County Credit

Making fun of Todd Stroger – even when laced with outrage – can become so entertaining and commonplace that we can lose sight of the stakes. Now we have a fresh look at Cook County finances that isn’t funny at all in the form of a credit report from Fitch Ratings.

“Even as controversy rages over Cook County’s big new sales tax hike, a major financial ratings service is warning that the county’s fiscal picture is darkening and suggests that a sales-tax increase now may not have been a good idea,” Crain’s reported on the Fitch analysis last week.

“In a statement issued late Tuesday, Fitch Ratings moved its outlook for about $3 billion in Cook County debt from ‘stable’ to ‘negative, a step short of an actual rating downgrade that would increase the county’s costs of borrowing.”

That’s a cost that taxpayers bear.

“The New York firm cited weakening county finances, structural deficits in the county’s massive health system and ‘an increasingly high-tax environment for retail sales in a down economy.’

“Fitch is not taking a position on the public policy question of whether the county should or should not have raised its sales tax from 0.75% to 1.75%, says Melanie A. J. Shaker, a Fitch director who was the lead analyst on the report. But she says the agency is questioning the viability of the levy given that, in the midst of an economic downturn, combined with the city sales tax, Chicago now has the highest rate in the country, at 10.25%.”

Here are some highlights from the Fitch analysis itself.

* “The increase in the county’s home rule sales tax rate, to 1.75% from 0.75%, is estimated to produce an additional $400 million in revenue, augmenting monthly sales tax receipts to an estimated $62 million by December 2008.”

* “The county has a broad and diverse sales tax base that generates good growth in sales tax receipts.”

* “Fitch Ratings believes that financial operations are subject to vulnerability on several fronts. The county will use bond proceeds to fund part of its fiscal 2007 pension payment, issue self-insurance bonds to address substantial claims liability, and is issuing cash flow notes for the first time in years for needed liquidity. Additionally, wage contracts with many bargaining units are still not settled, posing a significant risk to current reserves. The extent of the budget deficit in fiscal 2008 and beyond remains unclear, as do the county’s steps to address it.”

* “The massive county health and corrections systems continue to pressure the budget. Operating losses at the hospitals have widened and required increased tax support. Inadequate billing practices, coupled with changes in federal reimbursement rates, challenge revenue estimates. The county has taken steps to reform billing and administration of its health care system, but expenditure savings, as well as 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 in addition to revenue enhancement, will be key challenges in the future.”

* “Opened in December 2002, the Stroger Hospital is a 464-bed facility that cost approximately $623 million to build and equip. The promised efficiency gains through reduced inpatient bed capacity and length of stay, reduced staffing, better facility organization to improve utilization, a shift to more outpatient care, and technological equipment upgrades will require additional management efforts to realize these efficiencies and resulting savings.”

* “The extensive county health system faces challenges in its billing practices and level of uncompensated care, and operating losses have widened in the past three fiscal years. Revenue estimates have been overly optimistic, and the actual results have been substantially less than budgeted expectations.”

* “The combination of an increased caseload and a greater conviction rate over the past decade has strained the system. Compounding these demands, state legislative changes, which increased criminal and juvenile justice penalties, have boosted court costs throughout the system.”

* “The county has a broad revenue structure. Within the general, special revenue, and debt service funds, property taxes account for 24% of total revenues, while nonproperty taxes represent 45%. Nonproperty taxes consist of personal property replacement taxes, county sales and use taxes, and a variety of user fees and charges. The shift to consumption taxes from residential property taxes capitalized on a growing economic base and effectively shifted the tax burden to nonresidents. Licenses and fees, generated mostly through court fees and tax collections, accounted for an additional 17% of revenues. The county’s property tax levy for fiscal 2008 will remain constant ($720.5 million) for the ninth consecutive year. Consequently, property taxes represented 23.4% of revenues in fiscal 2006, compared with 27.5% in fiscal 2000.”

* “The current sales tax note issuance is a departure from historical practice and is another symptom of fiscal strain. With optimistic revenue projections and increased employee headcount, Fitch anticipates that fiscal 2008 will show a significant structural imbalance in operating funds, despite the sales tax rate increase. Credit concerns include uncertainty over current year-to-date performance as well as future budget passage given a difficult political and economic environment.”

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