June 13, 2014
Although Governor Pat Quinn originally proposed a capital budget for FY2015 with no new debt-funded projects, the General Assembly approved an additional measure that added $1.1 billion in new road projects that will be funded through the sale of long-term capital bonds.
As previously discussed here, the Governor’s recommended FY2015 capital budget included $19.5 billion in total spending, of which $16.5 billion represented reappropriations from previous years and $2.9 billion were pay-as-you-go new projects. Although the budget did not include any new projects to be funded through bond proceeds, $9.0 billion of the reauthorized projects were bond-funded.
On May 30, 2014, the General Assembly passed House Bill 3793, which is the primary capital appropriations bill and is expected to closely correspond to the Governor’s recommended FY2015 capital budget. However, on the following day an additional bill, House Bill 3794, was approved that increased the new projects in the capital budget by $1.1 billion. New bonding authority was also authorized in Senate Bill 3224 to fund the spending.
According to Illinois House Speaker Michael Madigan, who sponsored the additional capital legislation, the new bonds will be paid for through General Funds revenues that become available as bonds sold as part of the Illinois First capital program approved in 1999 are paid off.
Since FY2010 when the Illinois Jobs Now! capital spending program was enacted, the State of Illinois has funded the majority of its new capital borrowing through the Capital Projects Fund. As discussed here, the Capital Projects Fund has designated revenue sources outside the General Funds intended to pay the annual debt service cost associated with the new bond-funded capital projects. Illinois Jobs Now! includes $16.0 billion in bond-funded capital appropriations and the State has issued $11.5 billion in capital bonds to fund these projects since FY2010.
By shifting the payments on the new bonds sold to the Capital Projects Funds from the General Funds, the amount of capital purpose debt service paid out of the State’s operating resources has been declining even as the State sells more debt to pay for new projects. The State’s debt service payments also decline due to the level principal rule. As discussed here, under State law debt must be structured so that equal amounts of principal borrowed are retired in each year of the life of the bonds. This protects the State’s ability to borrow in the future and keeps total debt service costs low.
According to data provided in the Governor’s three-year budget projections, General Funds spent for capital purpose debt service decline by $50.0 million to $477 million in FY2015 from $527 million in FY2014 and by $23 million to $454 million in FY2016.
However, even as capital purpose debt service paid from the General Funds declines over time, the State is facing a loss of General Funds revenues totaling $2.0 billion in FY2015 compared to FY2014 due to the partial rollback of the increased income tax rates scheduled for January 1, 2015. The decline in revenue will continue in FY2016 when General Funds revenues are expected to fall by $4.0 billion. The expected General Funds debt service savings are insignificant compared to the loss of income tax revenue, which draws into question the affordability of the new bonds compared to other General Funds spending pressures. As previously described here and here, the FY2015 budget enacted by the General Assembly relies on budget gimmicks such as interfund borrowing, shifting revenues from one year to another and underfunding known costs in order to balance the budget. It is expected that the enacted budget in FY2015 will lead to an increase in the State’s backlog of unpaid bills even before accounting for the increased General Funds debt service if the new capital bonds are sold in FY2015.
The $1.1 billion in new bond-funded spending approved in HB3794 is not appropriated for specific projects. The legislation awards $1.0 billion for the road program portion of the State’s multiyear transportation plan that is managed by the Illinois Department of Transportation. The remaining $100 million is distributed to other governments according to the same proportions used to distribute the State’s annual motor fuel tax receipts. Municipalities receive $49.1 million, Cook County $16.4 million, other counties $18.3 million and township and road districts receive $15.9 million.
The capital appropriations bills and increased bonding authority were sent to the Governor earlier this week and await his approval.