October 31, 2014
When the Illinois Jobs Now! capital spending program was approved in 2010 the State also approved a series of dedicated revenue sources intended to fund new borrowing costs outside the State operating budget. As previously sold capital bonds were retired, it was anticipated that the cost for new bond funded capital projects would fall outside the operating budget.
However, five years into the capital spending program the FY2015 General Funds debt service costs for capital bonds continue to increase.
The package of dedicated revenue sources passed with the Illinois Jobs Now! capital program included statewide legalization and taxation of video poker; expanded sales tax on candy, sweetened beverages and some hygiene products; leasing a portion of state lottery operations; increased per gallon tax on beer, wine and liquor; and increased license and vehicle fees.
The proceeds from these sources are deposited in the Capital Projects Fund and used to pay for debt service on new capital bonds and some ongoing capital expenses. This was intended to limit the General Funds impact of the additional debt sold to pay for the new capital budget.
Despite the new funding, the debt service transfer associated with capital-purpose General Obligation bonds (GO bonds) in FY2015 will increase by $92 million, totaling $717 million compared to $625 million in FY2014. Over the last five years the General Funds debt service cost for capital bonds has increased by $177 million from a total of $540 million in FY2011. The operating budget incurs higher costs for capital purpose debt service due to the shortfall in revenues in the Capital Projects Fund.
The $31 billion Illinois Jobs Now! capital program included $16 billion worth of new bond funded projects in FY2010. The State has currently sold $12.3 billion of the bonds needed to pay for these appropriations. However, due to slow implementation of the new revenue sources and lower receipts earned than expected, the General Funds transfer for capital bond debt service continues to grow.
The increase in capital purpose GO bond debt service paid from the State’s General Funds is offset by a decline in the debt service on the outstanding POBs. Debt service transferred to pay for POBs totals $1.5 billion in FY2015 compared to $1.7 billion in FY2014. The enacted FY2015 budget includes total debt service transfers from General Funds totaling $2.2 billion, a decrease of $63.0 million from FY2014.
The following chart shows the General Funds cost of debt service paid on the State’s General Obligation bonds, both capital and pension related, for FY2011 through FY2015.
The amount in the table above only represents the General Funds transfer for annual debt service. The total principal and interest amounts due to investors for all outstanding State bonds totals $3.9 billion in FY2015. The State also funds capital purpose bonds through transfers from the Road Fund, Capital Projects Fund, School Infrastructure and State Construction Fund, in addition to the General Funds.
The Capital Project Fund revenues have not yet produced the funding levels projected when Illinois Jobs Now! was originally approved. In FY2014 revenues earned in the Capital Projects Fund totaled $734.0 million and are projected to total $765.6 million in FY2015. The legislative projections provided when the spending was approved in FY2010 anticipated $943 million to $1.2 billion in new revenues beginning in FY2012.
The following table shows the revenues deposited into the Capital Projects Fund from FY2010 through FY2014 and the estimated revenues for FY2015 compared to the original legislative projections of annual revenue by funding source.
The largest shortfall in revenues is related to the delay in implementing and taxing legalized video gaming, which was the largest single source of revenues in the approved funding package. Due to administrative delays, the first machines were not put into service until October 2012. Fiscal year 2013 was the first year that the capital budget received revenue from the 30% tax on video gaming. Under the law establishing legalized video poker, five-sixths of the tax revenues generated are used for capital project funding and the remainder given to local governments to help address adverse social effects of gaming.
The estimated FY2015 video gaming revenue totaling $167.6 million is well below the projection of $288 million to $534 million annually. This is largely due to the ability of local governments to opt out of video gaming or to continue existing local bans on the machines.
According to a report from the Commission on Government Forecasting and Accountability, 48.1% of the Illinois population lives in communities where video gaming is illegal. Chicago, where video gaming remains prohibited, represents 21.0% of the State’s population. However, according to data from the State Gaming Board, the number of residents living in communities where video gaming is banned is on the decline and dropped from 63.3% to 48.1% in 2014.
Although video gaming revenue accounts for the largest shortfall in capital funding, as shown in the table above, all other sources of capital projects revenue except liquor taxes continue to fall short.
Despite the lower amounts, the total revenues in the Capital Projects Funds for FY2014 exceeded total corresponding debt service related to the new bonds issued under the Illinois Jobs Now! authorization. However, due to a required annual statutory transfer of $245.2 million from the Capital Projects Fund to the State’s General Funds, which was included in the original capital revenue authorization, a shortfall existed in the Capital Projects Fund. State expenditures due from the Capital Projects Fund totaled $846.9 million, including the transfer to General Funds, compared to revenue of $734.0 million.
When the Capital Projects Fund does not have adequate revenue to cover all of the debt service owed on the new bonds sold since FY2010, the State may use resources from the Road Fund or the General Funds to make up the difference. However, these additional debt service costs are repaid by the Capital Projects Fund in the subsequent year after shortfalls occur.
The State used payments from the General Funds to pay for the additional debt service cost in FY2014 not covered by the revenues in the Capital Projects Fund. Although the General Funds budget received a transfer-in totaling $245.2 million from the Capital Projects Fund in FY2014, the General Funds were used to cover $173.5 million in debt service that exceeded capital revenue sources. This creates a net benefit of $71.7 million in additional General Funds resources.
In FY2015 as revenues to the Capital Projects Fund are received the State anticipates it will repay the General Funds for additional debt service costs covered in FY2014. However, in FY2015 the State anticipates the General Funds will be used to cover an additional $288.5 million shortfall in debt service owed by the Capital Projects Fund. This creates an estimated net loss of $43.3 million after accounting for the $245.2 million statutory transfer in FY2015 from the Capital Projects Fund to the General Funds.
For more details and the data citations for the information included in this blog see the full State of Illinois FY2015 Enacted Budget Analysis available here.