STATE OF THE STATE
Remember. If we
build it, the bills will come
by Burney Simpson
Times are good. Unemployment is
low and tax dollars are coming
in. And politicians are in a spending
mood.
Or, more accurately, optimists at
the Statehouse are in a borrowing
mood. Illinois, they argue, can now
afford to undertake long-delayed
repairs on roads and buildings, even
start new construction, because we
can afford to issue more bonds. A
form of government debt not unlike a
citizen's home mortgage, bonds can
be paid off over 20 years. And
because interest rates are low again,
some politicians, like some citizens,
believe they can't afford not to borrow
against the future.
So Gov. George Ryan has formed a
task force to suggest creative ways to
fund the state's infrastructure needs.
That report is due the first of this
month, just in time for final negotiations on the state's spending plan for
the upcoming fiscal year.
But the build now, pay later plan is
as old as Illinois. Throughout the
state's history, good economic times
have sparked a long list of exciting
projects, generally advanced by
expansive-minded, deal-making
governors. Bonds are issued, debt is
incurred. Then the inevitable downturn occurs. Businesses fail, jobs are
lost. The expansive deal-maker is
replaced by a hawk-eyed accountant.
Projects are canceled. Belt-tightening
leads to efficiency and savings. Bills
are paid. Jobs return. And the bookkeeper steps down. (Saying no can be
unpopular.) And here comes the new
guy, a friendly sort who likes to give
people what they want.
In the 1980s, the state
launched Build Illinois
to pay/or highways
and public buildings. We're
still paying those hills.
That was true in Abraham
Lincoln's day, when the state began
building its first transportation infrastructure. But we have a more recent
example. In the 1980s, Gov. James R.
Thompson pushed through Build Illinois, a $2.3 billion bonding program
to pay for highways and public buildings. We're still paying those bills.
No question, the state needs to
shore up some of its bricks and
mortar. Roads are crumbling, mass
transit is hurting, water systems are
worn and schools are overcrowded.
That's just the fixes. Future plans
require money, too. And Ryan's task
force, which held four public hearings
around the state, was given a pretty
long wish list. If all those dreams
were to be funded, the tab would hit a
jaw-dropping $38 billion, according
to the state's budget office.
"Keep in mind that [figure] includes
some overlap and duplication," says
Steve Schnorf, Ryan's budget director.
"We have to consider needs vs.
resources. You deflate the needs by 50
percent, then you go in and look at
what you can do."
Of course, some dollars for building projects could come from the feds,
and other dollars would come out of
local coffers. Even at that, the dreamon construction tab would constitute
the largest bond issue in state history.
So Schnorf attempted to give the
committee a "reality check" during
his testimony in Springfield.
Here are some of the brass tacks.
While Schnorf acknowledges the
state's $1.2 billion bank balance, he
stresses the $850 million in bills that
will come due June 30, the end of the
fiscal year. "We are in a solid but not
flush position. We got there by being
careful over the last 14 years," he says.
Further, the state will issue nearly
$4 billion in general obligation bonds
over the next five years anyway to
cover ongoing projects.
Schnorf says he would consider
issuing an additional $4 billion to $5
billion in new bonds over the next
four years, but only if the governor
and lawmakers agree on a new
revenue source for paying off the
added debt. That generally means
higher taxes or fees. A rough rule of
thumb, says Schnorf, is that for every
$1 billion in new debt, the state would
need $85 million in revenue to service
that debt. An increase in the $48
license plate fee seems most likely. For
every dollar increase in that fee, the
state could raise $8 million.
And Schnorf wants to protect the
state's reputation with the firms that
rate government bonds. A higher rating makes bonds more desirable to
buyers and lowers a seller's interest
rates. One prominent agency,
Moody's, upgraded Illinois' rating
last June to Aa2, its third-highest
quality level. That puts Illinois on par
with other Great Lakes states and the
10 most populous states nationwide.
Even in the worst economic times
early in this decade, the state was
6 / May 1999 Illinois Issues
careful to keep its debt service level
beneath the two key benchmarks
rating agencies use to judge a state's
fiscal health: No more than 5 percent
of a state's revenue should be used to
pay off bonds; and debt should not
amount to more than 3 percent of the
personal income of a state's citizens.
We're good on both counts. In fact,
each Illinoisan currently owes $723 on
the state's bond debt, or 2.6 percent of
our combined personal income,
according to the budget bureau.
Schnorf believes if current economic
conditions continue, the state could
issue a maximum of $9 billion in
bonds over the next five years. That's
the $4 billion already planned and $5
billion in new infrastructure funding.
