Chicago public schools are effectively bankrupt. Its pension plans are countless billions of dollars in the hole, the worst in the nation. And Chicago bonds carry a junk rating, the worst of any major US city.
There is plenty to fix. But instead of addressing the enormous problems Chicago faces, Mayor Rahm Emanuel opts to nickel and dime residents and businesses to death, scaring away companies away in the process.
He also threatens property tax hikes that rate to be enormous.
There’s much more in this article. Make sure you get to the details of how Chicago “funded” its pension plan this year. Starting from the top …
“9% Cloud Tax on Streaming”
In April, Emanuel announced a commitment from technology companies to create 1,000 new jobs.
This month, Emanuel rewarded those technology companies with a 9% Cloud Tax on Online Movies, Music, Game, Real Estate Data Feeds.
Streaming data? Movies? Real estate Feeds?
If you have a Chicago business address expect to pay 9% more to do so thanks to an amusement tax and property lease tax extension.
Chicagoans who pay to stream movies and music from services like Netflix and Spotify will now need to fork over an additional 9 percent for the privilege, as will Chicago businesses that pay to use everything from real estate to court databases online, under a decision the city quietly made recently to expand its taxing power.
According to the Finance Department changes, the 9 percent amusement tax, which has mostly been tacked onto tickets to concerts and sporting events, also now applies to paid subscriptions for streamed digital music and to streamed rental movies or TV shows, and “for the privilege of participating in games, on-line or otherwise,” if the person paying to receive the data is in Chicago.
The personal property lease transaction tax expansion also applies to professional services, like electronic property databases real estate agents use, court case databases lawyers rely on and various financial information networks.
“I think they have taken the existing lease transaction tax and existing amusement tax as far as you can take them,” said Michael Wynne, a partner and attorney in the Chicago office of the law firm Reed Smith.
“Let’s say I sign up for streaming business data in the city but I have offices throughout the country,” Wynne said. “I will definitely make sure my billing goes through a different office.
Anything that requires a user to do a search or make a request is subject to the tax. “There is nothing you can access that’s not taxable,” he said.
Minimum Wages
Chicago hopes to collect $12 million from the streaming tax. Let’s assume it does.
How many businesses will take a look at Chicago nickel and diming everyone to death and decide there are better places to do business?
Recall that in December, the Chicago raised its minimum wage to $13.00 by 2019. It’s $10 an hour as of July 1, 2015.
State Problems
Just outside Chicago, there’s a place called Illinois. And Illinois is not a good place to do business.
Illinois has ….
- The second-highest property taxes nationwide.
- The fourth-highest workers’ compensation costs in the country.
- The ninth-highest regulatory burden in the U.S.
- The ninth-highest overall tax burden nationwide.
- Forced unionism.
Progressives have been angling for a massive income tax hike.
The “glory” does not stop there.
Please note that Illinois has the most units of local government of any state in the country. According to the U.S. Census Bureau, with 6,963 local governments, Illinois beats its nearest competitor by more than 1,800. Texas is No. 2 with 5,147 local governments.
For more details please see Congratulations to Illinois: Most Government Bodies, Most Convicted Governors, Lowest Credit Rating.
Chicago Public Schools Over the Edge
Anyone living in Chicago has to deal with Chicago schools. The district is both politically and fiscally bankrupt.
On June 25, The public school system contract talks ground to a halt.
Even though its pension plan is horribly unfunded, someone hatched a plan to borrow $500 million from it, to avoid teacher cuts.
Emanuel Eyes Property Taxes
The Pension Borrowing Scheme was Shelved and instead, Emanuel has his eyes on your wallet.
The Chicago Public Schools and the Chicago Teachers’ Pension Fund have ended discussions on a school district proposal to borrow $500 million from the pension to avoid additional layoffs and classroom cuts.
The district recently paid a $634 million pension bill that officials said it couldn’t afford. As a result, the nation’s third-largest school district plans 1,400 layoffs, scaled-back maintenance and reduced transportation.
