CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
title
Receive the March 2022 Financial Report
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DEPARTMENT: Finance Department
SUBMITTED BY: Rachel Mayer, Finance Director
BOARD/COMMISSION REVIEW:
N/A
BACKGROUND:
Regular monitoring and reporting served the City well over the past two years of economic uncertainty driven by the pandemic. Monthly financial reports to City Council help inform the public on important issues related to City finances, including discussions around short- and long-term financial strategies.
This month’s report focuses on local, state, and national trends observed in the first two months of the year, including ongoing global supply chain, inflationary, and financial market issues. In addition, staff has begun initial analysis of how the State of Illinois 2023 budget proposal may impact municipalities.
DISCUSSION:
Local Economic Trends
State and Home Rule Sales Taxes
Revenues generated by sales and use taxes continue to be one of the best indicators of local economic activity across the many business sectors that collect these taxes. The table below shows sales tax and home rule sales tax (HRST) revenue for the first two months of 2022 (October and November 2021 sales). Revenue continues to be strong in both categories and exceeded budget projections by 8.2% and 10.5% respectively. Expectations for another strong month in March (December sales) are high as the National Retail Federation reported 2021 holiday sales were up 14.1% over 2020.
|
Sales Tax Receipts through February |
|
|
Projection |
Actual |
Diff ($) |
Diff (%) |
2022 Budget |
% of Budget YTD |
|
Sales Tax |
6,871,395 |
7,437,754 |
566,360 |
8.2 |
41,837,584 |
17.8 |
|
HRST |
2,771,421 |
3,061,346 |
289,925 |
10.5 |
16,186,610 |
18.9 |
Local Taxes
Monthly sales data submitted with local tax returns also provides valuable information on economic trends. The information is timelier than state data but covers a limited number of business sectors. The table below shows a comparison of fourth quarter (October - December) sales over the past three years. The data shows a varied recovery among different business sectors. Highlights include:
• Food and beverage sales exceeded 2019 Q4 numbers by 10%.
• Hotel/motel sales continued to rebound, increasing 134% from 2020 Q4 and just 5% below 2019 Q4 sales.
• Local gas sales remain 10% below 2019 Q4. This trend may persist as long-term commuting habits change and more drivers transition to electric vehicles.
• Real estate sales remained very strong in 2021 Q4, exceeding the two prior years by 40% or more.
|
Fourth Quarter Local Tax Comparison |
|
|
Food & Beverage |
Hotel/Motel |
Local Gas |
Real Estate |
|
2019 |
122.14 |
11.73 |
17.00 |
466.31 |
|
2020 |
84.16 |
4.73 |
12.42 |
473.43 |
|
2021 |
134.19 |
11.09 |
15.27 |
660.28 |
$ in millions
State Economic Trends
Revised Revenue Estimates
Staff utilizes revenue estimates provided by the Illinois Municipal League (IML) for state revenues shared on a per capita basis. Those estimates are revised throughout the year based on the most recent economic forecasts and actual tax collections. The 2022 budget utilized the August CY2022 estimate. IML’s January revisions forecast a substantial increase in state income tax, as well as downward revisions to use tax and motor fuel tax (MFT). Except for the income tax revision, the budget impact is relatively minor.
