Week in Review: CV19, budget, taxes & more

“Phase 4” in Illinois. With coronavirus case counts going up in many states, worries are spreading in Illinois. An upsurge in COVID-19 could force the State to retreat from its current “Phase 4” status, which has allowed the resumption of many Illinois activities such as nonessential retail store activity, socially distanced indoor dining, and swimming pool use.
News reports indicate sharp increases in COVID-19 case counts and hospitalizations in California, Florida, Texas, and some adjacent states. Similar numbers posted in Illinois, particularly in the number of positive COVID-19 cases as a percentage of total tests, could force Illinois back into the much more restrictive “Phase 3.” Reports from the city of Chicago indicate, however, that some local businesses are allegedly falling short of obeying the complex and onerous guidelines that Phase 4-compliant businesses are required to follow. City health inspectors announced on Monday, July 6 that they had begun to issue fines to alleged Phase 4 violators.

CARES Act federal money to be distributed; municipalities ask for more discretion. “CARES Act” community-grant money, appropriated by the federal government, is slated for distribution through the states to local governments to help communities subsist during the COVID-19 pandemic and move towards economic recovery. Much of the CARES Act community-grant money goes through the 50 states, with the states serving as fiduciaries to make sure the money goes to local communities with a population smaller than 500,000.

New standards, proposed by the Pritzker administration as emergency administrative rules without public comment, sharply restrict the discretion of local governments on how to spend their share of CARES Act money. Due to collapsing Illinois economic activities in some sectors, including sectors of the retail market and some elements of Illinois manufacturing, many local governments should be able to use this money to keep key sectors of their communities in a position of day-to-day financial health. In some cases, some businesses that are backbones of their local communities are facing actual or potential solvency challenges. The federal CARES Act assumes that local communities will have discretion to use these moneys to help themselves based upon the unique circumstances of each community, but the new statewide emergency rules impose a one-size-fits-all mandate upon how CARES Act community grant money can be spent.

The statewide rules fall with special force upon Downstate Illinois. A feature within the CARES Act, the state-fiduciary pass through feature, applies only to communities with populations less than 500,000. Units of local government with populations greater than 500,000 got CARES Act money directly from Washington and are not bound by the Pritzker emergency rules promulgated this week. This provision affects Cook County and four Chicago-area suburban counties: DuPage, Kane, Lake, and Will. The 97 other counties of Illinois, including all of Downstate plus Grundy and McHenry counties near Chicago, are affected by the new emergency rule.

The Illinois Municipal League (IML) has expressed its concern about the new Pritzker-administration emergency rules. The new rules were promulgated by the Illinois Department of Commerce and Economic Opportunity (DCEO).

CGFA reports budget numbers for June 2020. The Commission on Government Forecasting and Accountability (CGFA) has released its monthly report for June 2020. The summary is a description of the current state of Illinois cash flow during the final month of fiscal year 2020, the year that ended on June 30, 2020.

Like other states, Illinois was hit hard by the economic shutdown that took place, starting in March 2020, in response to the COVID-19 pandemic. Many Illinoisans were laid off and changed their spending habits; many activities that yield significant tax income, such as the purchase of nonfood goods, were cut back. Some highly-taxed activities were almost entirely cut off for a time. Examples include drinking excise-taxed alcoholic beverages in bars, and playing the slots in casinos and at gaming terminals. CGFA reports that total FY20 State general funds revenues dropped by $1.135 billion, with the decline occurring in the COVID-19-related months of March, April, and May of 2020.

June 2020 saw a partial Illinois economic rebound, with many residents and their workplaces able to resume taxable economic activity. Personal income tax collections rose in June 2020 by $173 million from the year-earlier period, a net gain of 9.4%. Many other taxes continued to generate disappointing numbers in June, however. Declines were led by an $83 million drop in sales taxes for the month, representing a net drop of 10.5% in sales tax payments by Illinois customers through the retailers that collect the tax. Two specialty tax levies, on cigarettes and insurance, demonstrated especially sharp declines.

The CGFA data analysts also continued to collect numbers that point forward towards understanding the State’s budget situation in FY21, the fiscal year that began on July 1, 2020. Illinois employment has declined, with more than 600,000 jobs lost. While some of this lost paycheck tax revenue can be made up for a short period by activity derived from federal emergency relief payments, true private-sector-based income tax revenue is not in a position to do well in FY21. As of May 2020, the Illinois unemployment rate was 15.2%. This marked an improvement from the pandemic-affected jobless number of 17.2% posted in April 2020, but CGFA analysts could not affirm that their current data points to continued recovery along this trajectory at this time.

State of Illinois borrows $1.2 billion in General Obligation debt in June 2020. The State of Illinois’ general obligation (GO) bonds are currently marked by major New York-based credit rating agencies with the lowest-sector rating available for so-called “investment grade” securities, a rating of “BBB-“ (Fitch Ratings, Standard & Poor’s) or “Baa3” (Moody’s). Any further cut by any one of these three credit rating agencies would reduce the State’s GO debt credit rating to below-investment-grade, a category popularly known as “junk bonds.” Junk bonds are bonds that are seen as having a significant risk of debt default and resulting loss of income to the creditor. The financier will customarily demand a higher rate of interest return for lower-rated credit instruments than is paid out by market borrowers who enjoying a high-grade credit rating. With global “true” interest rates near zero, the highest-graded borrowers can currently borrow money for as little as 0.55%/year.

