If you live in a suburb, village or small city surrounding Chicago, the next big public debt crisis is coming your way.
While it’s common knowledge that Illinois and Chicago’s government balance sheets are awash in debt, scores of small municipalities are the next casualties of a escalating public finance debt debacle brought on by mismanagement, out-of-control borrowing and huge public pension obligations.
The Better Government Association investigated this emerging and increasingly urgent trend by focusing on the financial challenges of three established and mid-sized Chicago suburbs: Des Plaines, Evanston and Oak Park.
The BGA examination of the suburbs’ finances and interviews with civic leaders, municipal experts and area residents reveals that even stable, prosperous communities, such as these, are hard-pressed to meet their obligations, especially as soaring public pensions and other costs outstrip their ability to financially cope.
These suburbs, like many municipal counterparts throughout the region, are struggling to deliver the services residents demand without squeezing homeowners and businesses with ever-higher taxes and fees.
But deep cutbacks—including library and facility closings, selling assets, worker lay-offs, consolidating or shutting units of government, even scrapping holiday fireworks displays and outsourcing festivals—are underway. Unfortunately, as the strain of reductions is beginning to take a toll on residents and businesses, these moves may not be enough to staunch the crisis.
“Does something have to give? It’s already starting to happen,” says Christopher Canning, board member and former president of Northwest Municipal Conference, a government trade group that represents over 41 municipalities and one township in Cook, DuPage, Kane, Lake and McHenry counties.
DES PLAINES: CASINO NO BONANZA
As gamblers take their chances at the rows of high-stakes gaming tables and glittering slot machines, the revenue from the year-old Rivers Casino, in northwest suburban Des Plaines, is starting to flow to that city’s bottom line.
But Des Plaines residents hoping to cash in on a new era of gambling-related prosperity will be sorely disappointed.
Indeed, casino money will help shore up aging water lines and crumbling sidewalks but it will not solve pressing economic problems such as soaring pension costs, vacant storefronts and stalled hotel developments.
“It’s not like we’re going to have streets full of gold,” Alderman Michael Charewicz said at a City Council meeting in June.
Even if the city could count on a steady stream of casino money, Des Plaines’ legally required contribution to public employee pensions will make it harder to hold the line on taxes while providing essential services.
Total pension costs have grown by 164 percent in the last 10 years, from $3.5 million to a proposed $9.2 million contribution in 2012, according to the city’s 2012 budget.
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| Des Plaines is located near O’Hare International Airport and is home to some of area’s largest employers. |
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But despite the city’s stepped up payments, police and fire retirement funds have only 50 cents and 54 cents, respectively, for every dollar owed in long-term benefits, according to the 2011 comprehensive annual financial report.
A minimum 80 percent funding is considered healthy, according to pension experts.
In all, Des Plaines owes $108.5 million in unfunded pension liabilities and retiree health care benefits.
When counting the city’s other obligations, the total is $168.5 million, or $3,800 per resident, according to the nonprofit Institute for Truth in Accounting, which produced for the BGA a tally of what each resident in Des Plaines, Evanston and Oak Park would owe in order to pay off debt.
Meanwhile, this middle-income suburb near O’Hare International Airport is not immune from the economic and political pressures forcing local governments to lay off employees, cut popular programs and hike fees.
Des Plaines was caught with such thin reserves when the recession socked tax receipts in 2009 and slowed payments, city government was forced to borrow money from a bank to meet payroll.
“The way it was going was unsustainable,” says Mayor Martin J. Moylan, a retired official of the International Brotherhood of Electrical Workers Union Local 134. He took office in April 2009, pledging a “back to basics” approach.
“Our government was bloated,” he said.
Today, a strong wind of fiscal conservatism prevails and Des Plaines has made significant changes.
The City Council has held the property tax levy flat for two years, paid down bonded debt, beefed up operating fund reserves and adopted strict spending policies.
“We evaluated all the things we were doing and asked, ‘What’s our core function here?’” says former acting city manager Jason Slowinski, now manager of Lake Zurich. “If it’s not a core function, then why are we doing it?”
The city stopped paying for July 4 fireworks and outsourced community festivals. It slashed support by 80 percent to organizations such as the History Center, a cultural icon, which is down to a single employee from seven in 2008.
Rain dripped onto the city manager’s desk during bad storms, yet plans to build a $70 million police headquarters and city hall were scrapped. Instead, the existing 1974 complex got a new roof, new lighting, ceiling tiles and paint.
| ABC 7 CHICAGO: Suburbs in Debt Face Tough Choices |
Even police and fire departments were not immune: Four round-the-clock ambulance crews were cut to three, a satellite police office closed, and top brass eliminated. In all, the city workforce is down by 14 percent, from 401 at the end of 2008 to 345 currently.
