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ILLINOIS FINANCING AGENCY

A New Tool

For Local

Governmental Units

By
Alan J. Dixon

IT HAS BEEN SAID BY MANY
that the office of State Treasurer is a dull and unrewarding job—an office that attracts attention only when mistakes are made. While I must admit that there is some truth in the latter statement, I completely disagree with the former.

There is probably no office in which improvements cannot be made. New programs and innovative changes in old ones make the office both interesting and personally rewarding.

In approaching the task of service in the Treasurer's office, we have studied programs that have possible application in Illinois.

One such program has been introduced into this session of the legislature. I welcome this opportunity to give you a brief outline of this somewhat technical legislation.

The bills now before the legislature call for the creation of the Illinois Financing Agency. Simply stated this Agency will be empowered to issue bonds which will provide money for use by all units of local government if they wish to avail themselves of the program.

A small proportion of the bond sale by the Agency will be used to establish a fund equal to the maximum annual debt service of the issue and to pay the marketing expenses. The remainder will be transferred to local units of government (including park districts) in return for an equal face amount of general obligation bonds on these units. The counties, municipalities, school districts, park districts, et al., that choose to do so shall be served on request, without onerous restrictions and red tape.

I should emphasize that none of the jurisdictions to be served would be forced into the program against their will nor would the Illinois Financing Agency have the power to decide that certain units will be accommodated and others will not. These discussions will be made by the appropriate local officials, solely on the grounds of economy and conscience.

The obvious question I suppose is—Why is such an Agency needed? The fact is that throughout most of the United States, the smaller units of government, the new municipalities, and the economically depressed units of government which have not yet constructed and/or paid for streets, schools, sewers, parks and other essential public facilities in fact, precisely those local units of government that can least afford to, must pay punitively high interest rates for long-term funds borrowed on the open market. Interest rate

Illinois Parks and Recreation    8    March/April, 1972


differentials which favor stronger borrowers and penalize weaker ones, may make good economic sense where private business enterprise is concerned, since such differentials tend to encourage the flow of financial resources from less to more efficient, productive and profitable companies. I submit to you, however, that the principle of the survival of the fittest is not realistically applicable to the financing of parks and local school districts. This is precisely the reason we have taken action to strengthen the financial structure of local government by reducing the excessively high interest rates they are forced to pay, whether because of low credit ratings or no credit ratings, or for other reasons.

Banks are the predominant investors in general obligation bonds and they almost inevitably follow the advice of the two major rating agencies—Moody's Investor Service and Standard & Poor's Low rated or unrated bonds usually carry a stigma. According to a study which at my suggestion was sponsored by the investment banking firm of Hornblower & Weeks, Hemphill, Noyes, through the first half of 1970, in Illinois, less than 2% of municipal bonds sold in issues of one million or less were rated double-A or triple-A, while more than 20% of bonds sold in issues greater than one million were so rated.

However, the financing difficulties of small units of government are not entirely due to low credit ratings or no credit ratings. Overhead costs of marketing bonds—legal opinions, advertising, payment for ratings, advisory fees, etc., tend to be higher per bond for small bond issues than for larger ones. Administrative costs per bond are lower per bond, for large blocks than for small ones. Furthermore, small units of government often cannot afford to employ civil servants who have the necessary expertise to originate and market bond issues.

Several states have programs which are designed to equalize interest rates, most often directed to borrowing for school construction, but Illinois is not among the vanguard in this respect. Details of the programs vary, but the basic concept in each case is to allow localities to share in and benefit from the states high credit rating to some degree. This program has been designed by my staff with the able assistance of the investment firm Hornblower & Weeks, Hemphill, Noyes, and two of the most distinguished law firms in the field of municipal bonds —Chapman & Cutler, of Chicago, and Mudge Rose, Guthrie & Alexander, of New York.

The makeup of the Agency shall consist of five directors, including the State Treasurer, ex-officio and four prominent persons appointed for five year terms by the Governor with the advice and consent of the Senate. The State Treasurer shall serve as Chairman and Chief Administrative Officer, and the Agency's staff shall be drawn from the office of the Treasurer. There is no intention and no necessity to create a semi-independent structure.

It is our belief, based on the experience in other states, that substantial savings can accrue to local units of government participating in this program. Although we do not as yet know how the Agency's bonds will be rated, there is every reason to assume a double-A rating. Of greater significance, perhaps, is the distinct possibility that many communities might not be able to borrow at all without the assistance of the Agency.

During my twenty years in the legislature, I came to know the problems of local government and to appreciate their problems relating to financing. It is my feeling that we must take advantage of every opportunity to reduce costs. If this legislation clears the General Assembly in this session, and I see no reason why it should not, early in 1973 the Agency should be fully operative. I commend it to you.

Alan J. Dixon is Treasurer for the State of Illinois.

Illinois Parks and Recreation    9    March/April, 1972


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