The Fiscal Challenges of Inequity

May 15, 2018

Good Morning! In this morning’s eBlog, we return to the small municipality of Harvey, Illinois—a city fiscally transfixed between its pension and operating budget constraints in a state which does not provide authority for chapter 9 municipal bankruptcy; then we turn east to assess Connecticut’s fiscal road to adjournment and what it might mean for its capital city of Hartford; before heading south to Puerto Rico where there might be too many fiscal cooks in the kitchen, both exacerbating the costs of restoring fiscal solvency, and exacerbating the outflow of higher income Americans from Puerto Rico to the mainland.

Absence of Fiscal Balance? After, nearly a decade ago, the Land of Lincoln—the State of Illinois—adopted its pension law as a means to ensure smaller municipalities would stop underfunding their public pension contributions—provisions which, as we noted in the case of the small municipality of Harvey, were upheld when a judge affirmed that the Illinois Comptroller was within the state law to withhold revenues due to the city—with the Comptroller’s office noting that whilst it did not “want to see any Harvey employees harmed or any Harvey residents put at risk…the law does not give the Comptroller discretion in this case: The Comptroller’s Office is obligated to follow the law. This dispute is between the retired Harvey police officers’ pension fund and the City of Harvey.” But in one of the nation’s largest metro regions—one derived from the 233 settlements there in 1900, the fiscal interdependency and role of the state may have grave fiscal consequences. As we previously noted, U. of Chicago researcher Amanda Kass found there are 74 police or fire pension funds in Illinois municipalities with unfunded pension liabilities similar to that of Harvey. Unsurprisingly, poverty is not equally distributed: so fiscal disparities within the metro region have consequences not just for municipal operating budgets, but also for meeting state constitutionally mandated public pension obligations.

Now, as fiscal disparities in the region grow, there is increasing pressure for the state to step in—it is, after all, one of the majority of states in the nation which does not authorize a municipality to file for chapter 9 municipal bankruptcy: ergo, the fiscal and human challenge in the wake of the state’s enactment of its new statute which permits public pension funds to intercept local revenues to meet pension obligations; the state faces the governance and fiscal challenge of whether to provide for a state takeover—a governing action taken in the case of neighboring Michigan, where the state takeover had perilous health and fiscal consequences in Flint, but appeared to be the key for the remarkable fiscal turnaround in Detroit from the largest municipal chapter 9 bankruptcy in American history. Absent action by the Governor and state legislature, it would seem Illinois will need to adopt an early fiscal warning system of severe municipal fiscal distress—replete with a fiscal process for some means of state assistance or intervention. In Harvey, where Mayor Eric Kellogg has been banned for life from any role in the issuance of municipal debt because of the misleading of investors, the challenge for a city which has so under-budgeted for its public pension obligations, has defaulted on its municipal bond obligations, and provided virtually no fiscal disclosure; Illinois’ new state law (PL 96-1495), which permits public pension funds to compel Illinois’ Comptroller to withhold state tax revenue which would normally go to the city, which went into effect at the beginning of this calendar year, meant the city reasons did not take effect until January 2018. Now, in the wake of the city’s opting to lay off nearly half its police and fire force, the small municipality with the 7th highest violent crime rate in the state is in a fiscal Twilight Zone—and a zone transfixed in the midst of a hotly contested gubernatorial campaign in which neither candidate has yet to offer a meaningful fiscal option.  

Under Illinois’ Financial Distressed City Law ((65 ILCS 5/) Illinois Municipal Code) there are narrow criteria, including requirements that the municipality rank in the highest 5% of all cities in terms of the aggregate of the property tax levy paid while simultaneously in the lowest percentage of municipalities in terms of the tax collected. Under the provisions, the Illinois General Assembly would then need to pass a resolution declaring the city as fiscally distressed—a law used only once before in the state’s history—thirty-eight years ago for the City of East St. Louis. The statute, as we have previously noted, contains an additional quirk—disqualifying in this case: Illinois’ Local Government Financial Planning and Supervision Act mandates an entity must have a population of less than 25,000—putting Harvey, with its waning population measured at 24,947 as of 2016 somewhere with Rod Serling in the Twilight Zone. Absent state action, Harvey could be the first of a number of smaller Illinois municipalities unable to meet its public pension obligations—in response to which, the state would reduce revenues via intercepting local or municipal revenues—aggravating and accelerating municipal fiscal distress.

