices: A Framework for Improved State and Local Government Budgeting. 1999, p. 48.