State debt: Burden or not?

State government stands in the same position as some of its hard pressed residents. Illinois' debt is growing. An increasing percentage of its income (revenues) is being used to pay debt service. And because of inflation, the money that the state borrows buys less.

The Illinois Economic and Fiscal Commission staff says the twin factors, increasing debt service and decreasing value of bond sales, prompt concern. Comptroller Roland W. Burris says the state should be wary of a growing burden. But the governor's budget director maintains that the only position that matters is that of the agencies that rate state bonds, and that they give Illinois high marks.

Bonded indebtedness constitutes the most familiar portion of the state's debt. Bonds are sold to pay for things like schools, bridges and prisons. The money is repaid from state tax revenues.

In May Comptroller Roland W. Burris analyzed state debt. He acknowledged the need for bond sales but warned that growth in bonded indebtedness places an increasingly heavy future burden on state taxpayers. Burris reported that direct state bonded indebtedness (including principal and interest) had increased from $2.87 billion at the end of fiscal year 1977 to $6.99 billion at the end of fiscal year 1986.

The comptroller also examined debt service spending as a percentage of all spending over the 10-year period. Debt service in the general funds increased from 1.9 percent of all spending in 1977 to 2.7 percent 1986. Debt service in the road funds rose from 5.4 percent to 8.7 percent of all spending over the same period.

Burris noted that debt increased faster than state personal income. In 1977 the state's debt was 3.15 percent of personal income; by 1986 it had risen to 3.93 percent. On a per capita basis the state's direct debt was $252 for each state resident in 1977 and $605 per Illinoisan in 1986.

The federal government also reports state debt on a per capita basis, but only on the principal owed. For 1985 the Census Bureau reported Illinois per capita debt at $302.30. That was the 17th highest among the 50 states, $45.51 (or 19.1 percent) higher than the national average and higher than all surrounding states except Wisconsin.

In light of last year's fiscal debates, the Illinois Economic and Fiscal Commission the General Assembly's revenue forecasters and debt analysts, revised its annual examination of state debt. Taking a cue fron questions asked during the spring debate on revenues, it reported long-term obligations as a percentage of general funds revenues. The statistic is a measure only since not all debt is repaid from the general funds.

The report analyzed 10 years of trends and found that:

• State debt has been growing as a percentage of general funds revenue. Between 1978 and 1987 state spending to repay bonds increased from 3.73 percent of general funds revenues to 5.21 percent.
• Inflation has eroded the value of annual bond sales. In 1978 direct bond sales totaled $400 million. The sales in 1987 adjusted for an early issue, were less than half that in constant dollars.
• Pension obligations should be viewed as a long-term obligation. Between 1978 and 1987 state contributions to the pension systems dropped from 4.52 percent to 3.98 percent of general funds revenues, because the state reduced its level of contributions. (Contributions peaked at 4.95 percent in 1980).
• The governor has not complied with statutory requirements to present a long-term capital plan that the commission says is needed to determine an appropriate level of bonding. The plan should include an inventory of the state's infrastructure, a projection of needs and priorities for meeting them.

Besides reporting on 10 years of trends, the commission projected the direction the state is headed in the next eight years under current policy. The analysts assume 4 percent annual revenue growth, along with $340 million per year in general obligation bond sales, no expansion of Built Illinois, no increases in other state supported debt and continued contributions to state pension systems at 60 percent of annual pension payments.

Under those assumptions debt service payments would decrease from 5.21 percent of general funds revenue in 1987 to 5.15 percent in 1995. But, the commission says, sharp increases required for pensions over that period would boost spending on long-term obligaltions from 9.19 to 10.08 percent of general funds revenue.

Robert L. Mandeville, director of the Bureau of the Budget, disputes the comparison of debt service to revenues. The proper comparison, he insists, is debt service to total spending, a figure he says is "slightly increasing." His figures show an increase in general obligation (the largest category of bonds) spending from 3.65 percent of total spending in 1984 to 4.01 percent in 1987. Mandeville also insist that the capital plan was complete and followed the law.

Mandeville's most severe criticism of the Economic and Fiscal Commission' report was reserved for the twin concern of increasing debt service and decreasing bond sales. "They've mixed the two. They call them both problems," he protests. Mandeville says the constant dollar amount for bond sales is intentional and must be considered positive from a financial view although it could be considered negative from a program standpoint.

James J. Ofcarcik, the commission' manager of long-term debt analysis, say Illinois is not in a situation where its increasing debt load is going to drop its credit rating. Long before that, state lawmakers will have to make choices about other programs as more money is allocated to debt service. The Superconducting Super Collider may bring that question to the fore, he says. The bond-financed improvements promised in Illinois' bid for the federal research plum and its high salaries would squeeze funding in other areas.

Debt and pensions are not sexy. Ofcarcik acknowledges the report has sparked little interest. It may take something like the strain that would be put on state resources by the Superconducting Super Collider to prompt legislative interest. □

February 1988 | Illinois Issues | 18