Capital for the Capitol. In a rare Saturday session, the Connecticut Senate passed legislation to enable the state to claw back emergency debt assistance for its capital city, Hartford, through aid cuts beginning in mid-2022, with a bipartisan 28-6 vote—forwarding the bill to the House and Gov. Dannel Malloy—as legislators raced to overwhelmingly approve a new state budget shortly before their midnight deadline Wednesday which would:  restore aid for towns; reverse health care cuts for the elderly, poor, and disabled; and defer a transportation crisis. The $20.86 billion package, which now moves to Gov. Dannel P. Malloy’s desk, does not increase taxes; it does raise the maximum tax rate cities and towns can levy on motor vehicles. In addition, the bill would spend rather than save more than $300 million from this April’s $1 billion surge in state income tax revenues. The final fiscal compromise does not include several major changes sought by Republicans to collective bargaining rules affecting state and municipal employees. And, even as the state’s fiscal finances are projected to face multi-billion-dollar deficits after the next election tied in part to legacy debt costs amassed over the last 80 years, the new budget would leave Connecticut with $1.1 billion in its emergency reserves: it will boost General Fund spending about 1.6 percent over the adopted budget for the current fiscal year, and is 1.1 percent higher than the preliminary 2018-19 budget lawmakers adopted last October. The budget also includes provisions intended to protect Connecticut households and businesses which might be confronted with higher federal tax obligations under the new federal tax law changes. Indeed, in the end, the action was remarkably bipartisan: the Senate passed the budget 36-0 after a mere 17 minutes of debate; the House debated only 20 minutes before voting 142-8 for adoption.

In addition to reacting to the new federal tax laws, the final fiscal actions also dealt with the sharp, negative reaction from voters in the wake of tightening  Medicare eligibility requirements for the Medicare Savings Program, which uses Medicaid funds to help low-income elderly and disabled patients cover premiums and medication costs—acting to postpone cutbacks to July 1st, even though it worsened a deficit in the current fiscal year, after learning an estimated 113,000 seniors and disabled residents would lose some or all assistance. As adopted, the new budget reverses all cutbacks, at a cost of approximately $130 million. Legislators also acted to restore some $12 million to reverse new restrictions on the Medicaid-funded health insurance program for poor adults, with advocates claiming this funding would enable approximately 13,500 adults from households earning between 155 and 138 percent of the federal poverty level to retain state-sponsored coverage.

State Aid to Connecticut Cities & Towns. Legislators also took a different approach with this budget regarding aid to cities and towns. After clashing with Gov. Malloy last November, when Gov. Malloy had been mandated by the legislature to achieve unprecedented savings after the budget was in force, including the reduction of $91 million from statutory grants to cities and towns; the new budget gives communities $70.5 million more in 2018-19 than they received this year—and bars the Governor from cutting town grants to achieve savings targets. As adopted, the fiscal package means that some municipalities in the state, cities and towns with the highest local tax rates, could be adversely impacted: the legislation raises the statewide cap on municipal property taxes from a maximum rate of 39 mills to 45 mills. On the other hand, the final legislation provides additional education and other funding for communities with large numbers of evacuees from Puerto Rico—dipping into a portion of last month’s $1.3 billion surge in state income tax receipts tied chiefly to capital gains and other investment income—and notwithstanding the state’s new revenue “volatility” cap which was established last fall to force Connecticut to save such funds. As adopted, the new state budget “carries forward” $299 million in resources earmarked for payments to hospitals this fiscal year—a fiscal action which means the state has an extra $299 million to spend in the next budget while simultaneously enlarging the outgoing fiscal year’s deficit by the same amount. (The new deficit for the outgoing fiscal year would be $686 million, which would be closed entirely with the dollars in the budget reserve—which is filled primarily with this spring’s income tax receipts.) The budget reserve is now projected to have between $700 million and $800 million on hand when the state completes its current fiscal year. That could be a fiscal issue, as it would leave Connecticut with a fiscal cushion of just under 6 percent of annual operating costs, a cushion which, while the state’s largest reserve since 2009, would still be far below the 15 percent level recommended by Comptroller Kevin P. Lembo—and, mayhap of greater fiscal concern, smaller than the projected deficits in the first two fiscal years after the November elections: according to Connecticut’s nonpartisan Office of Fiscal Analysis, the newly adopted budget, absent adjustment, would run $2 billion in deficit in FY2019-20—a deficit that office projects would increase by more than 25 percent by FY2020-21, with the bulk of those deficits attributable both to surging retirement benefit costs stemming from decades of inadequate state savings, as well as the Connecticut economy’s sluggish recovery from the last recession.

