Boyle opened the lunch by reminding the members that the Federal Reserve Bank sets monetary policy to maximize employment with stable prices, as well as protect consumers. Moreover, a new mandate from the federal government requires that the Federal Reserve Bank also provide credit and capital to low-income communities, ensuring fair and equal access to opportunity nationwide.
Boyle then discussed the Industrial Cities Initiative, which was a policy paper issued by his department and of which the work is continuing. The paper concluded that by working together, state and local governments can work through their financial problems. He also added that his department offers resources and technical advice to help state and local governments find solutions to their common problems.
Mattoon then opened his presentation by pointing out that both the State of Illinois and the City of Chicago have been running structural deficits since before the Great Recession, but the recession showed the magnitude of that shared problem. Both governments employed the same budget maneuver, which was to borrow from the future to fill the gaps, and most of that borrowing was through their pension systems. This explains why the bond rating agencies have all degraded Illinois and Chicago debt.
First Mattoon began with an analysis of the State of Illinois by showing that, “The state is a relatively modest tax state, however there has been a cost at keeping those rates artificially low which has been done by borrowing from the future.” The State’s first year of deficit spending was 2000, and it has only become worse with time. To close the gap now through tax increases only, the State tax rate would have to be risen to well above the U.S. average and would also be higher than all our neighboring states. “It suggests that filling the gap would be a fairly large enterprise through revenue alone,” he concluded.
Turning to the City of Chicago, he said its solutions lie in how the State fixes its problems. He also noted Chicago’s overlapping governments and that while there could be a fix for the city, that might not be a fix for the school system or other large government bodies. He noted that the historical avoidance of raising the property tax has forced the city to look at all other sources of revenue, which means, “You get to a point where the property tax is the only base where you can make meaningful adjustments and raise significant revenue.”
Including all other overlapping units of government, Chicago’s share of unfunded liability per capita is $18,596, the highest in the nation, and nearly double the second-highest, New York City which is at $9,842, which explains another reason why Chicago’s bond rating is so low. Moreover, the City’s debt issuance has been for general operating purposes, not for capital investments. The City has looked at pension reform to trim the liability on the expense side but those changes have been found to be unconstitutional by the State Supreme Court, which means this problem is not going away soon. The City has also done consolidation of services, and selling off assets such as the Skyway and its parking meters, but all to pay for short-term expenses. “None of these are best practices,” he concluded.
Mattoon noted that, “the pension contribution is driven by a statutory formula that the General Assembly created, but it has no bearing on reality on what the exposure is, it is just based on a payroll formula.” He urged policy changes to force a higher contribution rate. However, to solve the problems the City and the school systems would need $590 million and $400 million respectively just to pay for next year’s pension contribution, but he also acknowledge that is money neither government has.
In an examination of property tax rates, Mattoon noted that only Cook County distinguishes between residential and commercial property, and that residential property tax rates are low for the region, but the commercial rate is very high.
Mattoon then did a summary of Mayor Emanuel’s recent proposals which includes a 60% property tax increase (almost completely to fund pension contributions) as well as a fee for garbage service, a tax on e-cigarettes and smokeless tobacco, and a surcharge on ride sharing services.
The implication of this poor fiscal condition is that the marginal benefit of the city’s costs may not equal the marginal benefit of the city’s services. He said when that happens it encourages mobile capital to leave, and city services will then start to decline, followed by population outflow (such as what happened in Detroit).
Suggestions for improvement include an independent fiscal institution to force changes, using transparency in accounting so it can be clearer what your liabilities are, and increased state oversight. However on the later Mattoon noted that the State of Illinois can’t manage its own house, so may not be qualified to manage local governments. An example of a good system is North Carolina, which can intercept local government funds when they are not appropriated responsibly.
Following the lunch CCAC members were offered a rare tour of the basement of the Reserve that handles cash deposits and withdrawals from commercial banks. Members also were shown an example of the machinery the Reserve uses to count cash, as well as given an understanding of how it is determined when currency should be removed from circulation and destroyed, and how fresh currency from the U.S. Mint is entered into circulation.
Afterwards CCAC members were given a tour of the Federal Reserve Bank’s public “Money Museum” which has examples of currency going back to the U.S. Civil War, a display showing the difference between counterfeit and real currency, and the opportunity to wrap your arms around $1 million in cash and have your photo taken with it.
