STUMP » Articles » Quick Takes: Who's Up For Some Taxes? Lotteries, Teachers, and Property Owners, Watch Out! » 10 September 2015, 05:53

As mentioned in the last post, Rahm Emanuel has proposed about $750 million in additional taxes on Chicagoans.

Let’s see how it’s playing, shall we?

BUSINESS PROPERTY OWNERS

Unsurprisingly, they’re unhappy:

Count many building owners and business tenants in downtown Chicago among those displeased to hear Chicago Mayor Rahm Emanuel is considering a property tax hike of $500 million or more as part of his 2016 budget for a severely cash-strapped city.

“It’s not good news,” said Ron Tabaczynski, director of government affairs for the Chicago chapter of the Building Owners and Managers Association (BOMA), in an interview today.

In Chicago BOMA includes among its membership the owners and operators of some 260 office buildings, most in the city’s downtown Loop business district.

One way or another, Tabaczynski said, this property tax hike, if it goes through, is only going to make life more difficult and costly for office tower owners and tenants, many of whom already have to to deal with rising regulatory, energy and labor costs in the Chicago market.

BOMA’s figures show that commercial buildings in Chicago already are assessed 250 percent higher than residential buildings, and property taxes account for nearly 76 percent of a large building’s total operating expense.

BOMA’s quick calculations indicate that Emanuel’s proposed tax boost could result in around an 11 percent hike in the property taxes a downtown office building now pays. Typically such costs are immediately passed on directly to building tenants, but not always, Tabaczynski said. “It really depends on how the leases are structured,” he noted.

By all means, make it more expensive to do business in Chicago.

Since I started working in the New York corporate world (and note: I don’t work there any more), I have had two attempts to relocate me to Charlotte, NC. Others have seen their offices moved from Manhattan, to New Jersey, and then to North Carolina.

North Carolina would be happy to absorb the Chicagoans just as they absorbed New Yorkers, I’m sure.

VIDEO/RADIO INTERLUDE

Mark Glennon talks about the tax proposal being too little.

CREDIT ANALYSTS

They’re not impressed.

A $500 million property tax increase will not be enough to solve Chicago’s $30 billion pension crisis or rid the city of the junk bond rating that has saddled the taxpayers with tens of millions in penalties and borrowing costs, analysts concluded Tuesday.

Civic Federation President Laurence Msall and Matt Fabian, a partner at Municipal Market Analytics, offered the grim assessment during a lively panel discussion on city finances before a packed house at a City Club of Chicago luncheon.

The title of the discussion was: “Fiscal Cliff: What’s Next for Chicago Finances.”

Fabian’s conclusion was that, as tough as it will be for homeowners and their aldermen to swallow a $500 million property tax increase, Mayor Rahm Emanuel and the City Council need to bite the bullet even harder.

“I would have preferred to see this as the first of several property tax increases and part of a more aggressive plan. Say, $200 million or $300 million every year for the next three or four years as opposed to one large one because one large tax increase can create political volatility,” Fabian said.

“The political cost of a $500 million raise probably makes this the only revenue raise — at least the only significant one that we’ll see in the near term. And that’s just not enough. So, either it means much deeper spending cuts or a return to gimmicks, particularly if the economy softens.”

Fabian acknowledged that Chicago bonds have been “trading up a point or two for the first time in quite a while” since the Chicago Sun-Times first disclosed last week that Emanuel is poised to raise property taxes by a record $500 million for police and fire pensions and school construction and impose a first-ever garbage collection fee.

But he argued that it will take a lot more than that to rid Chicago of its costly junk bond rating.

“The city could have $1.5 billion [worth] of increases and it would still be [just] almost enough. We’re still very far from [the solution] because the full cost of the pensions for the city and the school district are enormous,” Fabian said.

See, it’s not just random bloggers who can see that using Chicago’s own numbers, $500 million or $750 million is not enough to fill the gap.

Of course, that’s assuming Chicago’s pension valuations are close to realistic.

Related: Cook County tax flip flop also unimpresses the bond market.

SOME GOOD NEWS? REDUCING OPERATIONAL COSTS

I like letting in a little good news, but given this is still Chicago and still Illinois, I’m hesitant to take it at face value.