As adopted, Connecticut’s new budget also retains and scales back a controversial plan to reinforce new state caps on spending and borrowing and other mechanisms designed to encourage better savings habits; it includes a new provision to transfer an extra $29 million in sales tax receipts next fiscal year to the Special Transportation Fund—designed in an effort to avert planned rail and transit fare increases—ergo, it does not establish tolls on state highways.

Reacting to Federal Tax Changes. The legislature approved a series of tax changes in response to new federal tax laws capping deductions for state and local taxes at $10,000: one provision would establish a new Pass-Through Entity Tax aimed at certain small businesses, such as limited liability corporations; a second provision allows municipalities to provide a property tax credit to taxpayers who make voluntary donations to a “community-supporting organization” approved by the municipality: under this provision, as an example, a household owing $7,000 in state income taxes and $6,000 in local property taxes could, in lieu of paying the property taxes, make a $6,000 contribution to a municipality’s charitable organization.

Impacts on Connecticut’s Municipalities. The bill would enable the state to reduce non-education aid to its capital city of Hartford by an amount equal to the debt deal. It would authorize the legislature to pare non-education grants to Hartford if the city’s deficit exceeds 2% of annual operating costs in a fiscal year, or a 1% gap for two straight year—albeit the legislature would be free to restore other funds—or, as Mayor Luke Bronin put it: “I fully understand respect legislators’ desire to revisit the agreement after five years.” Under the so-called contract assistance agreement, which Gov. Malloy, Connecticut State Treasurer Denise Nappier, and Mayor Luke Bronin signed in late March, the state would pay off the principal on the City of Hartford’s roughly $540 million of general obligation debt over 20 to 30 years. With Connecticut’s new Municipal Accountability Review Board, not dissimilar to the Michigan fiscal review Board for Detroit, having just approved Mayor Bronin’s five-year plan. In the wake of the legislative action, Mayor Bronin had warned that significant fiscal cuts in the out years could imperil the city at that time, albeit adding: “That said, I fully understand and respect legislators’ desire to revisit the agreement after five years, and my commitment is that we will continue to work hard to earn the confidence our the legislature and the state as a whole as we move our capital city in the right direction.”

Dying to Leave. While we have previously explored the departure of many young, college-educated Puerto Ricans to the mainland, depleting both municipio and the Puerto Rico treasuries of vital tax revenues, the Departamento of Salud (Health Department) reports that even though Puerto Rico’s population has declined by nearly 17% over the decade, the U.S. territory’s suicide rate has increased significantly, especially in the months immediately following Hurricane Maria, particularly among older adults, with social workers reporting that elderly people are especially vulnerable when their daily routines are disrupted for long periods. Part of the upsurge is demographically related: As those going have left for New York City, Florida, and other sites on the East Coast, it is older Americans left behind—many who went as long as six months without electricity, who appear to be at risk. Adrian Gonzalez, the COO (Chief Operating Officer at Castañer General Hospital in Castañer, a small town in the central mountains) noted: “We have elderly people who live alone, with no power, no water and very little food.” Dr. Angel Munoz, a clinical psychologist in Ponce, said people who care for older adults need to be trained to identify the warning signs of suicide: “Many of these elderly people either live alone or are being taken care of by neighbors.”

