Illinois Debt Service Eating Up Earmarked Capital Fund

CHICAGO – Increased debt service from Illinois’ recent round of borrowing is coming closer to exhausting revenues available in a special capital projects account even as the state has billions more to issue in the coming years under an ongoing $31 billion capital program.

The warning sounded by the Civic Federation of Chicago’s Institute for Illinois’ Fiscal Sustainability poses no risk to bondholders, as all of the bonds sold to support projects in the infrastructure program carry the state’s full faith and credit pledge or a top-rated sales tax backing.

Instead, the numbers underscore the failure of the revenue sources approved as part of the Illinois Jobs Now capital program in 2010 to live up to expectations. That’s due primarily to the slow and arduous launch of video gambling.

It also raises questions over whether the cash-strapped state that is grappling with billions in unpaid bills and faces the partial expiration in fiscal 2015 of an income tax hike can afford to keep up its pace of borrowing. The state has staked a position that revenues flowing to the special capital projects fund will eventually pick up speed, so no retreat is planned on future borrowing.

“Our capital program remains on track,” said state capital markets director John Sinsheimer. “We expect the capital projects fund will generate revenues sufficient to support Illinois Jobs Now” once the video gambling piece of the revenue pie picks up speed.

Revenue to repay debt service on much of the state’s more than $2 billion in borrowing this year will come from the capital projects fund. The account was established along with the infrastructure program. The package raised taxes on candy, certain beverages, grooming and hygiene products; amended the lottery laws to allow for a private management contract to raise additional revenue; raised taxes on various liquors; increased vehicle-related fees; and legalized video gambling in some establishments.

“These revenue sources have lagged far behind the original legislative estimates. With the additional cost of bonds sold from May through July, the capital projects fund appears to be close to its capacity to fund additional debt,” the federation wrote.

A total of $627 million in revenues flowed to the account in fiscal 2013 while only $398 million was needed for debt service. The debt service number, however, will rise to $564 million in the fiscal year that began July 1. The federation’s report specifically attributes $131 million of the increase to a round of borrowing between May and July including a $1.3 billion GO sale, a $604 million Build Illinois sales tax backed refunding, and a $300 million new money Build Illinois sale. The federation did not count the state’s $800 million GO sale in April. Debt service demands on the capital fund without any additional borrowing would drop slightly to $557 million in fiscal 2015.

The state still has about $7 billion in borrowing to do under the ongoing capital budget, the federation wrote. The state has reported plans in its annual capital budget documents and offering statements plans to issue roughly $2 billion annually over the next two to three years to wrap up bonding for the $31 billion program.

Civic Federation President Laurence Msall warned that while there may be room to fund some additional approved projects, the capital fund will still fall far short leaving the state to “find additional resources to pay for $5 billion to $6 billion in underfunded promises as it continues to confront billions in overdue bills, ever-increasing pension costs and the upcoming loss of billions in revenue due to the rollback of the income tax increases in 2015.”

Revenues deposited in the capital projects fund in fiscal 2013 fell between $300 million and $500 million short of original projections. The video poker tax was originally estimated to generate between $288 million to $534 million. A delayed start as licenses were issued and local governments weighed the option resulted in no new revenues in fiscal years 2010 through 2012 and just $58 million in fiscal 2013.

The General Assembly’s Commission on Government Forecasting and Accountability now projects the tax may ultimately just raise between $106 million and $196 million annually for the capital projects fund due to local governments opting out of the new gambling system.

The state also repays debt service for Illinois Jobs Now projects from other accounts including transportation-related fund and a state construction fund. Repayment of GO-supported projects approved before the enactment of Illinois Jobs Now comes from the general fund.

The state is considering a fall GO issue depending on the need for project funding, Sinsheimer said. The state has seen its GO ratings steadily deteriorate in recent years due to its pension funding crisis and has struggled with steep interest rate penalties demanded by investors. Illinois is the lowest rated state at the low-single-A level and carries a negative outlook from all three rating agencies.

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