Monday, December 29, 2008
Gapers Block
by Ramsin Canon

Last week County Commissioner Forrest Claypool's office released a memo arguing that Cook County was looking at a significant operating surplus, and that therefore borrowing money for several classes of county expenses, as Stroger has proposed to do a lot of, will only saddle future budgets with considerable debt service. Claypool asserted that the borrowing was unnecessary and dangerous, so we pressed his office for details on what alternative the County had.

Claypool Chief of Staff Doug Kucia spoke to me about Claypool's assertion that borrowing was unnecessary, and that the money from the operating surplus could be used to cover the FY2009 budget shortfalls.

"We've gotten two--now three--sets of numbers. We've had to try to make sense of the numbers," Kucia told GB. "The [sales tax] projections they have suggest the downturn will be much much worse. The economy is in trouble, but we're not standing in soup lines." Kucia is referring to the fact that Stroger's budget team has projected an apocalyptic decline in sales tax revenue due to the sagging retail economy. He's not alone in doubting the Stroger figures; speaking to Progess Illinois, Commissioner Larry Suffredin called the President's budget numbers "a political document rather than an accounting document." Claypool's memo claims that the downturn projected by Stroger's office would be the first of its size since the Depression days of the early 1930s.

While typically, conservative estimates of things like sales tax--particularly in the midst of a serious recession--are a good idea, the enormous decline Stroger is predicting doesn't seem to be based on anything but a guess.

Claypool uses as his baseline Illinois state Comptroller Dan Hynes' figure for expected sales tax decline--a modest 1.4%. Compare this to President Stroger's latest estimate, released 15 December, of nearly 23%. Given the state generally collects sales taxes, and Comptroller Hynes' sterling reputation as a civil servant, Kucia told me, Claypool feels comfortable using his numbers.

"Even if the one point four is too low, and it went as high as six, that's still not even close," to President Stroger's numbers.

Fitch Ratings, a credit rating agency, issued a relatively positive report about the county's credit situation in July, despite revising its Rating Outlook on the county from Stable to Negative, saying,

The Outlook revision to Negative reflects financial weakening, an increasingly high-tax environment for retail sales in a down economy,and the need for structural reform within the county's massive health system, where widening operating losses require an increasing amount of operating fund subsidy. Along with the steps the county has already taken to reform billing and administration of its health care system,expenditure savings and enhanced patient fee recovery will be necessary to curtail rising operating deficits. With the highest sales tax rate in the nation, the county faces political and economic pressure to provide tax relief for county residents. The long-term sustainability of fiscal decisions, and the charge for structural reform and revenue enhancement, will be key future challenges....The county's strong economic growth has reduced the relative dependence on residential property taxes and modestly increased the county's financial flexibility.

Note that the revision downward was based at least in part on the recent sales tax increase. (For an explanation of Fitch's ratings, see here.)

Bonds issued to pay for operating expenses such as "Self Insurance" (legal fees and payouts, etc.) and pension obligations are taxable, whereas capital bonds are not. Issuing the taxable bonds along with the tax-exempt bonds could lead, according to Claypool, to as much $55m a year in debt service, a serious built-in burden for an annually tight budget.

When pressed as to why Stroger's office would create such a dire forecast for sales tax revenue, Kucia declined to speculate.

One possible explanation is that publicly dedicating surplus sales tax revenue to self insurance or pension costs pins the administration down, reducing flexibility in more discretionary spending. Whatever the reason, the Board has an obligation to Cook County residents--who are, we should remember, the actual "borrowers" whenever the County issues debt--to err on the side of less borrowing particularly when it comes to operating expenses.

Jump the jump to see Claypool's comparison chart.