A Hot Potato of Municipal Debt. Under Puerto Rico Gov. Ricardo Rosselló’s proposed FY2019 General Fund budget, the Governor included no request to meet Puerto Rico’s debt, adding he intended not to follow the PROMESA Board’s directives in several parts of his budget—those debt obligations for Puerto Rico and its entities are in excess of $2.5 billion: last month’s projections by the Board certified a much higher amount of $3.84 billion. Matt Fabian of Municipal Market Analytics described it this way: “Bondholders have to wait until the Commonwealth makes a secured or otherwise legally protected provision to pay debt service before they can begin to (dis)count their chickens: The alternative, which is where we are today, is an assumption that debt service will be paid out of surplus funds. ‘Surplus funds’ haven’t happened in a decade and the storm has only made things worse: a better base case assumption is the Commonwealth spending every dollar of cash and credit at its disposal, regardless of what the budget says: That doesn’t leave much room for the payment of debt service and is good reason for bondholders to continue to litigate.” Under the PROMESA Board’s approved fiscal plan, Puerto Rico should have $1.13 billion in surplus funds available for debt service in FY2023—with the Board silent with regard to what percent the Gov. would be expected to dedicate to debt service. The Gov.’s budget request does seek nearly a 10% reduction for the general fund, with a statement from his office noting the proposal for operational expenditures of $7 billion is 6% less than that for the current fiscal year and 22% less than the final budget of former Gov. Alejandro García Padilla. The Governor proposed no reductions in pension benefits—indeed, it goes so far as to explicitly include that his budget does not follow the demands of the PROMESA Oversight Board for the proposed pension cuts, to enact new labor reforms, or to eliminate a long-standing Christmas bonus for government workers.

Nevertheless, PROMESA Board Executive Director Natalie Jaresko, appears optimistic that Gov. Ricardo Rosselló Nevares’s government will correct the “deficiencies” in the recommended budget without having to resort to litigation: while explaining the Board’s reasoning for rejecting the Governor’s proposed budget last week, Director Jaresko stressed that correcting the expenses and collections program, as well as implementing all the reforms contained in the fiscal plan, is necessary to channel the island’s economy and to promote transparency and accountability in the use of public funds, adding that approving a budget in accordance with the new certified fiscal plan is critical to achieve the renegotiation of Puerto Rico’s debt—adding that, should the Rosselló administration not do its part, the Board would proceed with what PROMESA establishes: “The fiscal plan is not a menu you can choose from.”

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What Is a State’s Role in Averting Municipal Fiscal Contagion?

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eBlog, 9/28/16

Good Morning! In this a.m.’s eBlog, we consider, again, the risk of municipal fiscal contagion—and what the critical role of a state might be as the small municipality of Petersburg, Virginia’s fiscal plight appears to threaten neighboring municipalities and utilities: Virginia currently lacks a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion. Nor does the state appear to have any policy to enhance the ability of its cities to fiscally strengthen themselves. Then we try to go to school in Detroit—where the state almost seems intent on micromanaging the city’s public and charter schools so critical to the city’s long-term fiscal future. Then we jet to O’Hare to consider an exceptionally insightful report raising our age-old question with regard to: are there too many municipalities in a region? Since we’re there, we then look at the eroding fiscal plight of Cook County’s largest municipality: Chicago, a city increasingly caught between the fiscal plights of its public schools and public pension liabilities.  From thence we go up the river to Flint, where Congressional action last night might promise some fiscal hope—before, finally, ending this morn’s long journey in East Cleveland—where a weary Mayor continues to await a response from the State of Ohio—making the wait for Godot seem impossibly short—and the non-response from the State increasingly irresponsible.

Where Was Virginia While Petersburg Was Fiscally Collapsing? President Obama yesterday helicoptered into Fort Lee, just 4.3 miles from the fiscally at risk municipality of Petersburg, in a region where Petersburg’s regional partners are wondering whether they will ever be reimbursed for delinquent bills: current regional partners to which the city owes money include the South Central Wastewater Authority, Appomattox River Water Authority, Central Virginia Waste Management, Riverside Regional Jail, Crater Criminal Justice Academy, and Crater Youth Care Commission. Acting City Manager Dironna Moore Belton has apparently advised these authorities to expect a partial payment in October—or as a spokesperson of a law firm yesterday stated: “The City appears committed to meeting its financial obligations for these important and necessary services going forward and to starting to pay down past due amounts dating back to the 2016 fiscal year…We appreciate the plan the city presented; however we have to reserve judgment until we see whether the City follows through on these commitments.” One option, it appears, alluded to by the Acting City Manager would be via a tax anticipation note. Given the municipality’s virtual insolvency, however, such additional borrowing would likely come at a frightful cost.

