Originally posted by @John Jack R.:
Hi just a quick question. When you speak of a MASSIVE property tax Hike, at the end of the day what does that really mean? What are you anticipating? Let's say rent is a dollar a month, by kind of a factor will the rent increase be? $1.08 or a $1.20?
Over the next 5 years, if everything goes wrong, i.e. no state bailout or bankruptcy, those in Chicago will be paying $1.50-2.00 more primarily because of State (our Governor wants to take large amounts of money that has historically flowed to local governments to pay off the state's pension debt), County, City, Chicago Public Schools pension and retiree healthcare debt. On top of that hike, there will be cuts to schools, parks, public transportation, police, etc. In this scenario, Chicago landlords will be asking tenants to pay more rent and receive less city services. If Chicago Public Schools tank (think 40 kids in a classroom), parents will seek other options in the suburbs.
Right now, CPS is asking the Teachers Pension Board to be allowed to only pay $200 million on a $643 million bill (can kicking). This is an annual Bill that is set to increase, not a one time payment. Mayor Emanuel proposed a 50% property tax hike ($1.50) last year but it was not enacted. The Governor has called CPS insolvent. I can post links to these stories in anyone is interested.
Chicago has the worst debt BUT the most options for avoiding property tax spikes because of its size and the fact that its a world class destination. For instance, it raised its fee on cell phones last year from $2.50 a month to $3.90. That raised $150 million annually for the city. I suppose they can just raise cell phone fees to $10 per month... They can also build a casino, add more speed and red light cameras, impose a city-wide income tax, etc. All this would require approval from a Democratic Legislature and Republican Governor who aren't agreeing on much right at the moment. If there's gridlock, Chicago will attempt to use property tax hikes to pay these bills. The good news is that the Governor is calling for a temporary property tax freeze to put the breaks on big spikes and force local governments to start controlling their costs. Over the last 30-40 years, local governments have made government "work" by passing along any increase in the cost of running government to property owners AND by not paying pension and retiree healthcare debt.
The suburbs are in a varying state of mess now. The suburbs (and downstate) - like most other units of government in Illinois - have put off paying their (police and fire) pensions as well. Some are funded at 30% and other are funded at 85% (I can post a link to the latest CGFA report if anyone's interested). The suburbs already have pretty high property taxes but most will continue to raise them to "catch up" on their police and fire pension funding levels to 90% (as required by state law). The Bond Buyer thinks 5 south suburban communities will immediately declare bankruptcy if they receive permission from the state this year. This problem could be magnified if the state decides to divert funds historically paid to local governments to pay its own pension debt ($111 billion) instead of raising the income tax and also starts to make the suburbs pay its teachers pensions (like the city of Chicago has to now). Keep in mind that the State, unlike local governments, cannot declare bankruptcy.
It's an extremely messy situation. Illinois has more units of local government per capita than any state in the nation. They all played games with their pension debt. Taxes are going up in Illinois. There's no doubt. How it will impact growth, job creation and other important factors for real estate investors is really anyone's guess right now because there's no grand bargain or even a plan on how to fix the problem at every level of government. The government has run out of money at current tax rates. The true costs of government (operations and retiree costs) were hidden from voters by governments taking regular pension holidays (skipping payments) and kicking the can down the road and thereby making the problem even larger. In theory, the can can get kicked a few more years, but the pension funds really are close to running out of money in Chicago and at the state level. Cook County's pensions are about 50% funded (and benefits costs are rising) so they will be in the taxing game soon enough. Most proposals - so far - simply call for this generation of property owners to (a) pay for current governmental operations and (b) "make up" for generations of skipped pension payments. If it's all done via property tax hikes, the hikes indeed will be MASSIVE and THEIR WILL BE CUTS. Throw in the Federal Reserve raising interest rates while these tax hikes and cuts occur and Chicago's and Illinois' real estate bubble may pop in a fantastic way.
Sorry about this rant....but the risk of a property tax spike in every community in Illinois is very, very real. It's not being baked in to current pricing models - at least at the level of investing that I would like to be in engaged in over the next few years.
