Illinois fiscal crisis clouds business climate

Corporations weigh potential financial burden

Tuesday, September 07, 2010

Peter Anthony, president and CEO of UGN Inc., an auto parts-maker based in Tinley Park, is weighing where to invest $14.5 million on a plant expansion next year that will create 30 jobs.

Anthony is juggling three eager suitors — Indiana, Kentucky and Tennessee — waiting to see which jobs-hungry state will offer up the sweetest deal. But he has averted his gaze from Illinois, where the company opened its first plant in Chicago Heights nearly a quarter-century ago.

"All the other states are going well beyond the call of duty to try to attract these jobs and these investments," said Anthony, whose company supplies Japanese automakers with sound-deadening parts such as carpets, dashboard insulators and trunk dampers. "We have met with Illinois officials on many occasions, and there's no money for them to offer incentives to businesses."

Anthony's experience is one example of how Illinois' mushrooming fiscal crisis threatens to further dampen the state's business climate. While Illinois has enviable selling points, from its diversified economy, central location and robust transportation hubs to first-rate universities and cultural offerings, the state also is in the throes of a financial meltdown that is tarnishing its image and helping to shape the decisions taking place in corporate boardrooms.

With the state government facing a budget deficit of about $13 billion this fiscal year, and with its much-publicized distinction of having the most underfunded pension system in the nation, many businesses are beginning to worry not only about the state's ability to assist with business expansion but also about what kind of fresh taxes are likely to fall on their shoulders, adding to their cost of doing business here.

At Woodland Foods Ltd., a Gurnee-based wholesaler of specialty dried foods, facility qualities and costs are top-of-mind as the company shops for a site in Illinois or Wisconsin to consolidate its operations, said Ralph Chor, chief operating officer. But uncertainty about future tax rates in Illinois has crept into the considerations as well. "It's part of the evaluation," he said.

"Many businesses are saying, 'Why would I want to invest in a state that is bankrupt and have a long-term financial burden hanging over my head that somehow will have to be paid,'" said Doug Whitley, president and CEO of the Illinois Chamber of Commerce. The Civic Committee of the Commercial Club, one of Chicago's most influential business organizations, has been sounding this warning as well.

Smelling opportunities, "other states are circling like sharks in the water," said Brent Pollina, a Park Ridge-based corporate-site-selection specialist.

Indiana, for one, is ramping up its efforts to lure Illinois firms, sensing a greater receptivity, said Mitch Roob, the state's commerce secretary.

"People in Chicago used to laugh at Indiana," he said. "No one's laughing (now)."

Asked what distinguishes the Hoosier state from Illinois, he said, "We have not had a governor convicted of anything in recent memory and we don't have a budget deficit, and for the business community we talk to, that's the incentive."

Warren Ribley, director of the Illinois Department of Commerce and Economic Opportunity, said the state government's fiscal condition and its past scandals are not among the issues brought up by companies making location decisions.

"So, it gets down to more traditional factors that impact location decisions," he said, "such as quality of the work force, access to markets (and) quality of life issues, and in all those areas, Illinois ranks very well."

He acknowledged hearing complaints that the state's incentive programs are no longer as attractive as some in other states, and that resources are not always available.

But, he said, the state is willing to consider assistance on a case-by-case basis for industries considered key drivers for recovery, among them manufacturing, biotechnology, financial services, information technology, food processing and agriculture.

"It's a balance we have to strike because of the fiscal condition of the state," he said.

Whether government incentive programs are useful ways to spend taxpayer money is subject to debate. Many argue they often play only a small role in company decisions, taking a back seat to other considerations, among them real estate development costs, tax levels, proximity to customers and the quality and cost of the labor pool.

Still, losing beauty contests for companies dings the state's reputation, and makes it tougher to climb out of the recession and to fight a long-standing trend of jobs and residents migrating from the Midwest and Northeast to lower-cost states in the South and the West.

Illinois has seen its number of jobs shrink by more than 6 percent so far this decade, while the national level remained virtually flat, according to the U.S. Labor Department's Bureau of Labor Statistics.

Since January 2009, the state put together 91 incentive packages, totaling an estimated $184.7 million in assistance, some of which will be spread over 10 years. State officials say the assisted projects will trigger $2.2 billion in private investment and create or retain 15,400 jobs.

The projects include corporate headquarters or facilities for several pharmaceutical-related firms, including Astellas Pharma US Inc.; an upgrade to UPS facilities in Rockford and southwest suburban Hodgkins; and Boeing's first manufacturing plant in Illinois, a relatively small facility at MidAmerica Airport in Mascoutah, near the company's defense division headquarters in St. Louis.

But in spite of a sweetened incentive offer from Illinois, Navistar International Corp., the Warrenville-based truck and engine manufacturer, is contemplating moving its headquarters to Alabama, Texas or South Carolina after encountering local opposition to plans for a new headquarters in Lisle. More than 7,000 direct and indirect jobs are on the line, the company has said.

The company declined to discuss its considerations, but noted that talks are continuing with Gov. Pat Quinn and Attorney General Lisa Madigan. A spokesman characterized the talks as "positive."

A number of substantial projects have gotten away.
Caterpillar Inc., the Peoria-based construction-equipment giant, recently unveiled plans for a $120 million plant that will make excavator machines in Victoria, Texas, taking over some work now done at its Aurora plant. The Illinois site was too small for expansion, and the company wanted to be close to a deep-water port, said spokesman Jim Dugan.

In all, Caterpillar announced four expansions recently, all in other states. Together, the projects are expected to create 1,325 jobs.

The company remains committed to Illinois, Dugan said, noting it is investing $1.5 billion in its plants here, including the addition of mining-shovel production at the Aurora plant that is losing its excavator work. But the business climate in the cash-strapped state could be improved, he said, citing as an example the state's reluctance to extend the tax credit on corporate research and development for more than one year at a time.

"It creates an environment of uncertainty … to the point where businesses think, 'Maybe we can't plan, and maybe we need to find something else,'" he said.

Uline Inc., which sells more than $1 billion a year of such shipping supplies as packing peanuts and bubble wrap, just hopped over the state line from Waukegan to Pleasant Prairie in Kenosha County, Wis., where it spent $125 million on a sweeping new headquarters and warehouse facility that together will employ 800 workers.

The deal hinged on finding a development-ready greenfield site just off Interstate 94, and not on the incentives proffered by Wisconsin or Illinois' fiscal woes, according to officers of the company, which is retaining its Midwest warehouse operations in Waukegan.

Still, its president, Liz Uihlein, remembers being courted by Wisconsin officials, including Gov. Jim Doyle, but not by Illinois. "Illinois is in a shambles," she said. "Nobody approached us."

Just north of Uline's new Wisconsin site, Abbott Laboratories, one of Illinois' most prominent corporate citizens, owns nearly 500 acres for potential development, purchased for $30 million in 2006. At the time, Wisconsin pledged up to $12.5 million in assistance. No plans have emerged yet, and the company declined an interview request.

Other companies are on the move. Phoenix Closures Inc., a Naperville-based maker of plastic caps for the likes of Hellman's Mayonnaise, Coffee-Mate and Skippy Peanut Butter, plans to expand its plants in Iowa and Tennessee next year, but not its factory in Naperville.

Bert Miller, company president, said the decision was based mainly on lower costs for electricity, employee health care and workers' compensation in those states.

"Before the state had these fiscal problems, this plant was less competitive than the others, that's the overriding thing," said Miller, a past chairman of the Illinois Manufacturers' Association. "The fiscal crisis only makes things worse. I know taxes in Illinois will be going up."