The municipality is caught in a fiscal void. It appears to have totally botched the rollout of new water meters intended to reduce leakage and facilitate more efficient billing. It appears to be insolvent—and imperiling the fiscal welfare of other municipalities and public utilities in its region. It appears the city has been guilty of charges that when it did collect water bills, it diverted funds toward other activities and failed to remit to the water authority. While it seems the city has paid the Virginia Resources Authority to stave off default, questions have arisen with regard to the role of the Commonwealth of Virginia—one of the majority of states which does not permit municipalities to file for chapter 9 bankruptcy. But questions have also arisen with regard to what role—or lack of a role—the state has played over the last two fiscal years, years in which the city’s auditor has given it a clean signoff on its CAFRs; and GFOA awarded the city its award for financial reporting. There is, of course, also the bedeviling query: if Virginia law does not permit localities to go into municipal bankruptcy, and if Petersburg’s insolvency threatens the fiscal solvency of a public regional utility and, potentially, other regional municipalities, what is the state role and responsibility—a state, after all, which rightly is apprehensive that is its coveted AAA credit rating could be at risk were Petersburg to become insolvent.

In this case, it seems that Petersburg passed the Virginia State Auditor’s scrutiny because (1) it submitted the required documents according to the state’s schedule, regardless of whether or not the numbers were correct; (2) the firm used by the city was probably out of its league. (It appears Petersburg used a firm that specialized in small town audits); (3) the City Council apparently did not focus on material weaknesses identified by the private CPA (nor did the State Auditor). The previous city manager, by design, accident, or level of competence, simply did not put up much of a struggle when the Council would amend the budget in mid-year to increase spending—a task no doubt politically challenging in the wake of the Great Recession—a fiscal slam which, according to the State Auditor’s presentation, devastated the city’s finances, forcing the city in a posture of surviving off cash reserves. (http://sfc.virginia.gov/pdf/committee_meeting_presentations/2016%20Interim/092216_No2b_Mavredes_SFC%20Locality%20Fiscal%20Indicators%20Overview.pdf). Now, in the wake of fiscal failures at both levels of government, the Virginia Senate Finance Committee last week devoted a great deal of time discussing “early warning systems,” or fiscal distress trip wires which would alert a state early on of impending municipal fiscal distress. Currently, in Virginia, no state agency has the responsibility for such an activity. That augurs ill: it means the real question is: is Petersburg an anomaly or the beginning of a trend?

The challenge for the state—because its credit rating could be adversely affected if it fails to act, and Petersburg’s fiscal contagion spreads to its regional neighbors and public utilities, a larger question for the Governor and legislators might be with regard to the state’s strictures in Virginia which bar municipal bankruptcy, bar annexation, prohibit local income taxes, cap local sales tax, and have been increasing state-driven costs for K-12, line-of-duty, water and wastewater, etc.

Who’s Governing a City’ Future? Michigan Attorney General Bill Scheutte yesterday stated the state would close poorly performing Detroit schools by the end of the current academic year if they ranked among the state’s worst in the past three years in an official legal opinion—an opinion contradictory to a third-party legal analysis that Gov. Rick Snyder’s administration had said would prevent the state from forcing closure any Detroit public schools until at least 2019, because they had been transferred to a new debt-free district as part of a financial rescue package legislators approved this year—a state law which empowers the School Reform Office authority to close public schools which perform in the lowest five percent for three consecutive years. Indeed, in his opinion, Attorney General Scheutte wrote that enabling the state’s $617 million district bailout specified Detroit closures should be mandatory unless such closures would result in an unreasonable hardship for students, writing: “The law is clear: Michigan parents and their children do not have to be stuck indefinitely in a failing school…Detroit students and parents deserve accountability and high performing schools. If a child can’t spell opportunity, they won’t have opportunity.” The Attorney General’s opinion came in response to a request by Senate Majority Leader Arlan Meekhof (R-West Olive) and House Speaker Kevin Cotter (R-Mount Pleasant) as part of the issue with regard to whether the majority in the state legislature, the City of Detroit, or the Detroit Public Schools ought to be guiding DPS, currently under Emergency Manager retired U.S. Bankruptcy Judge Steven Rhodes would best serve the interest of the city’s children. It appears, at least from the perspective of the state capitol, this will be a decision preempted by the state, with the Governor’s School Reform Office seemingly likely to ultimately decide whether to close any number of struggling schools around the state—a decision his administration has said would likely be made—even as the school year is already underway—“a couple of months” away. The state office last month released a list of 124 schools that performed in the bottom 5 percent last year, on which list more than a third, 47, were Detroit schools.