In order to pay past-due Medicaid bills, Illinois borrowed $1.2 billion in June 2020. The money was borrowed through the issuance of General Obligation Certificates. The tranche was financed through the loan window currently operated by the U.S. Federal Reserve’s Municipal Liquidity Facility (MLF). Despite the help provided to this borrow contract by the MLF loan window, Illinois was still required to pay 3.82% interest for one year. This marked a 327-basis-point (3.27%) interest rate spread, against Illinois and its taxpayers, above the payments that Illinois taxpayers would have been required to pay on the same debt if Illinois still had its now-long-vanished AAA credit rating.

The $1.2 billion bond transaction was described in CGFA’s report to the General Assembly for June 2020. CGFA analysts reported their belief that Illinois will be forced to refinance this one-year MLF certificate issuance when it comes due in June of 2021.

Facebook announces major investment in DeKalb County. The social-media giant allows hundreds of millions of worldwide registered users to share messages and images for free. In return for this free service, the users agree to let Facebook know what they ‘like.’ Facebook’s automated software turns these “likes” into valuable advertising data. For example, if a user repeatedly ‘likes’ pictures of friends at the beach, the user will start to see lots of online advertisements for beachwear and summer beach experiences.

Facebook’s business model demands that the firm own and control massive data centers. These facilities have to have large quantities of data storage machinery, together with the electronic connections required for rapid data retrieval and the massive cooling systems required for reliable machine operation. Facebook has selected Illinois as the site for its newest data center, a 907,000-square-foot factory-like building in DeKalb. Just west of Chicago, the DeKalb location possesses massive access to electronic data pipelines. New technologies, to be installed with the cooperation of the Kishwaukee Water Reclamation District, will reduce the use of cooling-pond evaporation and will enable the data center to use pre-used Illinois water.

In its announcement, Facebook stated that the $800 million Data Center project will employ hundreds of skilled trade workers in design and construction, with temporary site-related employment peaking at 1,200. After the multi-month design-build phase is completed, the center will employ approximately 100 operational jobs to tend the server machinery.

The DeKalb Data Center will be Facebook’s 12th data center in the U.S. In addition to water recycling technology, the data center is scheduled to use 100% renewable energy. Massive wind farms in Illinois, Iowa and the Great Plains states are starting to produce electricity at a level necessary to power facilities of this scale.

The Facebook announcement was made on Tuesday, June 30.

Revised State, federal tax filing deadline is July 15. Many Illinoisans have taken use of the one-time income tax holiday granted this year to taxpayers who usually face a filing deadline of April 15, 2020. Income tax returns and payments due, which usually must be mailed by April 15 of each calendar year, must this year be mailed no later than July 15. This one-time filing and payment relief was granted by the State of Illinois and the federal government as one of the steps being taken to respond to the current COVID-19 pandemic. Nothing in this July 15 relief will reduce the amount of the taxes due and payable; the relief, for each taxpayer, extends only to the date the return must be turned in and the tax paid.

Taxpayers who have already submitted their tax returns for calendar year 2019 are not affected by this announcement, which applies only to last-minute filers. The Illinois Department of Revenue continues to encourage early tax filing, which puts taxpayers first in line if they are eligible for a tax refund. Not all taxpayers can file before a deadline, though. Help is available for Illinois seniors who may be facing this year’s revised filing deadline.

Taxpayer groups announce opposition to November 2020 graduated tax referendum. The proposal, which will be on the statewide ballot this fall, would amend wording within the Constitution of Illinois that bars the General Assembly from the enactment of special tax rates against classes or ranges of personal income. The Constitution currently mandates that the Illinois income tax be a “flat tax,” which means that any tax increase will affect every taxpayer. The November 2020 referendum would amend this section; the amended language would delete the wording that creates this flat tax mandate.

Business groups came together this week to express concerns about the proposed amendment. The Illinois Farm Bureau, the National Federation of Independent Business, the Illinois Chamber of Commerce, and the Technology and Manufacturing Association announced their intent to form a consortium to develop public awareness about the consequences of the referendum proposal. The proposed amendment cannot be passed unless it gets either a majority of the entire November electorate, or three-fifths of the voters who specifically vote on the referendum question.

Illinois drivers’ licenses and vehicle registration credentials extended until November 1, 2020. The extension was announced this week by the Office of the Illinois Secretary of State. The extension covers: (a) drivers’ licenses, (b) restricted driving permits issued to drivers who are driving under supervision, (c) non-driving personal identification cards issued by the Secretary of State, and (d) vehicle registration papers.

As a result of the coronavirus pandemic, the Secretary of State closed his offices in mid-March. Many of the offices have since re-opened, but are only operating under conditions of severe social distancing. Furthermore, there is now a significant document backup. The Secretary of State’s Department of Driver Services issues more than 8.5 million Illinois drivers’ licenses and more than 3.0 million non-drivers’-license photo ID cards.

Under this extension, Illinois Secretary of State vehicle-related and ID-related documents will continue to be temporarily valid until the extension date. The extension will enable the Secretary of State’s personnel, and their customers, to continue to work together to try to clear the backlog.

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