ICYMI: S&P Global Forecasts Budget Uncertainty After Cook County, Ill. Beverage Tax Repeal

PHILADELPHIA – In case you missed it, S&P Global Ratings issued an analysis of the Cook County, Illinois budget situation in light of the County’s repeal last week of its beverage tax.  The agency “views the repeal as adding uncertainty to the county’s budget,” and adds, “the repeal will weaken the county’s financial position.”  (Copies available on request).

Cook County, IL Budget Uncertainty Not So Sweet After Soda Tax Repeal
Primary Credit Analyst: Lisa R Schroeer, Charlottesville (434) 529-2862; lisa.schroeer@spglobal.com
Secondary Contact: Helen Samuelson, Chicago (1) 312-233-7011; helen.samuelson@spglobal.com

CHARLOTTESVILLE (S&P Global Ratings) Oct. 11, 2017—S&P Global Ratings anticipates that Cook County, Ill. management will spend the next several weeks working to adjust its budget after the vote to repeal the sweetened beverage tax. Originally passed Nov. 10, 2016, and collected for part of fiscal 2017, the tax was budgeted to provide $200 million in revenue for fiscal 2018. S&P Global Ratings’ understanding is that the tax will sunset at the end of the current fiscal year (Nov. 30, 2017), rather than retroactively.

S&P Global Ratings views the repeal as adding uncertainty to the county’s budget, and without expenditure reductions or revenue enhancements, the repeal will weaken the county’s financial position. The $200.6 million budget gap for fiscal 2018 represents roughly 10% of general fund revenues. When taking into account fixed costs, such as debt service and pension costs, the county estimates that operating expenditure cuts would need to be close to an 11% reduction across the board, inclusive of the health enterprise fund to offset the lost revenue that the sweetened beverage tax would have provided.
Depending on the resulting severity of the repeal’s effects on the county’s budget and, ultimately, its financial position, it could impact credit quality. However, it is our expectation that the county will begin to address the new budget imbalance through board action regarding cuts and/or potentially additional revenues.

Adding some cushion to the county’s financial position while it addresses its budget gap is its stronger ending fund balance position. Preliminary ending operations for fiscal 2017 general fund operations look to be close to balanced, which means the county would be starting fiscal 2018 with somewhere near $138 million in unassigned reserves, or 8% of 2016 expenditures. When adding assigned reserves, the cushion grows to 11%. While this shows a significant increase in reserves when compared with 2015’s ending unassigned position of $76.7 million or roughly 5% of 2015 expenditures, if there were to be no significant expenditure reductions or revenue enhancements, the reserves would be insufficient to cover the estimated $200.6 million budget gap following repeal.

Swift management action will be necessary to maintain its stronger reserves and in the past few years, management has displayed efforts to balance and improve its ending reserve position. As recently as the current fiscal year, Cook County has shown its willingness and ability to implement midyear cuts by closing open positions and decreasing expenditures, which led to preliminary numbers showing at least balanced operations at year-end. Another example of management efforts to address ongoing expenditure pressures occurred in 2015 when the county raised its sales tax to dedicate revenue to its growing pension liability.

Over the next several weeks management’s and board actions will determine the extent of the fiscal effects of this repeal on the county’s finances.