Nevertheless, the governance authority to so disrupt a city’s public school system is hardly clear: John Walsh, Gov. Snyder’s director of strategic policy, had told The Detroit News that the state could not immediately close any Detroit schools, citing an August 2nd legal memorandum Miller Canfield attorneys sent Detroit school district emergency manager Judge Rhodes, a memorandum which made clear that the transferral of Detroit schools to a new-debt free district under the provisions of the state-enacted legislation had essentially reset the three-year countdown clock allowing the state to close them—a legal position the state attorney general yesterday rejected, writing: a school “need not be operated by the community district for the immediately preceding three school years before it is subject to closure.” Michigan State Rep. Sherry Gay-Dagnogo (D-Detroit) reacted to the state opinion by noting it would not give Detroit’s schools a chance to make serious improvements as part of so-called “fresh start” promised by the legislature as part of the $617 million school reform package enacted last June, noting that she believes the timing of its release—just one week before student count day—is part of an intentional effort to destabilize the district: “We could possibly lose students, because parents are afraid and confused, that’s what this is all about…They want the district to implode…They want to completely remake public education, and implode the district to charter the district. There’s big money in charter schools…This is about business over children.”

Are There Too Many Municipalities? Can We Afford Them All? The Chicago Civic Federation recently released a report, “Unincorporated Cook County: A Profile of Unincorporated Areas in Cook County and Recommendations to Facilitate Incorporation,” which examines unincorporated areas in Cook County—a county with a population larger than that of 29 individual states—and the combined populations of the seven smallest states—a county in which there are some 135 incorporated municipalities partially or wholly within the county, the largest of which is the City of Chicago, home to approximately 54% of the population of the county. Approximately 2.4%, or 126,034, of Cook County’s 5.2 million residents live in unincorporated areas of the County and therefore do not pay taxes to a municipality. According to Civic Federation calculations, Cook County spends approximately $42.9 million annually in expenses related to the delivery of municipal-type services to unincorporated areas, including law enforcement, building and zoning and liquor control. Because the areas only generate $24.0 million toward defraying the cost of these special services, County taxpayers effectively pay an $18.9 million subsidy, even as they pay taxes for their own municipal services. The portion of Cook County which lies outside Chicago’s city limits is divided into 30 townships, which often divide or share governmental services with local municipalities. Thus, this new report builds on the long-term effort by the Federation in the wake of its 2014 comprehensive analysis of all unincorporated areas in Cook County as well as recommendations to assist the County in eliminating unincorporated areas. .In this new report, the Federation looks at the $18.9 million cost to the County of providing municipal-type services in unincorporated areas compared to revenue generated from the unincorporated areas, finding it spent approximately $18.9 million more on unincorporated area services than the total revenue it collected in those areas in FY2014, including nearly $24.0 million in revenues generated from the unincorporated areas of the county compared to $42.9 million in expenses related to the delivery of municipal-type services to the unincorporated areas of the county—or, as the report notes: “In sum, all Cook County taxpayers provide an $18.9 million subsidy to residents in the unincorporated areas. On a per capita basis, the variance between revenues and expenditures is $150, or the difference between $340 per capita in expenditures versus $190 per capita in revenues collected. The report found that in that fiscal year, Cook County’s cost to provide law enforcement, building and zoning, animal control and liquor control services was approximately $42.9 million or $340.49 per resident of the unincorporated areas. The following chart identifies the Cook County agencies that provide services to the unincorporated areas and the costs associated with providing those services. The county’s services to these unincorporated areas are funded through a variety of taxes and fees, including revenues generated from both incorporated and unincorporated taxpayers to fund operations countywide: some revenues are generated or are distributed solely within the unincorporated areas, such as income taxes, building and zoning fees, state sales taxes, wheel taxes (the wheel tax is an annual license fee authorizing the use of any motor vehicle within the unincorporated area of Cook County). The annual rate varies depending on the type of vehicle as well as a vehicle’s class, weight, and number of axles. Receipts from this tax are deposited in the Public Safety Fund. In FY2014 the tax generated an estimated $3.8 million., and business and liquor license fees, but the report found these areas also generated revenues from the Cook County sales and property taxes, which totaled nearly $15.5 million in revenue, noting, however, those taxes are imposed at the same rate in both incorporated and unincorporated areas and are used to fund all county functions. With regard to revenues generated solely within the unincorporated areas of the county, the Federation wrote that the State of Illinois allocates income tax funds to Cook County based on the number of residents in unincorporated areas: if unincorporated areas are annexed to municipalities, then the distribution of funds is correspondingly reduced by the number of inhabitants annexed into municipalities. Thus, in FY2014, Cook County collected approximately $12.0 million in income tax distribution based on the population of residents residing in the unincorporated areas of Cook County. The report determined the Wheel Tax garnered an estimated $3.8 million in FY2014 from the unincorporated areas; $3.7 million from permit and zoning fees (including a contractor’s business registration fee, annual inspection fees, and local public entity and non-profit organization fees (As of December 1, 2014, all organizations are required to pay 100% of standard building, zoning and inspection fees.). The County receives a cut of the Illinois Retailer’s Occupation Tax (a tax on the sale of certain merchandise at the rate of 6.25%. Of the 6.25%, 1.0% of the 6.25% is distributed to Cook County for sales made in the unincorporated areas of the County. In FY2014 this amounted to approximately $2.8 million in revenue. However, if the unincorporated areas of Cook County are annexed by a municipality this revenue would be redirected to the municipalities that annexed the unincorporated areas.) Cook County also receives a fee from cable television providers for the right and franchise to construct and operate cable television systems in unincorporated Cook County (which garnered nearly $1.3 million in revenue in FY2104). Businesses located in unincorporated Cook County pay an annual fee in order to obtain a liquor license that allows for the sale of alcoholic liquor. The minimum required license fee is $3,000 plus additional background check fees and other related liquor license application fees. In FY2014 these fees generated $365,904. Finally, businesses in unincorporated Cook County engaged in general sales, involved in office operations, or not exempt are required to obtain a Cook County general business license—for which a fee of $40 for a two-year license is imposed—enough in FY2014 for the county to count approximately $32,160 in revenue.

