DETAILS MATTER by Bob Ginsburg August 9, 2022
The Dash for New Cash, or Spending Old Cash like New: Budget Season Activity
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The Dash for New Cash, or Spending Old Cash like New: Budget Season Activity
Late July and August are often slow times in terms of political and budget news. It’s quiet at the city and county levels because the detailed work is being done behind closed doors in preparation for release of draft budgets at the end of August or early September. This usually means budget discussions wait until the drafts are released.
But this year is different, as the budgets presented in September will affect either the November county election or the March/April 2023 city elections. So there is a lot of “pre-budget” maneuvering right now. There is an added wrinkle this year with a potential new wave of funding from the federal climate, health care, tax reform bill (the Inflation Reduction Act of 2022).
Anyway, the city is moving ahead with new announcements preserving desperately needed revenue streams (e.g. red light cameras) and new revenue-generating and image-making contracts The county is making announcements on how they will begin spending last year’s budget programs (i.e., just in time for the next budget cycle). While the city announcements are more dramatic, the county has its own challenges and its own approach.
City of Chicago: structural deficit requires ever increasing revenue.
The Chicago budget was bailed out by the infusion of federal funds in FY21 and FY22. The FY2022 budget alone was filled with an extra $1.2 billion in federal grants and other federal funding. Most of that money was spent in FY2022 paying down debt, covering pandemic (and ongoing) revenue losses and expenses, and funding a variety of progressive policy initiatives such as guaranteed basic income, rental assistance, affordable housing, support for violence prevention, pilot programs for alternative response to mental health and domestic violence calls to 911, etc.
The extent of that “bailout” can be seen in the grants total in the FY2022 budget but also in the 2021 Annual Comprehensive Financial Report (ACFR) which became publicly available in July. Nearly all the fund balances showed healthy growth. The 2021 CAFR also noted the pressing need to cover debt payments. Payments for bond debt, excluding payments for pension debt, have increased by $520 million since 2019. For comparison, pension payments since 2019 have increased by $974 million. The bond debt payments reported in the budget would nearly match the increase in pension payments if they included the bond debt service payments made with sales tax revenue funneled through the Sales Tax Securitization Corp.
Unfortunately the media solely focuses on the pension payments as the “problem” rather than bond debt, as they apparently find it easier to explain.. However, the difference between them is important. Pension payments are an obligation to employees and are part of the compensation structure for city employees.. On the other hand, debt payments result from a choice to borrow to cover deficits because of insufficient revenues. The challenge for 2023 is to find enough new revenue to continue as many of the new policies on income, housing, community services as possible and limit any unpopular cuts in 2023.
So it was not surprising that the city has been looking to both preserve existing revenue streams and quickly create new ones in advance of the 2023 budget. Why else would the $80 million in red light camera revenue over two years be so important? I discussed the casino project a few weeks ago. Among the economic development analysts I surveyed, most felt that the $30 million upfront payment from Hollywood Casino was the deciding factor in the winning bid. It also helped that the “threat” of increased funding requirements (which appeared to be presented as demands) from the Metropolitan Pier and Exposition Authority (i.e. MPEA) if the Lakeside Center was chosen were taken very seriously – especially as the MPEA has had problems for two years and likely a couple more in making its bond payments – because of inadequate revenue from the downtown hotel and restaurant taxes, requiring the city and state to cover the difference. Those shortfalls plus the real possibility of funding more construction at McCormick Place, Navy Pier and the Museum Campus made the Halsted street site more attractive in the short term.
Besides the rushed casino vote and the red light camera vote, two other contracts were rushed through in time to boost the FY2023 budget.
LOLLAPALOOZA: The dramatic announcement on the last night of Lollapalooza in front of the city skyline secured the festival for another ten years. It is unclear how much in direct payments the city will receive, as the final contract has not been released. According to Crain’s Chicago Business, we do know that the city will receive at least $2 million plus 5-20% of fees and sponsorships in addition to a new $2.2 million (annual?) grant going to CPS and After School Matters arts programming. The city has not released the actual costs (and thus Lollapalooza payments) for the four-day event or the increased costs for a couple of extra days of street closures. Best estimate of direct payments to the city would be $10-20 million with hundreds of millions in other revenue from hotels, restaurants, etc.
NASCAR: NASCAR normally announces its coming year schedule in December and January. The July announcement of a July 2023 Chicago Street Race was surprising, as the city pushed hard to finalize the contract and release the permit at the announcement. This allows it to be included in 2023 budget calculations. (Note the same rationale applies to the Lollapalooza contract extension, with the video of “ten more years” filmed in front of the Lollapalooza sign and the city skyline bound to end up in campaign ads.) News reports have noted that the permit issued for the NASCAR event will include a $500,000 fee, plus payment to the Chicago Park District of 15% of merchandise and concessions and $2 per ticket.
Unfortunately, we have barely touched the surface on NASCAR costs and revenue, as the park district property and responsibility are only a relatively small part of the total. For example, industry publications and Forbes (NASCAR and Forbes) report that 65% of the $8.2 billion television deal signed in 2014 goes to the venues on NASCAR’s schedule, which means that $5.3 billion from the TV contract could be divided between at least 36 venues, or $148 million per venue. All venues also take in money from selling grandstand tickets (included in the Chicago permit) and off-site musical acts, sponsorships, and other events not included in the Chicago permit. The bottom line is that there is significant revenue potentially available to the City SEPARATE from increased hotel, restaurant and other sales taxes, despite the apparent contract signed by Chicago and released by Crain’s on 8/9/2022. (Crain’s NASCAR). The contract between the city and Nascar for use of the streets, cost of police and sanitation, etc., indicates little additional revenue, especially as compared to Lollapalooza and contracts negotiated by other NASCAR venues.. More important is the question of how this money will be spent. If the allocation of the 2021 federal American Rescue Plan (ARP) funding is the blueprint for such windfalls, some will support community programs and most will cover existing budget costs and debt.
