Local Cook County Debt Poses Problem: Report

CHICAGO — A fresh analysis of local debt in Cook County warns that its governments face a $34 billion unfunded debt burden, most tied to retiree obligations, and that nearly all the county's municipalities, including Chicago, face long-term deficits without structural changes.

The analysis marks one of the first detailed examinations of local government debt in Cook County, the second-most populous county in the U.S., behind Orange County, Calif.

Bond debt is generally not a problem, though bonds tied to tax increment financing districts can be "staggering" for some governments, the report said.

The findings underscore the need for pension reform and transparency in government reporting, said the Institute for Truth in Reporting and the Heartland Institute, a free-market think tank, which produced the analysis.

It comes as Illinois is in the midst of a contentious debate over its own $95 billion pension debt, the highest in the country.

The state's inability to solve its pension crisis directly affects most local governments because their pension funding standards are set in state statute.

Governments like Cook County "have their backs against the wall" waiting for the state to take action, said John Nothdurft, director of government relations at the Heartland Institute, who co-authored the report with Sheila Weinberg, CEO of the Institute for Truth in Accounting.

The groups examined annual audits and financial reports of 518 primary taxing districts, out of 552, to craft the policy brief, titled "The Municipal Government Debt Crisis."

They added up local governments' obligations and subtracted them from their assets to determine the size of the debt burden or, for many districts, the size of the surplus.

The local governments together had a total debt of $63.13 billion and assets of $29.41 billion, leaving a financial burden of $33.72 billion. Capital assets were not included in the calculations, because it is difficult to apply them to meet spending obligations, and the debt issued to finance the capital assets was excluded.

Unlike many counties, Cook requires its local governments to update financial reports annually, including unfunded retiree benefits. The data, posted on the county treasurer's web site, put a spotlight on local debt and highlights trends over time.

"Everyone knows the federal government is deep in debt, and we know that Illinois is dealing with huge debt, and we even know about Chicago and Cook County," Nothdurft said. "But it's even more systemic than that, and a lot of these small municipalities have huge debt burdens."

The 518 local taxing districts face a combined unfunded pension liability of $31.07 billion and an unfunded retiree healthcare benefits liability of $7.18 billion, the report found. Other debts, including bonds and liabilities, totaled $24.88 billion.

Without structural reforms, Cook's residents will face service cuts, raised taxes, or both in the future, the groups warned. The problem could drive residents and businesses to other states, aggravating the burden for those who remain.

"There is growing and legitimate fear that Cook County could be heading over a financial cliff, not in 10 or 20 years but in the next three to five years," the report says.

Nothdurft said debt could send some of Cook's municipalities down the road Detroit is currently on.

"A lot of it depends on how the economy shakes out, but I think you're going to see some defaults and maybe even bankruptcies," Nothdurft said. "I don't know if it'll be a tidal wave, but there are going to be more."

Until the state reforms its pension system, the ability of many districts to reform their systems is limited.

Gov. Pat Quinn and legislative leaders have said local reforms would likely follow state action and track state measures.

"That's a problem in itself: putting too much power at the state level instead of in local control," Nothdurft said.

The report declares that 13 Cook municipalities, including Chicago, have higher per-household debt burdens than Stockton, Calif., which is in the midst of a bankruptcy. For Nothdurft, that's a red flag.

"It's really alarming," he said. "People have to pay for this debt eventually, whether with cutting services or raising taxes. Obviously Chicago is not in bankruptcy right now, but it should raise red flags that they are in a dire situation and need to start rectifying it," he said. "It adds another data point saying something needs to be done."

Cook County itself has a $6 billion financial burden, with the Cook County Forest Preserve carrying another $5.2 billion and the Metro Water Reclamation District of Greater Chicago facing a $1.2 billion burden, according to the report.

The county's 10 funds have $5.8 billion of unfunded obligations for a funded ratio of 57.5% as of 2011. The forest preserve has an $11 million obligation for a funded ratio of just under 62%.

Chicago, the economic engine of the county, leads the pack in terms of debt. The city and its taxing districts, including the school district, have a financial burden of $26.1 billion. The city accounts for $19.1 billion of that.

On the bond side, general obligation and other types of bonds are not generally considered a big driver of the local debt burden, according to the report. The exception is bonds issued for tax increment financing districts, which can be "staggering," the report said.

The problem is when TIF districts don't generate the projected revenues, forcing the local governments to tap general funds to cover payments.

There are 280 TIF districts in the county. Nearly 80% of Chicago TIFs saw double-digit revenue drops, and since 2007, total TIF revenues have dropped 18%, according to a 2011 report from the county clerk's office.

There are bright spots. Most of the county's educational districts enjoy a financial surplus, according to the analysis.

That's largely because the state of Illinois pays the retirement benefits of teachers for most of the districts, with the exception of Chicago.

Also most of the townships, library, park, and sanitary taxing districts have fiscal surpluses, because most of those districts participate in a state pension fund, the Illinois Municipal Retirement Fund, which is relatively well managed, according to the report.

The challenges facing Cook's governments don't stop at the county's borders, Nothdurft said.

"Obviously there are municipalities that are doing it right, but then there's Harrisburg and Detroit," he said. "Then you look at all these suburban districts that we thought were doing well, but they have a lot of debt on their books."

For reprint and licensing requests for this article, click here.
Illinois
MORE FROM BOND BUYER