Who’s Financing a City’s Future? It almost seems as if the largest municipality within Cook County is caught between its past and its future—here it is accrued public pension liabilities versus its public schools. The city has raised taxes and moved to shore up its debt-ridden pension system—obligated by the Illinois constitution to pay, but under further pressure and facing a potential strike by its teachers, who are seeking greater benefits. The Chicago arithmetic for the public schools, the nation’s third-largest public school district is an equation which counts on the missing variables of state aid and union concessions—neither of which appears to be forthcoming. Indeed, this week, Moody’s, doing its own moody math, cut the Big Shoulder city’s credit rating deeper into junk, citing its “precarious liquidity” and reliance on borrowed money, even as preliminary data demonstrated a continuing enrollment decline drop of almost 14,000 students—a decline that will add fiscal insult to injury and, likely, provoke potential investors to insist upon higher interest rates. According to the Chicago Board of Education, enrollment has eroded from some 414,000 students in 2007 to 396,000 last year: a double whammy, because it not only reduces its funding, but likely also means the Mayor’s goal of drawing younger families to move into the city might not be working. In our report on Chicago, we had noted: “The demographics are recovering from the previous decade which saw an exodus of 200,000. In the decade, the city lost 7.1% of its jobs. Now, revenues are coming back, but the city faces an exceptional challenge in trying to shape its future. With a current debt level of $63,525 per capita, one expert noted that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Nevertheless, unemployment is coming down (11.3% unemployment, seasonally adjusted) and census data demonstrated the city is returning as a destination for the key demographic group, the 25-29 age group, which grew from 227,000 in 2006 to 274,000 by end of 2011.) Ergo, the steady drop in enrollment could signal a reversal of those once “recovering” demographics. Or, as Moody’s notes, the chronic financial strains may lead investors to demand higher interest rates—rates already unaffordably high with yields of as much as 9 percent, according to Moody’s. Like an olden times Pac-Man, principal and interest rate costs are chewing into CPS’s budget consuming more than 10 percent of this year’s $5.4 billion budget, or as the ever perspicacious Richard Ciccarone of Merritt Research Services in the Windy City put it: “To say that they’re challenged is an understatement…The problems that they’re having poses risks to continued operations and the timely repayment of liabilities.” Moody’s VP in Chicago Rachel Cortez notes: “Because the reserves and the liquidity have weakened steadily over the past few years, there’s less room for uncertainty in the budget: They don’t have any cash left to buffer against revenue or expenditure assumptions that don’t pan out.” And the math threatens to worsen: CPS’ budget for FY2016-17 anticipate the school district will gain concessions from the union, including phasing out CPS’ practice of covering most of teachers’ pension contributions—a phase-out the teachers’ union has already rejected; CPS is also counting on $215 million in aid contingent on Illinois adopting a pension overhaul—the kind of math made virtually impossible under the state’s constitution, r, as Moody’s would put it: an “unrealistic expectations.” Even though lawmakers approved a $250 million property-tax levy for teachers’ pensions, those funds will not be forthcoming until after the end of the fiscal year—and they will barely make a dent in CPS’s $10 billion in unfunded retirement liabilities.