Sources of new or increased revenue for the city that will be or could be announced soon
SALES TAX REVENUE: Given the 12% increase in 2022 state sales tax over the FY21 revenue, including cannabis and internet sales(COGFA), it will be interesting to see how “optimistic” the city revenue totals will be, especially if they factor in higher restaurant and hotel tax revenues from the casino, Lollapalooza and NASCAR. COGFA estimated in the July monthly report that they expect FY2023 sales tax revenues to be slightly below FY2022 levels.
INNOVATIVE USE OF TIF FUNDS. The recent announcement of the South Side Transit TIF (TIF) to help fund the needed Red Line extension presents more opportunities than suggested in the media coverage. It proposes redefining TIFs as funding sources for projects of CITYWIDE significance. The new TIF district (authorized by legislation passed during the Emanuel administration) from the Loop down to Pershing Road would be used to fund the Red Line extension to 130th Street as well as some new rail yards and other rail improvements. This makes sense to me but it also suggests many other possibilities for use of TIF funds.
Last month I suggested using TIF resources to fund two citywide initiatives. The first (at an annual cost of $115 million) would have the city directly responsible for additional funding for school programs in art, music, student health/support, and libraries. The second (at an annual cost of $80 million) would create an annual summer and year-round youth jobs programs in all wards, but focusing on wards with high unemployment and poverty. The lack of a commitment to such ongoing programs in Chicago, as compared to New York and Los Angeles, weakens anti-violence programs and blocks growth in those communities. For example, Los Angeles funds a “Gang Reduction and Youth Development” program and is one example of non-enforcement services. GRYD provides gang prevention and intervention services in 23 designated areas of the city. The program works to prevent gang-joining among youth ages 10 through 15, and to reduce gang-embeddedness among people ages 14 through 25. Chicago has a number of similar though inconsistently funded programs. A TIF-funded Chicago variation could be focused on community service and other sport and civic activities. .
I don’t receive that many comments on these newsletters, but there were a few on the July 14 issue on TIF funding. One set of comments was that TIFs should be abolished and the other was that targeted citywide use of TIF funds was not a possible “or desirable” use. Both explicitly argued that it was better to take that funding and return it to taxing bodies for general budget purposes. There is a long history (good and bad) of focused and limited citywide uses of TIF funding, such as for Block 37 and for a citywide school construction program created by Mayor Daley in 2013 (Schools). The TIF law was amended to allow TIFs to fund workforce training and development programs (Training). Now the Red Line TIF proposal indicates innovation is possible with some effort and creativity.
Cook County: stable finances, limited local income, and still on pilot programs after 12 years.
Given the August release of the Cook County budget, a few extra words about the county are in order. The major priority for the county administration for the last 12 years has been “fiscal management.” It has been a success, and the county is in much better fiscal shape than the city. The only attempt to increase the base for county revenue away from sales taxes was the disastrous Soda Tax. County property tax revenue has been fixed at the same dollar amount since 1997. The sales tax was eventually increased, primarily to cover increased pension payments. The announcements in the last month have all been about implementation of the FY2022 programs that were budgeted last year. Slow (or perhaps very deliberate) implementation leads to no results this year and little pressure to expand programs in the FY23 budget. A relatively small preliminary budget gap and no results from last year leads to a no-drama election-year budget.
Besides the lack of drama, while this approach has led to significant cash reserves, it has also led to a steadily smaller workforce, limited spending of public money on administering programs, and a preference for contracting services out. The good side of that was the prudent decision to divide the $1 billion in ARP funding into $300 million allocations for the next three budget years. The result is contracting out management and administration of the guaranteed basic income pilot (e.g. RFP issued last week) and affordable housing initiatives, creating a “public-private” corporation to oversee development in South Cook County, and, of course, the Land Bank Authority. The County is not developing and keeping staff with expertise to effectively manage and oversee these initiatives and dictate direction..
That is not to say there haven’t been some good new initiatives, including creation of County Care, bail bond reform (though it took almost eight years for the county to implement), small expansions of some county housing programs, and some use of federal funding to support groups providing transitional and mental health services in the county, and the $9 million annual transportation grants to municipalities as part of the Long Range Transportation Plan/Connecting Cook County. The county transportation department, more than any other department, has maintained the technical expertise to run and oversee programs without contracting everything out.
Despite the good initiatives, the entire county (Both Chicago and Suburban Cook) still does not have the capacity to address major issues at a scale commensurate with the size of the problems and the county. All the residents (2.8 million in Chicago and 2.1 million in Suburban Cook) lose as the city and county continue to duplicate functions, and the county limits its spending to relatively small programs run by private companies. In April, the county announced its $12 million “Building Healthy Communities Initiative'' (County) to address Covid-related mental health, food security, and youth development issues. Of course, a month or so later the city announced an $89 million expansion of its mental health network (City.) Just last week Cook County put out an RFP for an outside organization to administer the guaranteed basic income pilot rather than use county employees. Even the county guaranteed basic Income proposal is only $39 million – only 13% of the $300 million set aside from ARP funding for 2022. According to the Census, there are approximately 205,000 households in suburban Cook with incomes below $35,000 per year. (Census).
Ultimately, the county needs to articulate what its role is. It should be more than a collection of unrelated or semi-related programs (like the jail and courts and hospital and the hospital deserves a separate discussion all its own) without a clear connection to what the City does and how it does it. Sixty years ago when nearly half of Cook County was unincorporated and the needs in the City of Chicago dominated, it might have made sense. It doesn’t in 2022. If the county is only there to run a few programs and maintain a small bit of unincorporated land, then there are better ways to run those programs.