Mayor Rahm Emanuel blames state legislators for worsening the situation and says a property tax increase is up for consideration.
Budget Cuts? Where?
Instead of facing the fact that the system is bankrupt, Emanuel wants still higher property taxes.
The Chicago Public School Budget brags about cutting $55 million. Here is a bit of perspective on those cuts from The Stump.
$55 million out of a $5.8 billion budget is not much more than a rounding error.
Illinois Budget $4 Billion in the Hole
The Chicago school budget assumes $500 million is coming from the state. Is that going to happen?
If you think so, please recall this headline from June 25, Rauner vetoes Illinois budget, cites $4 billion deficit.
And curiously, that $500 million assumption is exactly the same as the amount that was to be borrowed from the pension plan.
Chicago Public Schools Borrow $1 Billion to Fund Pensions
Inquiring minds might even be wondering where the money came from to “fund” the pension this year.
I use the words “fund the pension” very loosely.
For the answer, please consider CPS Has ‘No Choice’ But To Borrow $1B Amid Cash Crunch.
The school board approved the new borrowing on Wednesday, a day after the Illinois House rejected a three-week delay for a $630 million payment due to the teachers’ pension fund on June 30. The district also is facing a $1 billion operating deficit.
It might not sound like a good idea for CPS to borrow $1 billion more when it’s already heavily in debt, but Performance Trust Capital Partners director Brian Battle said CPS has no real options.
“They need to borrow this money short-term, so they can make a massive pension payment that’s coming due here in two weeks.
“CPS might get downgraded, because of an action like this, but really the rating agencies will deem this as a reasonable tactical thing to do. You know, you don’t want to default if you have another option. You don’t want to not make the payment if you have another option,” he said.
According to Battle, bond agencies want to see CPS come up with a long-term plan to address its budget and pension issues, and that might mean a property tax hike.
Got That?
The public schools borrowed $1 billion to make a $630 million payment due to the teachers’ pension fund. The teachers then wanted to borrow $500 million of it right back, to support ongoing budget needs.
Brian Battle, Performance Trust Capital Partners director, claims the rating agencies will view this as “reasonable” thing to do, even though Chicago’s four pension plans have a combined $20.1 billion unfunded liability and funded ratios ranging from just 24% to 57%.
Beware the Tax Man
I commented on the tax aspect before, on May 4, in Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering.
Short Synopsis: A report by Nuveen shows a pension payment spike looms in 2016, and the potential tax hike to fix it is staggering. Nuveen estimates property tax hikes of close to 50% will be needed.
Lost Cause
Not a penny of taxpayer money should go to fund these lost causes. I find it hard to believe that Emanuel himself does not know the school system is truly bankrupt.
To spare the citizens of Illinois massive tax hikes, the only reasonable course of actions are as follows:
- Halt defined benefit pension plans for new employees
- Eliminate collective bargaining of public unions
- Scrap Davis Bacon and all prevailing wage laws so that cities do not have to overpay for services
- Enact right-to-work legislation
- Pass bankruptcy legislation allowing cities, municipalities, and other taxing bodies the right to declare bankruptcy
Had options 1-4 been done a decade ago, Illinois would not be as bad off as it is today. Now, even those measures cannot and will not fix the problems.
Moody’s Announcement “Chicago’s Pension Pressures Will Grow For Years”
On May 1, Moody’s made this announcement: Regardless of legal and political outcomes, Chicago’s pension pressures will grow for years.
Illinois desperately needs bankruptcy legislation. 50% tax hikes are not only amazingly unfair, they will drive both corporations and individuals out of the state.
Sad Conclusion
Instead of admitting the obvious, Emanuel expects $500 million from the State, nickels and dimes businesses to death, further makes Illinois and Chicago an uncompetitive place to do business, and even threatens massive property tax hikes.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com