Growing up in a fifth-generation farm family, 36-year-old Matt Ewing always
knew his eventual career goal. A love of farming persisted even during the seven
years he lived out of a suitcase on the pro golfing circuit. Golf was off-farm
income, or an expense, depending on how his game was going. In the fall, when
the Professional Golf Association held qualifying rounds for the next year’s
tour, Ewing frequently phoned home to check on the harvest yields at his father’s
farm in west central Illinois.
When Ewing realized he’d never compete with Tiger Woods, he focused on his ultimate challenge–buying the land needed to compete in today’s agricultural economy. How Ewing got a foothold in farming is a cautionary tale for the Blagojevich administration to consider as it executes plans to streamline state government.
In 2000, Ewing and his cousin Justin, then just 21 years old, bought a 122-acre tract in Seaton, seven miles from the Mississippi River, for $250,000. As beginning farmers, the pair qualified for financing programs designed to help newcomers get into the business. Half of the money came from a long-term, low-interest loan program offered by the U.S. Department of Agriculture. They secured the other $125,000 from a commercial bank–despite having no other assets to use as collateral.
For that lucky break, the Ewing boys can thank an agricultural bond program administered by the Illinois Farm Development Authority. “Aggie bonds” are sold to banks to finance loans to young farmers and ranchers for certain capital purchases, such as cropland, machinery, and equipment. Since the earnings are tax exempt, the banks are able to pass on their savings in the form of lower interest rates. Through the use of aggie bonds, the state facilitates transactions between private parties who most likely wouldn’t do business. The loan is entirely between the bank and the farmer, with no government guarantees.
At first glance, the Ewings hardly seemed like they needed a boost. Their fathers and their aunt own nearly 2,000 acres of farmland. Matt, Justin, and four other cousins stand to inherit real estate worth an estimated $4 million. But Matt points out that this land is not a liquid asset: after it gets divided among family members, some acreage will have to be sold to pay estate taxes. “When our parents die, we’re not going to be left with cash, but with the land that gives us the means to make a living,” he says.
On a recent afternoon, Ewing turned off his tractor to talk about how the aggie bond program is helping to create a new generation of farmers.
“No banker in the world would have given Justin and me a $250,000 loan,” Ewing says. “My dad and uncle could have borrowed the money to buy the farm. But as non-owners employed by the family, we would have been watching our fathers. Instead, we get the first-hand experience of preparing budget sheets and going to the bank once a year to discuss cash flows and operating loans. The aggie bond program has started Justin and me on track to one day take over the family farm.”
The Ewings’ acreage was among the 750 first-time farmland buys made nationwide each year with aggie bonds. First offered in 1980, aggie bonds are now available in more than a dozen states. Illinois’ program is second only to Iowa’s; through the years, 2,745 Illinois farmers have benefited from $233,480,000 worth of bonds.
The Illinois Farm Development Authority was created by the General Assembly in 1981. The Springfield-based agency also provides farmers with supplemental financing. The sums may be considered small potatoes by some larger state finance authorities, but the need is great. Over the last two decades, the IFDA has earned a reputation for serving Illinois agriculture one family at a time.
But with the passage of the latest state budget, the IFDA is slated to close its doors next January. The agency is one of seven state finance authorities marked for consolidation by the Blagojevich administration. Farm development will be folded into the newly created Illinois Finance Authority, which will also incorporate the Illinois Development Finance Authority, Illinois Health Facilities Authority, Illinois Educational Facilities Authority, Illinois Research Park Authority, Illinois Community Development Authority, and the Illinois Rural Bond Bank. The finance authority will serve as the state’s investment banker, overseeing the billions of dollars in bonds sold on capital markets to support development projects in the private, public, and non-profit sectors. The new agency will also generate millions of dollars in pinstripe patronage for bond lawyers and accounting firms.
Farm and rural interests fear their relatively tiny agencies will get lost in the shuffle. State senator Steven Rauschenberger (R-Elgin) contends the Blagojevich administration could inflict substantial damage to downstate programs in a rush “to pack its pals” on a big new finance authority. The former chairman of the senate appropriations committee, Rauschenberger sees a “straight intellectual logic” to merging authorities that manage billions of dollars in debt for comparable projects. But the rural and agricultural entities offer specialized expertise to their borrowing clientele. “Wiping out the Rural Bond Bank and the Illinois Farm Development Authority highlights the administration’s understanding of form and misunderstanding of function,” Rauschen-berger says.
