Fiscal Health of the Chicago City

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Table of Contents

Abstract
Introduction
Sources of fiscal crises
The Financial Trend Monitoring System (FTMS)
Fiscal analysis of Chicago city using the FTMS
Conclusion
References

Abstract

The project looks at the fiscal health of the city of Chicago. The 2007-2008 financial crisis is known to have hit various cities in the US hard. However, without a credible fiscal health analysis, it is hard to know what the impact of this crisis on these cities.

While there have been different financial reporting mechanisms developed to measure fiscal health, this study uses the system developed by the International City/County Management Association (ICMA) popularly known as the Financial Trend Monitoring System (FTMS). The analysis reveals the fiscal strength indicators and also potential shortfalls of the Chicago economy. The project aims at producing a comprehensive report on Chicago’s fiscal health by analyzing nine critical variables.

Introduction

Various US cities have been hit by fiscal crises in the past. There are reports that go back to the early nineteenth century that reveal economic turmoil especially in the big industrial cities. However, not much interest was paid to these crises until the New York City crisis of 1975 when the city almost defaulted in making payments on municipal bonds and the federal government was called upon to intervene.

Other major municipalities such as Cleveland followed in this fiscal meltdown leading to an increased interest by the federal government into the fiscal health of state and local governments. Scholars were then called upon to develop financial indicators and methodologies that could act as early warning systems for poorly performing localities.

Though Chicago has not been in any major fiscal crisis that did not affect the entire country, various financial reporting systems have been employed to monitor its fiscal health. The burden of measuring the fiscal health and ensuring economic stability in the state of Illinois rests with the state government.

This is because the local government of Chicago and other environs in the state have the Illinois state government as their guarantors for all contingent liabilities and unpaid debts. The state’s and local governments’ fiscal health are thus intertwined.

Sources of fiscal crises

There are many reasons why cities and municipal governments suffer myriads of fiscal problems. One of the chief reasons is poor management and fraught accounting methods and decisions.

The most interesting aspect of this source of fiscal ill health is the fact that it has the potential to strike even in cities with strong economic indicators and a good financial base. It is the prime reason for the 1994 bankruptcy of the Orange County in California where the county treasurer made some very poor investment decisions yet other indicators showed that the county had grown economically.

Another cause of fiscal ailments is the correlative effect of a poor economy or a large scale economic crisis such as the Great Depression of the 1930s and the 2007-2008 financial crisis. This is because state or municipal governments are not economically autonomous-no entity in the world is, even countries themselves.

A city/municipal government normally invests its employees’ pensions and compensation packages or even other portfolios of service delivery in a diversified asset. The asset maybe national or global in nature and when a global or countrywide economic meltdown occurs, the states incurs losses due to the close proximity to the resultant fiscal imbalance.

Another notable aspect of fiscal health is that there may be a confluence of more than one factor i.e. a poor economy coupled with poor economic management. Scorsone et al (2008) state that “economic decline may lead to poor management over time as municipal resources are strained forcing major cuts and possibly accounting gimmicks to stave off even further cuts (p. 5).”

An unstable economy also affects the morale of workers as they begin worrying about their job security or salaries. It is notable that a good financial reporting tool can actually report on the fiscal state of a poor economy but it might not capture the poor management decisions that have not yet ‘crystallized’.

The Financial Trend Monitoring System (FTMS)

Honadle (2003) states that generally, local authorities have failed to accurately monitor their fiscal health leading to 26 states having one or two fiscal crises reported in their local governments between 1963 and 2003. This has led to various financial analysts and scholars to develop fiscal reporting measures for these local governments (Brown, 1993; Nollenberger et al, 2003; Hendrick, 2004; Kloha et al., 2005).

In this project, I used the Financial Trend Monitoring System (FTMS) to analyze the fiscal health of Chicago. The FTMS is a credible and comprehensive tool that has been developed by the ICMA to measure the fiscal health of counties and cities. The ICMA and the Government Finance Officers Association (GFOA) are two of the organizations that have put in a lot of effort to encourage municipal governments to develop sound fiscal monitoring and management measures (Mullins and Pagano 2005).