At the library, which has a separate board and budget, commissioners eliminated a mobile library service and cut staff in order to beef up reserves and reduce the library’s tax levy by 12.5 percent since 2010.
One commissioner has proposed to cut taxes further by charging fees to check out DVDs and to use meeting rooms. This would shift costs from property owners to users, moving away from a tradition that library services are valuable enough to provide as a community benefit.
“We never charge for services, our services were paid for through your property tax,” says Holly Sorensen, library director. “That’s always been the goal and the mission of public libraries. It definitely is changing with the downturn” in library funding.
At City Hall, the recession’s harsh lessons are not forgotten. The City Council adopted a policy requiring an operating reserve of 25 percent, equivalent to three months’ expenses. Reserves have gone from a “dangerously low” 2.2 percent of spending in 2008 to 34.3 percent, according to the city’s 2012 budget.
In June, the council adopted a policy recommending that casino revenues will go for capital improvements or to pay down debt, not for operations.
For its first five months of operation through Dec. 2011, the Rivers Casino contributed a net $3.7 million to Des Plaines, after the city paid required shares to the state of Illinois and 10 low-income communities, as required by its licensing agreement.
At that rate, Des Plaines’ share would total about $8.9 million annualized, a substantial contribution to the city’s $114.8 million total budget for 2012.
But casino revenues are notoriously volatile, swinging by as much as 40 percent annually. As well, Mayor Moylan said he is “deeply concerned” about the competitive threat to Des Plaines of a proposed expansion of gambling to nearby racetracks in Maywood and Arlington Heights Park.
Casino spin off so far is a modest $140,000 in food and beverage tax receipts in 2011 from The Rivers’ restaurants and bars.
“We need to be able to support essential city services without casino revenue,” said Ald. Matthew Bogusz, chairman of the Finance Committee. “Relying on this casino revenue is like gambling itself.”
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| Located immediately north of Chicago, Evanston was formally incorporated in 1863. |
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EVANSTON: SELLING ASSETS
The City of Evanston is known for its scores of stately churches and houses of worship where, over decades, sermons about the virtue of sacrifice and thrift have undoubtedly been heard.
Lately, however, the North Shore community suburb must practice what’s been preached as it copes with heavy debt, including an unfunded pension liability of $187.6 million, and the stark fiscal reality that it can no longer provide some traditional resident services and must charge higher rates for others.
“People have made sacrifices,” Ald. Delores Holmes says. “But there are still sacrifices that have to be made.”
By all accounts, the suburb shouldn’t be in this predicament. The city of 74,000 residents has a healthy commercial and residential tax base, and its downtown retail district remains a magnet for residents, workers and students from Northwestern University, one of the nation’s most prestigious colleges.
But with tax revenues declining and public pension costs sopping up a greater share of its budget, the suburb’s financial picture has darkened over recent years.
In its fiscal year 2010-2011, the city was smacked by a $10 million budget deficit, and had to get serious about cost cutting, says Marty Lyons, chief financial officer.
It began by eliminating 50 positions, ordering workers to take four unpaid holidays and trimming top officials’ salaries by 5 percent, Lyons says.
The city even shut the South Branch Library, which opened in 1917, while residents began to pay more for basic refuse and yard waste pick up.
In the most recent fiscal year, the city faced a budget deficit of $2.4 million. To close the gap this time it cut seven jobs and increased parking, refuse and other fees, on top of raising its tax levy by nearly 5 percent, Lyons says.
That’s not all: Evanston also is looking for a buyer for the historic Harley Clarke Mansion on Sheridan Road. Besides raising much needed cash, a sale would relieve the city of an unwanted burden.
Officials say the English Tudor-style building, leased to the Evanston Arts Center, needs more than $400,000 worth of repairs that the city is unable to afford.
In recent years, Evanston also has considered selling assets such as the Chandler-Newberger Community Center and the Noyes Cultural Arts Center. Public outcry against such plans was loud and clear so, right now officials say, there are no plans to sell those properties.
However, a publicly owned 18-hole golf course could wind up on the block.
The Frank Govern Memorial Golf Course that runs along the North Shore Channel, will never make anyone’s “best course” list but it’s where scores of Evanston residents have to learned to play the game and shot their first bogey or par.
Mayor Elizabeth Tisdahl says the course, formerly known as Peter N. Jans, is not self-sufficient and officials must decide if precious cash should be used to keep it afloat. “There’s no wiggle room in the city anymore,” she says.
Soaring public pension costs are a big reason Evanston is being pinched.
From 2000 to 2010, the city’s annual police and firefighter retirement contributions increased more than nearly 150 percent to $13.2 million, from $5.3 million, according to Evanston’s comprehensive annual financial report (CAFR).