The mergers made headlines only in the financial press, whose readers include the investors in over $17 billion worth of bonds sold on capital markets for Illinois construction projects. “It is unclear just how the agencies will be consolidated from a logistical and technical standpoint, including where they will be housed and who will serve on boards,” the Bond Buyer reported. “Many market participants said they believed it is in the best interest of the state to deal with fewer agencies because it is just too unwieldy to deal with more than a dozen and too difficult to coordinate economic development activities in such an environment.”
The governor’s office of management and budget is spearheading the mergers, aiming to house all state-sponsored public-finance business under one roof. Though proposed in one form or another for years, the consolidation effort finally won passage this month after a 141-page bill appeared in the final hours of the session. It was tacked onto a proposal to increase funding for the Rural Bond Bank, the only one of the seven agencies to receive a direct appropriation from state revenues. The merger will definitely save the rural agency’s $230,000 annual subsidy. But by limiting duplication of administration and staff, proponents claim that consolidation will save millions of dollars.
The prime mover behind the merger is Blagojevich’s budget director John Filan. Before joining the new administration, Filan was managing partner of FPT&W, a Chicago-based accounting and management-consulting firm, where he had a special interest in public sector business. FPT&W clients included the Chicago Park District and Chicago Transit Authority. Filan’s personal involvement in public affairs has run the gamut, serving at one time or another on the boards of such organizations as the Chicago Board of Education, the General Assembly’s Citizens Council on Public Aid, and Chicago’s Wisdom Bridge Theatre.
Last summer, Governor George Ryan appointed Filan to the 17-person board of the Illinois Development Finance Authority–the largest of the agencies to comprise the new mega-agency. Based on the 40th floor of the Sears Tower in downtown Chicago, the Illinois Development Finance Authority is the chief financier of the governor’s economic development agenda, issuing nearly $1 billion in bonds each year. Recipients include public and private educational institutions, health facilities, municipal governments, and private businesses statewide. The agency keeps close tabs on the numbers of jobs created as well as on the legislative districts where the projects are carried out.
Filan’s experience gave him “a bird’s eye perspective on how the finance authority boards operate,” according to budget office spokesperson Becky Carroll. Two years ago, Governor Ryan proposed merging 16 finance authorities from around the state. The Blagojevich administration’s initial consolidation is more limited, Filan says, “because we didn’t want to do too much at once.”
The governor isn’t touching the regional finance authorities, which are widely seen as the most in need of oversight. In 1994, the Southwestern Illinois Development Authority and the Upper Illinois River Valley Development Authority issued $6.2 million in industrial development bonds for a tire-shredding company that ended up missing its payments. In order to protect the state’s bond rating, the budget office had to tap more than $1.5 million from its debt service reserve fund. The Dallas-based tire shredder, which built plants in Dupo and Marseilles, eventually replenished the state fund. In a worse case in 2001, a court ordered the state to pay off $12 million in bonds that the Southwestern Illinois Development Authority had sold for a St. Louis-based steel company to build a solid waste disposal system at its Alton plant. State taxpayers will be paying off that bad investment through 2020.
While regional finance authorities will retain their autonomy, so will entities like the Illinois State Toll Highway Authority and the Illinois Housing Development Authority, which have operational responsibilities. Instead, Blagojevich administration officials say the consolidation process will begin with a merger of agencies that issue bonds on a statewide basis.
The Illinois Farm Development Authority has a statewide focus, but its bond program is very different from a typical financing authority. Aggie bonds are not rated, underwritten, or sold into capital markets. Typically they’re small, private placements with local banks. The bonds cover the bank loans, which average about $125,000 and cannot exceed $250,000. The money stays in local communities. Only young farmers and ranchers with little or no land holdings can qualify for the loans.
The agency doesn’t only issue aggie bonds. It also guarantees loans to meet farm financing needs that banks view as too risky–including the restructuring of debt, investment in single-use livestock facilities, industrial development of value-added processing facilities, and certain capital purchases by young farmers and ranchers. The agency promises repayment of up to 85 percent of a loan if the farmer can’t pay.
