CHICAGO — The Illinois attorney general’s office and lawyers for a liquor distributor squared off before the state Supreme Court this week over whether the state’s 2009 $31 billion public works program — and the funding streams approved to repay bonding for it — are legal.

The court agreed to hear the case on an expedited basis following an appeals court decision in January invalidating the plan. The appellate court struck down provisions of the capital package that established funding streams to fund projects and repay bonding, ruling that they violated the state’s single-subject clause.

That action, in turn, overturned all the bills that made up the capital package and reversed a district court’s dismissal of the suit filed by Wirtz Beverage Illinois LLC in August 2009 shortly after Gov. Pat Quinn signed the law. Wirtz’ suit also challenged the state’s move to enact a higher tax hike on spirits and wine than on beer to support the capital budget.

Illinois sold more than $3 billion of taxable general obligation bonds to support the public works program last year and has plans to sell between $2 billion and $3 billion of GOs this year pending resolution of the legal case, state debt manager John Sinsheimer said earlier this month.

More than $400 million in new revenue has so far been collected from the various revenue streams enacted in the overturned legislation. The law legalized video gambling in various establishments, set up a capital spending accountability law requiring quarterly reports, amended riverboat gambling rules to include oversight of video gambling, and halted further diversion of state road funds.

The bill amended the state’s use tax, raising it to 6.25% on candy, certain beverages, grooming and hygiene products. It also amended the lottery laws to allow for a private management contract to raise additional revenue, raised taxes on various liquors, and established a capital projects fund to capture revenue generated by the various taxes to repay borrowing. In addition, it required a state university study on the impact of lottery-ticket purchases on families.

In arguments before the state’s high court Tuesday, assistant attorney general Richard Huszagh argued that the single subject of the bills that made up the overturned legislation was the public works program and that all of its pieces bear a “natural and logical relationship” to the capital plan.

Wirtz attorney Sam Vinson, of Ungaretti & Harris LLP, sought to refute that point.

“Studies on the fairness of taxes, the appropriateness of taxes,” are not “directly connected to the question of a capital project,” he said, citing the lottery study.

Huszagh countered that the study is directly related to the capital budget and its funding streams because lawmakers were concerned the lottery expansion could negatively impact families.

“Let’s try and raise new revenues … but let’s not do it in a reckless fashion,” Huszagh said of the Legislature’s reasoning. He asked the justices to follow previous rulings that allowed for a liberal application of the single-subject rule.

Supreme Court Justice Bob Thomas suggested that because there had been no capital budget in more than a decade, it was likely that the new capital plan’s legislation would be “enormous.”

But Vinson said by tying all the various bills together, individual lawmakers were forced to support the entire package. “We believe what that does is that it means every legislator who has a project in the appropriations bill or who has something in the revenue bill, if he cares about that, he’s compelled to vote for both bills, all the projects and all the revenue increases. … We don’t think that’s the way things should be done. That’s not a single ­subject,” he said.

The court did not say when it might rule on the case.

State officials have warned that if the package is not reinstated, they could be forced to suspend projects now underway and halt collection of various taxes and fees established in the overturned law, risking an irretrievable loss of tens of millions of dollars in state revenues.

Debt service for the bonds already issued under the authority of the capital projects act would have to be paid from a different revenue source, putting a further strain on state finances, the attorney general has warned.

Under the capital bill financing scheme, the state anticipates covering its $14.6 billion share of the $33 billion through GO and sales-tax-backed borrowing over the length of the program. Local and federal matching dollars cover the remainder.

Illinois would repay borrowing with $150 million annually taken from the road fund, $122 million generated from a hike in motor-vehicle title fees, and $180 million from an increase in license plate fees. Another $300 million would come from expanded gambling, $109 million from the liquor tax hike, and $53 million from increased taxes on candy, sweet tea, coffee, and personal hygiene items.

If the Supreme Court does not reverse the appellate court judgment, the General Assembly would need to revamp the package and pass new legislation.

Even though the original plan passed with bipartisan support, that task could prove difficult given the divisions between Democrats and Republicans over the state’s proposed fiscal 2012 operating budget. While Democrats hold majorities in the General Assembly, some GOP votes would be needed to reach the three-fifths majority needed for new bonding authorization.

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