Treasurer Summers Announces First Steps in Plan to Save Pension Funds $25-$50 Million a Year :

CHICAGO – Chicago City Treasurer Kurt Summers today announced that more than half of the City’s 11 public employee pension funds have signed on to a joint resolution that will help create significant savings on annual investment fees for all of the funds. Now, the Treasurer’s Office will partner with the funds to launch an online database or “clearinghouse,” so they can share information on how much in fees they pay to investment managers and work together to reduce those fees. By promoting collaboration among the retirement plans, the initiative has the potential to save more than $25-$50 million a year or $1 billion over the lifetime of all 11 pension plans.
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For decades, the pension funds have been paying different fees, even in instances where the investment manager is the same. There are 236 unique investment managers across all pension plans, however the top 50 manage more than 75 percent of all fund assets. Additionally, “overlapping” investment management firms, who work for more than one of our local pension funds, collect approximately 80 percent of all fees.

Each fund is treated separately and investments and their fees are not considered in aggregate, often leading to one pension fund paying more than another and driving up the overall cost. For example, some funds are paying 30-40 percent more on investment fees than other local plans.

In many of these cases, implementing this pension savings initiative can save some of the plans up to 50 percent on those fees. These significant savings will have a direct impact on improving all local plans without impacting workers, retirees or taxpayers and also without changing board governance, investment decision processes or asset allocation decisions of any of the plans.

Funds that have voted in support of the proposal include the Municipal Employees’, Officers, and Officials’ Annuity and Benefit Fund (MEABF); Policemen’s Annuity and Benefit Fund (PABF); Firemen’s Annuity and Benefit Fund (FABF); and the Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund (LABF). The remaining boards include the County Employees’ and Officers’ Annuity and Benefit Fund (the Cook County Fund); Forest Preserve District Employees’ Annuity and Benefit Fund (the Forest Preserve Fund); and the Water Reclamation District Retirement Fund (the MWRD Fund).

I hope that pans out for him, but I’m sorry to tell those hoping such cost savings will save pensions…. no they won’t. The operational costs aren’t what are killing the large pensions, at any rate.

If $500 million comes nowhere near the need to fill an annual gap, how would $25 – 50 million?

Still, every little bit helps. But one needs to remember these are very little bits.

It’s like cutting your daily Starbucks run when you’re overspending your budget by $1000/day. Sure, it will help your situation, but not by much.

NEW PUBLIC PENSIONS TOOL

Speaking of, check out the new (beta version) public pension dashboard from Ted Ballantine and Pension 360.

One of the differences between the Pension 360 tool and the Public Plans Database is that it includes some info on the investment fess and a few other costs.

For example, here are salaries and expenses for Illinois TRS:

They’ve just started it, so it has only a few plans… but some very big public plans indeed in there.

ILLINOIS LOTTERY WINNERS NOT BEING PAID

I am not sure how the Illinois state budget impasse is playing for those actually living there, but this story caught my eye: Illinois State lottery winners not being paid due to budget impasse

Under state law, the state comptroller must cut the checks for lottery winnings of more than $25,000. And lottery officials said that because lawmakers have yet to pass a budget, the comptroller’s office does not have legal authority to release the funds.

Prizes of $25,000 or less will still be paid at lottery claim centers across the state, and people who win $600 or less can cash in their ticket at the place where they bought it.

But the bigger winners? Out of luck, for now.

Eric Allie at Illinois Policy illustrates:

And, like clockwork, the lottery “winners” are suing the state:

A pair of lottery winners have filed a federal lawsuit against the Illinois Lottery, which still is selling tickets despite its inability to pay prizes greater than $25,000 until state lawmakers pass a budget.

“How the heck can they do this, and they’re still selling tickets?” said Homer Glen resident Rhonda Rasche, 48, who is still waiting for the $50,000 she won in July from a $3 scratch-off ticket. “If I was the one selling raffle tickets and I didn’t pay, I would be sued or in jail or both.”

First comment: she’s got a point. They should have stopped running the lottery if they couldn’t pay winners.

Second comment: it’s a weird way to run a lottery if the state is directly cutting the checks. It should be run as a separate corporation, for a variety of reasons, one of which being that the winners can be sure to get paid as long as the corporation is solvent.

I mean it sounds like it’s sort of run by a corporation… I’m just saying I don’t think this is good lottery governance.

I also think governments shouldn’t run lotteries, but that’s a different issue entirely.

TAXES FOR TEACHERS

This one is in California, but given how teachers pensions tend to be an overwhelming part of public pensions, it may as well be Chicago:

Taxpayers take note…you could get a much bigger tax bill than you expect.

