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Fitch questions Cook sales tax hike, cuts outlook
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Crain's Chicago Business
July
2, 2008
By Greg Hinz
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.
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.
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%.
“Having a high sales tax rate is economically difficult
for individuals and businesses,” she says. “It introduces
some uncertainty, both politically and economically.”
The sales tax hike proposed by County President Todd Stroger
was approved by the County Board with a one-vote margin, despite
fierce opposition from some business and civic groups. At least
one commissioner, suburban Republican Tony Peraica, has said
he hopes to repeal the increase in the near future.
Mr. Peraica said the Fitch critique is correct.
“You can’t cut your way out of a recession,”
Mr. Peraica said. “The revenues that Mr. Stroger anticipated
would be generated by this tax increase will not be generated.
People are going to shop somewhere else” outside Cook
County.
Another Stroger critic, Commissioner Mike Quigley, predicted
that “phenomenal economic and political pressure”
eventually will have an impact. “This administration just
doesn’t get it,” the Chicago Democrat added. “They’re
going to have to restructure and cut back.”
Fitch overall affirmed the county’s AA rating, but a reduction
in the ratings outlook often is a sign that a downgrade is near.
A downgrade would raise the cost of covering county debt, as
lenders demand somewhat higher interest.
In its report, Fitch also warned of widening deficits in the
county’s network of charity hospitals and health clinics,
as special funding the county obtained from the federal government
continues to dry up.
“Along with the steps the county has already taken to
reform billing and administration of its health care system,
expenditure savings and enhanced patient fee recovery will be
necessary,” the report says. The county is in the process
of spinning off its health network to an independent panel,
an action Mr. Stroger agreed to in exchange for the sales-tax
hike. But collecting patient fees from generally poor and often
uninsured patients has caused the county fits for at least the
last decade.
The Fitch report also noted that the county’s plans to
issue bonds to cover pension shortfalls “reflects continued
financial pressure.”
Mr. Stroger’s office failed to return several phone calls
seeking comment. His administration has warned of continuing
financial pressures even after approval of the sales-tax hike.
Another bond rater, Moody’s Investors Service, said it
is maintaining rating and stable outlook for Cook County, but
a full report is not yet available.