|
Illinois Municipal League - Per Capita Revenue Estimates |
|
|
CY2021 Actual ($) |
CY2022 Estimate August ($) |
CY2022 Estimate January ($) |
% Change August vs. January |
Potential Budget Impact ($) |
|
Income Tax |
132.08 |
122.20 |
132.20 |
8.2 |
1,495,400 |
|
Use Tax |
41.29 |
40.60 |
38.80 |
4.4 |
(269,172) |
|
Motor Fuel Tax |
22.53 |
23.80 |
23.10 |
2.9 |
(104,678) |
|
Transportation Renewal |
16.40 |
16.80 |
17.00 |
1.2 |
29,908 |
State Budget Proposal
Last month, Governor Pritzker released his proposed 2023 state budget, which would become effective on July 1, 2022, if passed through the legislature. The Governor’s proposal includes several provisions that are noteworthy for municipalities, including:
|
Proposal |
Impact |
|
Income Tax - No proposed reductions to current LGDF allocations; however, several bills have been presented to increase this allocation to municipalities. |
Budget proposal has no impact but any increase to the LGDF funding percentage would result in additional revenue for the City. |
|
State Sales Tax - One-year suspension of the 1% sales tax on groceries that municipalities receive from the state. |
The Governor is proposing to reimburse municipalities for revenue lost. How the state calculates that reimbursement would determine whether there is any impact on the City budget. |
|
Motor Fuel Tax - Freeze the state’s July 1, 2022 inflationary increase on MFT. |
Could impact growth of revenue dedicated to road maintenance and construction. |
|
Property Tax - One-time property tax rebate for qualifying homeowners of up to $300. |
No direct financial impact to the City but benefits local homeowners. |
National Economic Trends
Inflation and Supply Chain Challenges
Persistent global supply chain issues and price inflation are presenting some challenges for the City. The Consumer Price Index (CPI-U) is a measure of the average change in price for goods and services. From January 2021 to December 2021, the CPI-U rose 7.5%, which is much higher than increases in recent years of 2% or less. Along with other consumers, the City has experienced cost increases in several areas, with the most notable being commodities and items with significant raw materials. Examples include:
• Gasoline and diesel up 28% year-over-year
• Vehicle lubricants, tires, and other parts up 15-30% year over year
• Natural gas for heating up 95% year-over-year
As a service-based organization, salaries and wages represent one of the City’s largest costs. The March report from the Bureau of Labor Statistics cited average hourly earnings grew 5.1% year-over-year. This growth is likely to impact future budgets as the cost to recruit and retain talented employees rises.
Staff is also navigating challenges in acquiring materials and equipment, especially for capital projects. Lead times on vehicles, construction materials and utility equipment remain very long. Some examples include:
• Electric distribution transformers - 2 years lead time
• Ductile iron pipe for water mains - 36 week lead time
• Facility back-up generators - 1 year lead time
When appropriate, staff is revisiting material and construction standards to see if there are ways to include more suppliers in our bids without sacrificing quality and reliability. Staff is also exploring options to place more advanced orders to mitigate future disruptions. This may result in requests to increase contract awards in the near term to put future purchases on order sooner than anticipated. Ultimately, supply chain issues may cause delays on capital projects and other procurements. This could lead to budgetary imbalances where revenues received in the current year will need to fund expenses in 2023.
It is too early in the year to understand all the impacts of the inflation and supply chain issues; however, staff will closely monitor as we move further into 2022. For now, strong revenues are mitigating concerns over rising costs.
Financial Markets
Over the past 12 months, the U.S. and global financial markets have remained turbulent. While equity markets performed well in 2021, fixed income markets underperformed as continued inflation and talk of rising interest rates affected the bond markets. Both equity and fixed income markets have underperformed in early 2022 due to several factors, including interest rate increases expected from the Federal Reserve and geopolitical issues driven by the Russia-Ukraine conflict.
Financial impacts for the City can be seen in several areas:
• Firefighters and Police Pension Funds experienced investment returns of more than 12% in 2021 while IMRF returns exceeded 16%. Investment gains will have a positive impact on future years’ required contributions.
• The City’s investment portfolio comprised of cash held in reserves finished 2021 with a return of -1.6%. This conservative portfolio has no equity exposure, thus underperformance in fixed income markets negatively impacted returns. The Financial Advisory Board is closely monitoring the portfolio with our investment advisor.
• The $7.1 million bond issue approved by City Council on February 1 recently sold at an interest rate higher than expected. Initial estimates had interest rates at 2.25%; however, the bonds sold at auction on February 15 at a rate of 2.67%. This is still a historically low rate and better than rates for 2017 and 2018 bond issuances.
FISCAL IMPACT:
N/A