Out Like Flint. The City of Flint will continue to receive its water from the Great Lakes Water Authority for another year, time presumed to be sufficient to construct a newly required stretch of pipeline and allow for testing of water Flint will treat from its new source, the Karegnondi Water Authority (KWA). The decision came as the Senate, in its race to leave Washington, D.C. yesterday, passed legislation to appropriate some $170 million—but funds which would only actually be available and finally acted upon in December when Congress is scheduled to come back from two months’ of recess—after the House of Representatives adopted an amendment to a water projects bill, the Water Resources Development Act, which would authorize—but not appropriate—the funds for communities such as Flint where the president has declared a state of emergency because of contaminants like lead. Meanwhile, the Michigan Strategic Fund, an arm of the Michigan Economic Development Corp., Tuesday approved a loan of up to $3.5 million to help Flint finance the $7.5-million pipeline the EPA is requiring to allow treated KWA water to be tested for six months before it is piped to Flint residents to drink. While the pipeline connecting Flint and Lake Huron is almost completed, the EPA wants an additional 3.5-mile pipeline constructed so that Flint residents can continue to be supplied with drinking water from the GLWA in Detroit while raw KWA water, treated at the Flint Water Treatment Plant, is tested for six months. The Michigan Department of Environmental Quality is expected to pay $4.2 million of the pipeline cost through a grant, with the loan covering the balance of the cost. Even though the funds the Strategic Fund has approved is in the form of a loan, with 2% interest and 15 years of payments beginning in October of 2018, state officials said they were considering various funding sources to repay the loan so cash-strapped Flint will not be on the hook for the money. Time is of the essence; Flint’s emergency contract for Detroit water, which has already been extended, is currently scheduled to end next June 30th.  

Waiting for Godot. Last April 27th, East Cleveland Mayor Gary Norton wrote to Ohio State Tax Commissioner Joseph W. Testa for approval for his city to file chapter 9 bankruptcy: “Given East Cleveland’s decades-long economic decline and precipitous decrease in revenue, the City is hereby requesting your approval of its Petition for Municipal Bankruptcy. Despite the City’s best Efforts, East Cleveland is insolvent pursuant…Based upon Financial Appropriations projections for the years 2016, 2017, 2018 and 2019, the City will be unable to sustain basic Fire, Police, EMS or rubbish collection services. The City has tried to negotiate with its creditors in good faith as required by 11 U.S.C. 109. It has been a somewhat impracticable effort. The City’s Financial Recovery Plan, approved by the City Council, the Financial Commission and the Fiscal Supervisors, while intended to restore the City to fiscal solvency, will have the effect of decimating our safety forces. Hence, our goal to effect a plan that will adjust our debts pursuant to 11 U.S.C. 109 puts us in a catch-22 that is unrealistic. This is particularly true now that petitions for Merger/Annexation with the City of Cleveland have been delayed by court action in the decision of Cuyahoga County Common Pleas Judge Michael Russo, Court Case No. 850236.” Mayor Norton closed his letter: “Thank you for your prompt consideration of this urgent matter.” He is still waiting.