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Shaky in Chicago
Chicago is considering its biggest property tax hike since 1987 as leaders there grasp for solutions to the city’s structural budget deficit. Chicago is looking at a more than $200 million operating deficit for 2016 alone and the Illinois Policy Institute estimates the city is holding more than $60 billion in debt. Mayor Rahm Emanuel's office estimates the increased tax revenue would bring in about $500 million annually for the city and much of that would be used to shore up the pension funds that cover police and firefighters. This week, municipal credit analyst Matt Fabian said the tax increase likely had a “fair but not overwhelming chance of approval,” but his concern is that it doesn’t do enough to move the city out of debt.
“We expect that, to maximize its chances, this hike is being pitched as the only major revenue raiser in the current four-year council term,” Fabian wrote in his Sept. 26 analysis for Municipal Market Analytics. But, he added, even if the city's planned tax hike goes forward, it might not address its serious financial problems.
Specifically, Fabian notes that two of the city’s bids to reduce its pension obligations – one via a request to the state legislature and the other is a pending court decision – could go the wrong way for Chicago. Both of these events may represent financial setbacks totaling hundreds of millions of dollars, Fabian said.
Meanwhile a group called CivicLab has started an aggressive campaign against the tax plan. In an email sent to aldermen and the media this week, the group claims “Chicago is not broke” – it just needs to use its “civic imagination.” The group estimates Chicago could save $1 billion a year if it eliminated corruption-related spending, but gives poor examples of how that would happen. It also suggests eliminating Tax Increment Financing districts for a one-time infusion of $1.4 billion in cash. Lastly, it estimates a new tax on financial transactions and a “moderately progressive income tax” (again, no specifics) could raise $2.5 billion in annual revenue combined.
The Real Taxpayer Burden
A new report by the financial transparency advocate Truth in Accounting shows what states’ financial statements could look like soon with new pension accounting rules in place. The group tallies up state debt, and includes pension unfunded liabilities and retiree healthcare obligations. Starting this year, Government Accounting Standards Board (GASB) rules require states to include their unfunded pension liabilities in their government-wide financial statements to better reflect their debt burden. In a few years, accounting rules will require states to report unfunded retiree healthcare liabilities in the statement as well.
All states except Vermont have a balanced budget requirement, but annual budgets don’t reflect long term debt. The total debt across all 50 states in 2014 was about $1.4 trillion, according to the report. Some (11) states had a positive balance sheet and enough in available assets to counteract their debt load. But most (39) were in the red. The group then divided that balance sheet tally among all the state’s taxpayers to come up with each state’s taxpayer burden.New Jersey showed the biggest ever year-over-year leap in taxpayer burden for any state in the six years of the report's history. The jump was largely thanks to a big increase in its unfunded pension liability after new GASB accounting rules for all governments kicked in last year. The state’s taxpayer burden went from $36,000 in 2013 to $52,300 last year, the highest in the country.
The group’s report includes in-depth analyses of all 50 states.
Good News for Retirement Security
A new analysis by the Government Accountability Office could clear the way for some states to adopt programs that offer private sector workers without workplace retirement accounts access to 401(k) plans. The report recommends giving states more flexibility in private sector retirement plans. Recently, California and Illinois became the first states to adopt programs that will set up 401(k) plans or Individual Retirement Accounts (IRAs) for private sector workers without access to a retirement plan through their employers.
About half of private sector workers nationwide, particularly those who are low-income or employed by small firms, don’t have a retirement account from their employers. Other states are looking into replicating California and Illinois’ efforts -- referred to as Secure Choice plans -- but many have concerns about whether these plans would have to conform with the federal Employee Retirement Income Security Act (ERISA) that governs private retirement plans. But some advocates for the state-run plans say that many of the disclosure features of ERISA -- like the requirement that plans provide participants with plan information about fees and funding -- are features states would include in their plans anyway.
The GAO report recommends that the secretaries of the Treasury and Labor “review and revise... existing regulations and guidance causing uncertainty for state efforts.” For example, federal regulators could clarify where state laws would take precedent over ERISA rules when creating Secure Choice plans for private workers. The Department of Labor plans to issue a proposed rule on state programs by the end of this year.