Despite the increased payments, police and fire retirement funds had only 45.8 cents and 45.6 cents, respectively, for every dollar owed in long-term benefits as of last year, according to the CAFR. (A minimum 80 percent funding is considered healthy).
Altogether, Evanston owes more than $187.6 million in unfunded pension liabilities and retiree health care benefits, according to the CAFR.
As of 2010, the city’s total liabilities were $331.3 million, or $5,300 per resident, according to Northbrook-based Institute for Truth in Accounting, which looked at Evanston’s financial data from 2010.
Fearful that residents are shouldering too great a burden, Tisdahl says the city is working to attract more commercial developments, which can boost sales and property tax collections.
Recently, city officials worked out a deal to bring Trader Joe’s to town. Evanston is investing $2 million in a parking lot for the grocer, which it hopes will generate more than a half-million dollars a year in sales taxes when it opens next spring.
Other revenue-producing ideas include selling water to more nearby towns; Evanston already supplies Palatine, Arlington Heights and three other suburbs.
The city also is looking at cost-saving ways to streamline government, such as getting rid of the overlapping Evanston Township, which would save about $400,000 annually, supporters say.
In last March’s primary election, a majority of Evanston voters supported a non-binding advisory referendum to fold the township into the city.
Already, some residents say, escalating taxes and fees, coupled with a decline in basic services, is making the suburb too expensive for the city’s lower-income residents and even the middle-class.
“We’re becoming an upper-income community,” says Betty Ester, a community activist. “A lot of people can’t afford to live in Evanston.”
Meanwhile, community cutbacks, such as the branch library closure that the city says saved taxpayers about $200,000, are also sparking a grassroots backlash.
Volunteers opened a small, privately funded library in the south neighborhood but fret about Evanston’s priorities.
“We’re shooting ourselves in the foot,” says Lori Keenan, a resident who fought to save the library branch. “We’re cutting some of the things that make us vital.”
Mayor Tisdahl hears these concerns but says there’s no easy solution to the city’s financial problems, especially in light of Evanston’s looming pensions obligations.
“We’re pumping a lot of money into {the retirement funds},” she says. “But that doesn’t seem to be working.”
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| The Village of Oak Park was established in 1902 and is known for the many famed Frank Lloyd Wright buildings found there. |
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OAK PARK: TOUGH CHOICES
Knots of tourists gather on streets lined with Frank Lloyd Wright homes in west suburban Oak Park, a diverse community with a new library, an emerging arts district and a rejuvenated downtown.
There are few visible signs of financial distress: Retail sales tax receipts rose 14 percent in the first quarter on top of two consecutive years of gains.
Yet beneath this picture of evident prosperity lies a troubling trend. At Village Hall, Oak Park has eliminated one out of every five municipal jobs since 2007, overhauled operations and hiked taxes and fees. But costs continue rising faster than projected revenues, challenging the community’s ability to pay for the services that keep it vital.
In Oak Park, per capita debt totals $5,100 per resident, according to the Institute for Truth in Accounting.
“At some point, unless things change significantly, the community is going to have a choice between having fewer police officers or not fixing potholes or having a housing program,” said Oak Park Chief Financial Officer Craig M. Lesner.
(Oak Park’s housing programs are nationally recognized for promoting diversity.)
Like elsewhere, public employee pensions are by far the fastest-growing major cost, but missteps also drained millions during the previous decade, according to the village’s annual financial reports from 2001 through 2010.
During good economic times when Oak Park should have built surpluses, officials burned through reserves and ran up deficits while building parking garages to benefit the high school and to spur redevelopment projects. Not only did the village fail to earmark parking revenues to repay construction debt, the garages lost money, according to annual financial reports examined by the BGA.
The full extent of the problem was not apparent until auditors required an accounting change in 2006. The new accounting method revealed that parking operations had accumulated a $10.6 million deficit by year-end 2007. The village’s general fund, which had heavily subsidized parking, reported a $2.9 million deficit, according to the 2007 report.
“We’ve been trending in a better direction ever since,” said David Pope, a management consultant who was elected village president in 2005. “We’re building a more fiscally responsible and efficient organization.”
The village has reduced the parking deficit to $3.4 million and moved most city services into the black, according to the reports. Yet longer-term trends still are worrisome. Projections prepared for 2011 budget deliberations showed expenses would increase a total 24 percent from 2010 through 2015, while projected revenues would rise only 19 percent.
To close the gap, Oak Park continues to hike parking and other fees to shift the full costs of providing services to users from property owners. Property taxes increased by an average annual 5 percent, from $33.2 million to $41.7 million, during the five years through 2010, according to Cook County Treasurer records.
But Oak Park must strike a balance between recouping costs and raising taxes and fees so high that it drives residents and businesses out. Several years ago, Oak Park lost a number of retailers to a recruitment campaign by neighboring Forest Park, where costs are lower.
