Cook County seeks to fill gap as beverage tax fizzes out

BY SourceMedia | MUNICIPAL | 11/01/17 07:14 PM EDT By Yvette Shields

CHICAGO — As the Cook County, Illinois board weighs how to close a $200 million hole left by the repeal of its sweetened beverage tax, members were warned against using one-time maneuvers to balance the books.

“The county must not use this crisis as an excuse to use gimmicks and one-time revenue sources to balance the fiscal year 2018 budget,” the Chicago Civic Federation research group told board members during hearings this week and in a published commentary.

The county projects a $115.5 million unassigned general fund balance but the federation warned against its use because it would leave a hole the following year and “put the county at risk in the event of a future economic downturn or unexpected expense” and “could also result in a downgrade.”

The county also should not reverse course on pension funding, the group said. Board President Toni Preckwinkle’s proposed budget allocates additional funding beyond the statutorily required pension amount for a third year.

The county had previously raised the sales tax to funnel more money into its weak pension system and that allowed for a supplemental contribution of $270.5 million in fiscal 2016 and $353.8 million in fiscal 2017 with the proposed $4.9 billion 2018 budget allocating an additional $353.4 million.

The supplemental amounts are tied to a plan to reach fully funded status over 30 years. The payments are made under an intergovernmental agreement because state approval to change the county’s pension statutes is still needed.

“Diverting those funds to balance the budget instead would be short-sighted and ill-advised,” the federation warned. “The additional pension contributions have been well received by credit rating agencies. Reducing the pension allocation could lead to credit downgrades that would increase the cost of borrowing.”

The federation instead suggested the county consider revisions to its collective bargaining agreements, implement proposed health system cuts, eliminate the unincorporated area subsidy, create a unified property tax administration office, explore jail cost reductions and look at other areas where services can be streamlined.

County commissioners have been holding hearings on how to close the gap. They are taking public testimony and hearing from elected officers whose budgets are funded through the county such as the sheriff, state’s attorney, public defender, assessor, treasurer, and clerk.

Revisions to the budget would be made through amendments and no timeline has been set for their submission or a vote on the budget that covers the fiscal year that begins Dec. 1, said Preckwinkle spokesman Frank Shuftan.

The repeal represents “a credit negative because the county loses revenue and it reflects practical constraints on revenue raising,” Moody’s Investors Service wrote in a commentary after the board voted in October to repeal the tax. Moody's (MCO) rates the county's general obligation bonds A2.

Preckwinkle had billed the tax as a good revenue source to avoid public health and safety cuts and as a means to reduce consumption of drinks many believe lead to obesity and diabetes. But the county faced intense public and industry pushback when it took effect over the summer. The tax faced a lawsuit from the beverage industry, consumer complaints, and warnings that many were flocking to neighboring counties to make their purchases damaging local businesses.

The region also faces tax fatigue due to a series of tax hikes levied by the county, Chicago, Chicago Public Schools, and the state.

“This practical limitation is particularly critical for Chicago-area local governments, given the significant revenue needs of Cook County, the City of Chicago, CPS and other entities,” Moody's (MCO) analysts wrote.

The county's GO bonds are rated AA-minus by S&P Global Ratings, and A-plus by Fitch Ratings. All three agencies assign a stable outlook.

S&P warned the county needs to move fast or risk damage to its credit profile.

“Depending on the resulting severity of the repeal's effects on the county's budget and, ultimately, its financial position, it could impact credit quality,” S&P analysts Lisa Schroeer and Helen Samuelson wrote after the repeal vote.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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