CHICAGO — Warning of the threat posed to its long-term fiscal stability, the Regional Transportation Authority of Illinois is leading a charge against state legislation that would aid retailers and other businesses seeking to avoid paying some local sales taxes by setting up shell offices elsewhere.
If the bill is enacted, the RTA fears it could lose about $250 million in sales tax revenue. The agency — which oversees the Chicago Transit Authority, Metra commuter rail system, and Pace suburban bus service — collects about $900 million annually in sales taxes imposed in the Chicago region.
Illinois provides a 30% match, bringing the amount to $1.2 billion, which is more than half of the RTA’s annual operating budget, according to executive director Joseph Costello.
“The impact of the proposed legislation would be devastating to our transit system. It would enable businesses to take advantage of a sales-tax loophole that now exists and consequently will increase the tax burden on local residents and businesses,” said RTA board chairman John Gates.
When other taxing bodies, including Chicago, its neighboring counties and special districts are factored in, the potential loss grows to as much as $1 billion.
“This tax scheme would dramatically reduce revenue for taxing districts that fund public transportation, education, public health and public safety across the entire state,” Gates added.
Some businesses have already been using gray areas in state law to pay a lower sales-tax rate on wholesale purchases by setting up small offices to serve as the point of purchase in areas with lower taxes. The state recently challenged one company’s use of such an office, but lost.
The proposed legislation would codify retailers’ ability to use such sales offices to avoid higher taxes imposed in the Chicago region. Proponents counter that if such havens are banned, businesses will leave the state.
The RTA board approved a resolution at its meeting last week tightening its procurement practices to avoid doing business with companies that seek to take advantage of the existing loophole, and launched a campaign in opposition to measure, SB 2194.
The bill recently cleared the Senate and is pending in the House, which resumed its spring session this week. Democratic House Speaker Michael Madigan’s spokesman, Steve Brown, said the bill “is under review.”
The Chicagoland Chamber of Commerce initially supported the legislation, but backed away under pressure from Chicago officials. Some suburban governments that once supported it are now opposed, according to Rich Miller, publisher of the daily political newsletter Capitol Fax.
Opponents also are planning to introduce legislation that would ban the loopholes.
“Even a 10% loss is a big deal. That’s $120 million and is equal to an across-the-board fare increase,” Costello warned.
The transportation authority won a sales tax increase from the General Assembly in 2008 but due to the recession’s economic impact, revenue failed to meet initial projections.
The RTA board late last year approved a $2.3 billion operating budget that avoided service cuts or fare increases by tapping $258 million of federal capital funds to cover qualified operating expenses such as preventative maintenance.
The spending plan allocates $1.33 billion to the CTA, $634.2 million to Metra, and $183.3 million to Pace, while providing $120.7 million for paratransit and $33.7 million for RTA administrative costs.
The agency continues to struggle with overdue state payments, but earlier this year established a commercial paper program to ease the strain.
Illinois is currently $294 million behind in funds it owes the RTA, Costello said. The state government, because of its liquidity woes, is on pace to close out the fiscal year with about $6 billion in overdue payments owed to its vendors, transit agencies, and school districts.
The RTA initially issued working cash-flow notes to manage through the delays, but recently shifted to a commercial paper program.
“You can borrow what you need when you need it,” Costello said.
JPMorgan is serving as the placement agent and JPMorgan Chase Bank is providing a letter of credit.
As the working cash notes come due, the RTA has rolled them into the CP program, completing three such tranches for $65 million each. Costello said the agency has been paying a rate of under 1%.
Costello recently handed off his chief financial officer duties to Grace Gallucci, who joined the agency from the Greater Cleveland Regional Transit Authority in 2008.
Costello had long served in the CFO post, but was elevated to executive director last year. He continued to manage the RTA’s finances until Gallucci’s promotion in February.
“The executive director’s position has a lot of outreach responsibilities and work with elected officials that consume a lot of my time, and finances are too critical an issue to not have someone devoted to that job full-time,” Costello said.
The RTA exhausted nearly all of its state-authorized bonding capacity in 2006, but is planning a $111 million refunding.
Agency officials plan to issue the refunding bonds competitively in a sale next month and hope to achieve as much as 5% in present-value savings.
The RTA’s $2.3 billion of debt is rated AA-minus with a negative outlook by Fitch Ratings, AA and stable by Standard & Poor’s, and Aa3 and stable by Moody’s Investors Service. All three downgraded the authority last year due to its fiscal challenges.
The RTA’s ability to address ongoing capital needs while maintaining prudent leverage ratios will be closely watched by analysts, who view that challenge as a potential downgrade factor.
“The authority’s aging equipment forces operating expenses that would normally be used for improving or expanding service to be diverted to habitual system repair,” Fitch analysts wrote last year. “Timely action and proactive cost controls will be necessary to maintain adequate levels of service, safety, and state of good repair.”
The agency’s current five-year capital program totals $4.7 billion. The RTA has warned that $24 billion worth of infrastructure work is required over the next decade.
About $13 billion is needed to pay for overdue work on equipment and facilities.
Some of the $2.7 billion in funding allocated to public transit in the state’s $31 billion capital budget has trickled in, but it’s been slow in coming.
Looking to the federal horizon, the RTA is hoping to at least maintain current funding levels as officials work on a new long-term transportation funding package.
Costello also praised outgoing CTA president Rich Rodriguez.
Chicago Mayor-elect Rahm Emanuel last week announced his pick for the post: former Cook County Commissioner Forrest Claypool.
Emanuel will leave in place board chairman Terry Peterson, who worked on his election campaign.