But good economic conditions
never continue. Oil producing countries could decide to jack up their
prices, as in the 1970s. Foreign competitors in such industries as steel and
autos could slam their American
counterparts, as in the 1980s.
Of more immediate concern,
though, is politics. Stateside.
Former Gov. Thompson's Build
Illinois construction blueprint was
under discussion in the legislature in
1984 when Dawn dark Netsch was a
state senator from Chicago. What
began as a $1.3 billion program, she
recalls, was expanded in 1989 and 1990
to more than $2 billion.
The project kept getting bigger
because, in order to get agreement in
the legislature, Thompson promised
everyone something. "It was like a
Roman feast," Netsch says. "They
would go around to legislators and ask
'What do you want? What do you
need?' My concern was that a lot of
things were funded ahead of other
projects because they had to give
something to everyone."
But if the scope of Build Illinois was
underestimated, revenue to pay for the
construction spree was overestimated.
The source designated to pay off the
bonds for the program was a tax on
private sales of used cars. But those
dollars have always fallen short, says
Schnorf.
Additionally, as Build Illinois was
expanding, the national economy was
contracting. To Netsch, it was a case
of good times, bad times. In 1990, she
won election as state comptroller, but
before she could be sworn in she
learned the state's finances were in
serious trouble. By the next spring,
Illinois owed $263 million and had
only $50.3 million available to spend.
During Netsch's four years in that
office, the state was "broke, broke,
broke." Indeed, it took most of Gov.
Jim Edgar's two-term administration
to bring state spending in line with
revenues. Need we say that Edgar
played the tight-fisted accountant to
Thompson's deal-maker?
It may be the state needs some
infrastructure improvements,
including roads and bridges, buses
and trains, and schools. Interest rates
are low and revenues are high. But
if — let's say when — the state's
revenues slow, the debt will still be
there. And Illinoisans will still be
obligated to pay it.
So state officials may want to
consider a time when even Illinois' best
politicians allowed the art of the deal
to trump fiscal prudence.
Just about 165 years ago, the
nation's economy was going great
guns. Settlers were moving west. And
state lawmakers, including Abe
Lincoln, wanted to dig the Illinois and
Michigan Canal to connect Lake
Michigan with the Mississippi River.
Backers said the canal would pay for
itself with tolls on all of the goods
shipped between the expanding West
and the prosperous East. And anyway,
they argued, immigrant labor needed
to accomplish the project was cheap.
But the project kept getting bigger.
Politicians decided, while they were at
it, to build a railroad stretching from
Cairo to Galena, and Chicago to St.
Louis. Again, it was assumed, growth
would guarantee that the lines were
used and the bonds would be paid.
Then, to get everyone on board, rail
lines were planned for regions that
didn't need them. And $200,000 was
divided among counties that wouldn't
get a rail line or a canal. Some
historians believe Lincoln signed on
after being promised the state capital
would be moved to his hometown of
Springfield.
The legislature subsequently voted
to issue $8 million in bonds for four
railroads with 1,300 miles of track,
and to deepen five rivers. When
digging for the canal began July 4,1836, the state was $217,726 in debt.
Illinois wasn't alone in its ambitious
plans. But President Andrew Jackson
caused a national financial panic in
1837 by announcing that such
construction bonds shouldn't be
issued.
The panic led to an economic downturn. And by 1838, Illinois owed $6.7
million on its bonds. The canal had to
be abandoned for lack of funds. In
fact, the state was so far in debt, that it
couldn't afford to buy stamps.
But in 1842, Illinoisans elected a
governor some now consider one of
the state's best. Thomas Ford was not
Hollywood's version of a hero.
Contemporary accounts said he was a
scrawny man with a bent nose and a
squeaky voice. He had no legislative
experience and few pals in the Statehouse.
But Ford saw that only by paying off
the debt could the canal project be
finished, the railroads kept running
and the economy rejuvenated. He
pored over the books and determined
the state owed about $15.2 million.
Indeed, Ford made a series of moves
that lowered the debt, shored up the
banks and eliminated two state boards
that had run up some of the bills. And
he did the politically unthinkable by
instituting a tax to pay off the debt.
This guaranteed revenue gave
eastern bankers the confidence to
invest in Illinois again. And the canal
opened in 1848, leading to the growth
of Chicago.
But it took Illinois another 30 years
to pay off those bonds.
And now comes a new governor
— known as a deal-maker and backed
by a task force made up of construction and finance experts — who is
poised to decide what Illinois should
rebuild. Or build. He faces a legislature full of politicians who, after eight
years of fiscal prudence, are salivating
at the chance to start spending again.
If history is any guide, politicians
might learn to say no once in awhile.
Even in good times.
Illinois Issues May 1999 / 7