The FTMS has been revised twice, in 1994 and in 2003 so as to fit into new fiscal dynamics. It has 42 indicators and is based on 11 factors. Using these 42 indicators over a five year period, the FTMS provides an accurate picture of what is going wrong and where. However, it fails to include external factors and political environment in its analysis.

The FTMS works as follows; first, unfavorable trends are identified; it is determined when they began; mitigating circumstances are considered; next, causes of the trend are established; indicators are compared; economic trends in the national or regional sphere are compared; all other factors are taken into account and finally, a professional judgment is made from the data acquired.

The FTMS has been criticized by Kloha et al (2005). They state that it fails to standardize individual indicators to come up with an overall score of the financial condition of the government being investigated. This makes it unclear as to what the indicators signify for the overall economy i.e. are 5 poor economic indicators bad or are 10 strong indicators fair? Another weakness is the ambiguity that comes with overlapping of indicators.

Kloha et al (2005) provide an example of long term debt and the adjacent per capita values being the same in both poor and strong economies which leads to confusion. Lastly, they state that the FTMS requires too much data which might lock out small governments that may not have sufficiently monitored all the 42 indicators.

Fiscal analysis of Chicago city using the FTMS

General Overview

Being the third largest US city and the largest in the mid-west, Chicago’s economy is quite large and diversified. In a 2007 estimate, its gross metropolitan product (GMP) was at $506 billion. This means that the city is a financial behemoth that is powered by over 4.25 million workers. The city has the second largest labor force in the US (Department of Finance, 2010). This project analyzed Chicago’s fiscal health through nine basic variables.

Short term debt

As at December 2009, Chicago’s short term debt stood at $ 1,070,577,000 (1.07) billion. The debt was a major improvement from the 1996 short term debt burden of 1,863,870,000 (1.86) billion.

Generally, the economic vitals in between the ten years seem to be almost constant. Most of the short term debt in the 2009-2010 financial year was in the form of payable bonds, notes, accrued pension, other employee compensations and post employment benefits. Compared to the last ten years, the short term debt as a ratio of total debt has been almost constant; which is a sign of good fiscal health (Department of Finance, 2010).

Long term debt

The 2009-2010 long term debt for the city of Chicago stood at $9,380,151,000 (9.38) billion. The debt level rose exponentially throughout the entire ten year period. The balance in 1996 was $3,803,966,000 (3.8) billion. This represents a significant increase over the period with total debt increasing to $15,405,340,000 (15.4 billion) from a low of $5,667,836,000 (5.7 billion) in 1996.

Most of the long term debt came from long-term general obligation bonds, commercial notes, acquisition certificates and motor vehicle and fuel tax bonds. Generally, the debt ratio for the city is stable which means that the fiscal management is sound.

Property value

According to the comprehensive financial report for the financial year 2009-2010, the fair market value of all taxable property of the city of Chicago stood at $ 33,995,118,000 (34 billion). This reflected a steady rise in property value over the 10 years. The 1996 property value was at $15,367,397,000 (15.4 billion).

The rise in property value is attributed to increased investments in the real estate market despite the financial crisis. The growth was a phenomenal 121.22% increase over the assessed ten year period which shows strong economic foundation and good fiscal health.

Income

The total income went up to $131,270,613,248 from $79,261,030,398 between the years of study 1996 to 2009. The per capita income also went up from $28,473 to $45,328. The steady income growth characterizes Chicago city’s good fiscal discipline and investment culture. The interesting fact is that the income growth was achieved within tough economic conditions.

Employment

The unemployment rate went up to 10% in 2009 from 7.1% in 1996 collection (Department of Finance, 2005). This can be attributed to the impact of the 2007-2008 financial crisis which was a global phenomenon.

The crisis also had an effect on the number of employees employed by the city of Chicago which fell from 40,297 in 1996 to 37,419 in 2009. There was also a remarkable drop in private sector employment. The top five chief employers were J.P Morgan Chase, United Airlines, Jewel Food Trusts, Northern Trust and Bank of America.