The California State Teachers’ Retirement System (CalSTRS) recently announced that it may move 12% of its assets, or $20 billion, out of stocks and bonds.

CalSTRS is the second-largest public pension fund in the U.S. It manages roughly $191 billion for 868,000 teachers in California.

CalSTRS made this announcement immediately after the U.S. stock market’s sharp selloff last month. Casey readers know the S&P 500 plunged 11% in six days, its worst selloff in more than four years.

While we can’t know for sure, CalSTRS likely lost billions in the selloff. The fund’s officers said they want to put more money in assets that “will perform well if the markets tumble.” They’re considering U.S. Treasuries, hedge funds, and other alternative investments.

While it’s not necessarily a bad thing for CalSTRS to adjust their portfolio weights, I hope they are a bit more measured and carefully consider which stocks they’re going to sell… as opposed to, say, be driven by political divestment campaigns that have little connection to fiduciary duty.

Casey Research has this handy historical graph:

Here’s the deal: public pensions are run as if the promises are rock solid. Like, oh, the promises insurance companies make for fixed annuities.

Treasuries are a good nominal measure for what “rock solid” promises yield. Not much.

And yet they invest their money in volatile assets, and some very opaque assets, and use that as an excuse to discount at much higher rates. Even with many plans decreasing their discount rates, the median among plans in the Public Plans Database is still at 7.75%.

That’s very high compared to even long-term interest rates.

This is why I made the comment about a realistic valuation of Chicago pensions.

FOLLOW THE MONEY

And finally, from Citizen vs. Machine a look at the funding behing the Center for Tax and Budget Accountability:

This quote crosses my mind when I think of Ralph Martire’s Center for Tax and Budget Accountability (henceforth referred to as the CTBA). The CTBA has been peddling their sausage in Illinois for years. But once you discover the ingredients of that organization, it explains why all its offerings taste the same. And why, in this case, it’s good to know how the sausage is made.

First, a little background. The Center for Tax and Budget Accountability was “formed in 2000 to be a bipartisan, nonprofit research, and advocacy think tank that works across ideological lines to promote social and economic justice for everyone, from traditionally disadvantaged populations to the middle-class.” You’d be hard-pressed to find a nobler cause for a not-for-profit, right? Actually, not that hard-pressed, as most NFP’s have similar mission statements (advice: always mention “children”). In a nutshell, they produce financial analysis and reports ranging from opinions on how taxes should be structured in this state to the reality of budgets proposed by the Legislature as they pertain to state law.

The CTBA is run by Ralph Martire, its President and Executive Director. You might have seen him on WTTW’s Chicago Tonight debating against the Illinois Policy Institute on various issues. He frequently appears as a guest columnist in various media outlets statewide. Mr. Martire even has appeared on the State House floor, offering his fiscal opinion to Legislature on various matters. He has the ear of many elected politicians. Needless to say, Ralph Martire knows his way around Illinois government.
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What was revealed was a long paper trail of public sector funding at both the state and national level:

American Federation of Teachers (AFT) and 3 of its Illinois affiliate’s (IFT) PAC funds (COPE)
National Education Association (NEA) and its Illinois affiliate’s (IEA) PAC fund (IPACE)
AFSCME Local 31 (their national apparently doesn’t give a crap)
SEIU National HQ and 3 state affiliates – Healthcare IL/IN, International Illinois Council (WTF is that? “International” as in worldwide or House of Pancakes?), Local Union 73
In fact, from 2008-2013, nearly two-thirds of all CTBA revenue was derived from just the “Big Four” public sector unions: NEA, AFT, SEIU, and AFSCME:

I have no trouble with political organizations (and yes, these unions are political organizations) funding such efforts. No more than I have trouble with the Arnolds funding their own foundation to promote defined contribution pensions for public employees.

Disclosure: the only money I’ve made re: public pension blogging are the few people who click on my Amazon links and buy something. Thanks! I think I’m up to $25 total since I started. This does not cover my hosting fees.

You can look up my political contributions here: all the New York Mary Campbells — none of those Mary Campbells are me, btw.

So yeah, this isn’t a money thing for me excepting I’m a taxpayer, and I have lots of public school teachers in my family.

The issue I have, and that Citizen Vs. Machine has, is that the “reports” from these groups are identified as “bipartisan” when there is only one party represented, and it’s only a portion of that particular party.

Any conservative foundation, even if it did have some Democrats on the Board, is definitely labeled in the media as conservative.

A little honesty would be nice.

Compilation of Illinois posts