Among them was RoseMary Gange, owner of Camille et Famille, a women’s clothing and accessories store, who says she was “broken-hearted” to leave Oak Park Avenue when her landlord doubled her rent, but she couldn’t afford to stay. At her new location in Forest Park, her first quarter sales this year were up more than 30 percent.
She blames Oak Park’s higher taxes on the garage construction, which spurred redevelopment projects, benefitting developers but “leaving taxpayers holding the bag.”
Meanwhile, Oak Park’s business recruitment was impacted by cost cuts and the recession. At the nonprofit Oak Park Development Corp., which works closely with the city, staff is down by 20 percent since 2009. The group’s funding from the village for operations and business grants has been cut by 24 percent to $448,000 since 2008.
“We’re working smarter and doing more collaborations to have a broader impact,” says the organization’s president, Sara (cq) Faust.
At the village, business services and economic development staff is down to a single person from four through attrition. “It clearly is an area we’re looking to beef up as we move forward,” Pope said.
But Oak Park’s ability to restore lost positions is limited by soaring pension costs that make up a growing percentage of payroll, Oak Park’s single biggest cost.
Total contributions for police, fire and municipal workers increased by 261 percent to $9.4 million from 2000 to 2010, according to comprehensive annual financial reports. In recent years, they totaled between 13 percent and 15 percent of the village’s operating budget.
The village contributed 54 percent of firefighter payroll and nearly 30 percent of police payroll to pensions, according to the 2011 comprehensive annual financial report. Yet only 48 percent and 62 percent, respectively, of pension liabilities are funded.
A consultant report commissioned by the pension and village officials is expected to show that the firefighter fund’s assumed rate of return on investments should be lower than the current 7.24 percent, which means that contributions must go higher to make up for anticipated lower earnings.
Other than lobby Springfield lawmakers for pension reform, local officials can do little to control pension costs. One possibility is more regional collaboration, Pope says.
“There have been very, very informal discussions among the staffs of Oak Park, River Forest and Elmwood Park on forming a fire protection district,” Pope adds. “That’s one potential opportunity.”
Meanwhile, Oak Park must find ways to continue funding programs beyond basic services, such as housing and public art, Pope says.
“Without these things,” he says, “Oak Park would be a very different community.”
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OTHER SUBURBS IN JEOPARDY
When it comes to dealing with crushing debt and financial stress, the three suburbs examined by the BGA are far from alone. They have plenty of company throughout Northern Illinois, and the entire state for that matter, where small and mid-sized municipalities are already getting squeezed.
For example, Cook County taxpayers are on the hook for at least $140 billion in debt, or an average $35,774 per household in Cook County suburbs, owed by taxing bodies from mosquito abatement to library districts as well as municipalities, according to Cook County Treasurer Maria Pappas, who spearheaded a debt-disclosure campaign featuring a web site that lets taxpayers to view the levies and finances of all the local taxing districts that contribute to their bill.
(This number is gross rather than net debt, which means it doesn’t include assets held by pension funds to some of their offset liabilities.)
“Property taxes have nearly doubled in 10 years, in some cases (the levy has) gone up 500 percent,” Pappas adds. “If your income doesn’t increase, who is going to be able to live in these houses when you factor in the unpaid pension costs and the increases in the levy?”
A state law aimed to provide short-term relief by postponing the day when pensions must be 90 percent funded to 2040 means that police and fire pension liabilities “will grow faster and to much higher levels” than under the old law, the Commission on Government Forecasting and Accountability reported in February.
Echoing such concerns is the Institute for Truth in Accounting, which warns that future taxpayers will foot the bill for billions in “hidden” costs that are not reported on local municipalities balance sheets because of outmoded government accounting rules.
Sheila Weinberg, the Institute’s chief executive officer, says the rules mask the true cost of providing government services.
“If you didn’t offer these (pension) benefits, you would have to be paying employees more now so that they could save for retirement,” she says. “It’s a deferred compensation scheme to balance their budgets.”
But getting out of trouble will be tougher than getting into it. Some dire strategies may have to be deployed if the numbers don’t improve.
Across the country, local governments are struggling with pension and other debt that, in a rare handful of cases, has forced cities and towns from California to Rhode Island into receivership or Chapter 9 bankruptcy.
No Chicago-area town has gone down that road, but Canning contends it could happen within the next decade, especially if the economy continues to struggle and state lawmakers don’t take significant steps to fix pensions. ?”It’s increasingly hard to deliver services that residents expect us to deliver,” he says.
Barbara Rose is a freelance investigator for the BGA. BGA investigator Andrew Schroedter can be reached at aschroedter@bettergov.org or (312) 821-9035.