Population

The last population estimates showed that the population of Chicago had gone down from 2,783,726 in 1996 to 2,695,598 in 2010. The population drop arose from a low birth rate. The drop in population might prove to be a future problem especially if the working population continues ageing. The median age went up from 33.8 to 34.5 which is not a good fiscal sign (Department of Finance, 2010).

Inflation

The Cost-Price index (CPI) is the measurement tool for inflation in this project. The inflation was measured over a 10 year period from the year 1998 to 2008. All in all, inflation went up by 30.76% for all items. The most significant inflationary change was in the apparel sector where the costs went up by 135%.

Food and beverages went up by 1.04%, housing by 11.01%, transportation by 10.76% and medical care by 66.87%. The inflation was attributed to changing economic conditions, rising fuel prices and a general rise in costs of raw materials (Department of Finance, 2010).

Expenditures

The total expenditure for the fiscal year ended 2010 was at $ 6,269,395,000 (6.27 billion). This was an increase from the expenditure in 1996 which was at $5,698, 047,000 (5.7 billion) collection (Department of Finance, 2005).

The increase was attributed to the need to strengthen solid assets and investments in order to cushion the city from the devastating effects of the 2007-2008 recession. Most of the spending went to public safety, government activities, street sanitation, employee pensions, transportation, health, cultural/recreational expenses, interest on debt obligations and capital outlay programs.

Revenues

The income measured here includes all government and business-type revenues. The total primary government and business-type revenues for the fiscal year 2009-2010 was at $5,335,909 (5.34 billion) which reflected a steady improvement over the five year period. The total revenue as at December 1996 stood at $3,522, 510,000 (3.52 billion) which was 1.82 billion less than the 2009 collection (Department of Finance, 2005).

The main contributors to this income boom were property taxes which contributed 15.1% of the total income. Other contributors were; utility, state, sports, transportation, transaction, special area and other taxes; business licenses and permits; fines; federal and state grants; investment income; charges and other service income (Department of Finance, 2010). All these types of income show a high level of diversification in the Chicago economy.

Conclusion

On average, the fiscal indicators of Chicago city show a promising future for the city. Using the FTMS, the 42 indicators report that most of the fiscal variables are stable (Department of Finance, 2010). Though the 2009-2010 period showed some sluggishness in growth, the city has done well for itself compared to other US cities that are still reeling from the effects of the financial crisis. The city needs to tackle unemployment and a declining population growth rate since these are the two areas that may cause future fiscal problems.

References

Brown, K.W. (1993). The 10-Point Test of Financial Condition: Toward an East-to-Use Assessment Tool for Smaller Cities. Government Finance Review, 12, 21-26.

Department of Finance (2010). Comprehensive Annual Report for the Year Ended 31^st December, 2009. Chicago: City of Chicago Municipal Reference Collections

Department of Finance (2005). Comprehensive Annual Report for the Year Ended 31^st December, 2009. Chicago: City of Chicago Municipal Reference Collections

Hendrick, R. (2004). Assessing and measuring the fiscal heath of local governments: Focus on Chicago suburban municipalities. Urban Affairs Review, 40(1), 78-114.

Honadle, B.W. (2003). The State’s Role in U.S. Local Government Fiscal Crises: A Theoretical Model and Results of a National Survey. International Journal of Public Administration 26 (13), 1431-1472.

Kloha, P., Weissert, C. S., & Kleine, R. (2005). Developing and testing a composite model to predict local fiscal distress. Public Administration Review, 65(3), 313-323.

Mullins, D.R. and Pagano, M.A. (2005). Local Budget and Finance: 25 Years of Developments. Public Budgeting & Finance, 25 (Silver Anniversary Edition): 3-45.

Nollenberger, K., Groves, S. M., & Valente, M. G. (2003). Evaluating financial condition: A handbook for local government (4th ed). Washington, DC: International City/County Management Association.

Scorsone, E., Justice, J., and Bradshaw, N. (2008). Simulation Analysis of a Fiscal Stress Measurement System: The Case of Michigan. Chicago: Conference for the Association of Budgeting and Financial Management

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