Farm Development Authority director David Wirth doubts consolidating his agency with others will generate any real savings for the state government, because there’s no tax money involved. “Farmers and lenders who use our programs are the people who pay our operating expenses,” he says.
Since 1986, Farm Development has guaranteed a combined $320,730,000 in loans for 1,621 farmers. During the lifetime of the program, the agency has incurred a net loss of $3.8 million, losing money on just 1.2 percent of the loans it has guaranteed. (There’s no real good way to assess losses on aggie bonds, because banks absorb any losses.)
The Farm Development Authority’s seven-member board approves loan guarantees and aggie bonds. All are gubernatorial appointees whose sole compensation is reimbursement for expenses incurred at quarterly meetings. Their success has to do with their specialized knowledge of agricultural practices.
“Nobody from Governor Blagojevich’s administration has ever called to ask what we do or how this agency could be made better,” says Wirth.
The agency’s 43-year-old director grew up on a farm in DeKalb County, earned a degree in agricultural economics from the University of Illinois at Urbana-Champaign, worked for five years with Farm Credit Services (a nationwide farmer-owned cooperative of lending institutions), and then joined the Illinois Farm Development Authority in 1986 as a loan officer. He’s headed the agency since 1992.
Wirth was as surprised as anyone to learn this well-functioning agency is going out of business. Reading through the legislation, he was drawn to one provision about the new Illinois Finance Authority’s board, which will consist of 15 gubernatorial appointees who “shall be persons of recognized ability and experience in one or more of the following areas: economic development, finance, banking, industrial development, small business, management, real estate development, housing, health facilities financing, local government financing, community development, venture finance, construction and labor relations.”
In other words, the statute doesn’t require that the new authority’s board include a single person with an expertise in agriculture. State officials counter that of course farming will get its due in the new agency.
Filan appears to think five months is plenty of time to sort through the details. The budget office plans to conduct interviews in the next several months before Governor Blagojevich determines who will be appointed to serve on the new agency’s board.
Patrick Rea is bullish on the merger. Rea worked for 30 years in public finance for Bank One and the First National Bank of Chicago before Governor Ryan appointed him to run the Illinois Development Finance Authority. Rea anticipates the state’s bond business will become more efficient: “These authorities were all specialized, but when the dust settles we’ll all be generalists,” he says.
But specialists exist for a reason. The Rural Bond Bank was created in 1990 because the General Assembly became convinced the financing needs of small local governments were being overlooked. The Development Finance Authority’s mission was economic development, job creation, and, by extension, larger units of government. The Rural Bond Bank needs its state subsidy in order to fulfill its mandate of helping rural Illinois communities address health, life, and safety issues. While Development Finance may arrange a $10 million bond deal for one college or hospital, the Bond Bank may have to pool the needs of 15 participants–including small towns, school districts, and fire departments–to issue $10 million in debt.
“For the same volume, we have to deal with ten times the paperwork,” explains Eric Watson, executive director of the Rural Bond Bank. “It’s hard to imagine that the new authority will care about the $250,000 request, especially when you consider they usually deal in billions rather than millions.
“I am optimistic, though,” he says. “I don’t think they would be doing this if they thought it would have a negative impact on the communities of Illinois. Hopefully, the new authority will pull in the resources needed to help local governments get better deals.”
According to the governor’s 2004 budget, the three largest entities in the new authority manage $17.6 billion in debt–more than 75 times the amount managed by the Farm Development Authority and the Rural Bond Bank. A large, multifaceted finance authority doesn’t necessarily have to shortchange agricultural and rural needs. Yet this is the lesson learned from a battle among economic sectors over tax-exempt industrial revenue bonds.
This year the state has allotted $931 million for industrial revenue bonds. Farm Development and its young farmer program gets $12 million, or 1.28 percent of the total, while the housing and manufacturing sectors capture the lion’s share.
For the last seven years Farm Development director Wirth has chaired the National Council of State Agricultural Finance Programs. This 16-state coalition is pressing Congress to increase the supply of aggie bonds. Senator Peter Fitzgerald is one of 19 sponsors of a bill that would amend the federal tax code to exempt aggie bonds from an annual volume cap on state bond programs. The Joint Committee on Taxation figures that doubling the number of aggie bonds would result in less than a $10 million loss in federal tax revenues over the next five years.
Congress recognizes aggie bonds as “an efficient, effective public/private partnership that truly helps small family farmers,” Wirth contends. “The only opposition we’ve heard has to do with the fear of opening the floodgates, so that housing and manufacturing sectors will also want exemptions from the volume cap. For the other sectors, national brokerage firms are drawn to a huge investment pool which invites the kind of abuse that first led to the volume caps.”
Aggie bonds act as an incentive for community banks to invest in their market’s farming future. Young farmers who want to buy land face stiff competition, because well-capitalized farmers are currently undergoing rapid expansion, pushing prices and rents up as absentee owners are finding their farmland offers a steadier return on investment than the stock market. Another factor is suburban area farmers selling their land to developers because they can no longer resist the allure of easy money or pay rising real estate taxes. With the average age of farmers hitting 60, U.S. agriculture needs to help young farmers get started in the business.
Wayne Nelson, president of Minnesota-based Communicating for Agriculture, is a leading lobbyist on Capitol Hill for farmers and small businesses. Nelson says that shutting down the Illinois Farm Development Authority could set a bad precedent. “We’re concerned that states struggling to cut costs will allow their financial troubles to overshadow the beginning farmer loan program.”
Les Allen has concerns of his own. Allen is executive vice president and chief credit officer for the Midwest Bank of Western Illinois in Monmouth. This bank has $260 million in assets, including a $120 million loan portfolio, half of which is in agriculture-related enterprises. Allen has 225 farm customers ranging in age from 18 to 85. At the youngest end of this spectrum are 20 aggie bond recipients who have borrowed $2 million to finance first-time real estate deals.
“Almost all 20 of these farmers will likely be on the books for a lifetime,” Allen says. Aggie bonds are developing the next generation of his customers. These deals seal relationships that will lead to checking and savings accounts and other loans. Nearly all of his aggie-bond recipients are sons and sons-in-law of existing customers.
So Allen was prepared three years ago when George and Ivan Ewing brought their sons into his office to seek financing for a land purchase. The brothers’ cousin wanted to sell a parcel, and they wanted to help their sons get into the game. The Ewings didn’t know about aggie bonds. With demand exceeding supply, the Farm Development Authority doesn’t market the program for the same reason a car dealer doesn’t advertise models that aren’t in stock. But their banker knew all about aggie bonds–and how they help the Midwest Bank of Western Illinois remain connected to the local farm economy.
No wonder Allen’s disturbed to hear that a big finance authority is taking over the aggie bond program. (He isn’t so worried about the fate of the Rural Bond Bank, which competes with community banks.) “I’ve been through a lot of mergers and know leadership must be made to understand the importance of existing programs,” Allen says. “Farm Development may lose its identity, and I’m afraid that several years down the road the unique services that the aggie bond provides could be forgotten.”
As for cousins Matt and Justin Ewing, the aggie bond program has done them a lot more good than simply saving them thousands of dollars a year in interest on their loan. Now Matt says he feels a greater sense of responsibility: “Before my rear wasn’t on the line. But now that it’s my own crop, I have a vested interest in following the grain markets more closely.
“Most of my classmates have no choice but to farm other people’s land,” Matt says. “They enjoy it, but unfortunately are never in the position where it makes sense on paper for them to buy land. My great-grandfather and grandfather knew they had to adapt to each coming decade. They went into debt to buy land when they knew they didn’t need it at the time. They were farming for themselves and the next generation. When my father got going in farming, they used a two-row ear corn picker. They fed 100 percent of the corn to livestock. Now we use 12-row planters and are becoming less and less diversified. If not for the fact that I’m part of a fifth-generation farm family, I’d be just like everyone else, looking for farms to cash rent and getting in bidding wars to see what I can afford to give up.”
The nuances of this downward spiral may be lost on Chicago politicians acting on their mandate to change the way the state conducts the public’s business. The Illinois Finance Authority could become a vital instrument for shoring up the state’s economic and social foundations. But the Blagojevich administration would be wrong to let an obsession with new job creation trump the need to retain jobs and sustain wealth by building up the capacity of those who cultivate this land of Lincoln.
“Programs like aggie bonds help the younger generation be able to afford to
stay in the game,” Ewing says. He’s afraid that governments may decide there’s
not a need for such programs and, in the process, contribute to the forces that
are driving the family farmer out of business.
This article appears in Jun 26 – Jul 2, 2003.
