Reagan Revolution Misses Tax Fiefdoms Flourishing in U.S.

Oct. 28 (Bloomberg) –- Illinois has thousands of local government units that tax, spend and drive up debt. More than any other state, Illinois illustrates how local governments flourish across the U.S. Bloomberg’s Tim Jones reports. (Source: Bloomberg)

Nothing thrives in Illinois like local government -- almost 7,000 units that tax, spend and drive up debt in a state struggling to pay off vendors and cover almost $100 billion of unfunded pension liabilities.

More than any other state, Illinois illustrates how local taxing bodies flourish across the U.S., whether urban or rural, Republican or Democrat. The governments duplicate services and burn tax dollars at the same time states slash money for education and Washington cuts discretionary spending.

In Illinois, which has the 11th highest state and local tax burden in the U.S., overlapping government agencies managing everything from mosquito abatement to fire protection collect billions of dollars, employ tens of thousands and consume resources that could help pay pension deficits and $7.5 billion in outstanding government bills.

“The big focus is on Washington D.C. and deficits and tax increases,” said Dan Cronin, chairman of the DuPage County board in the longtime Republican stronghold west of Chicago. “But people frequently overlook a significant chunk represented by under-the-radar government -- quiet, sleepy, unaccountable.”

Across the country, there are 38,266 special purpose districts, or government units distinct from cities, counties and schools, each with its own ability to raise money. Since President Ronald Reagan declared in his 1981 inaugural address that government “is not the solution to our problem -- government is the problem,” their numbers have jumped 32 percent.

Schools Decline

The increase stands in sharp contrast to another area of local government: public-school districts that often levy their own taxes. Their numbers dropped 13 percent in the period, according to the U.S. Census Bureau. Much of that decline occurred in rural counties hit by decades of depopulation.

The government bodies include a mosquito abatement district in suburban Chicago that spends three-quarters of its budget on pay and benefits -- and more on pensions than insecticide. The districts have been around since the 1920s, when they were created to fight malaria. They have resisted recent efforts to consolidate as state officials have called them a waste of taxpayer money.

BIG SPENDING

Even when they are needed -- Illinois had the most cases of the mosquito-borne West Nile virus in a decade last year -- they can be ineffective. Jim Sexton, the mayor of Evergreen Park, contracted West Nile and was hospitalized for six weeks, although four entities spend money to combat the disease in his village alone.

‘Less is More’

“Less is more,” said Sexton, who lost 65 pounds and suffers lingering nerve damage. “If you didn’t have three or four different government agencies involved in coordinating something you certainly would be able to eliminate some of the pay that’s being given and you could probably put more toward the effort.”

The tangle of local government adds hundreds of millions of dollars to tax bills in Illinois and tens of billions nationally, money that could be returned to taxpayers if their number could be reduced, said Jack Franks, a Democratic state representative who chairs an Illinois legislative committee formed to consider local-government mergers.

Their presence defies political stereotype. The top five states in terms of most local governments per resident, including the Dakotas and Kansas, all reliably vote for Republican presidential candidates.

The year after Reagan’s inaugural swipe at the public sector, the census counted 81,780 units of local government, including school districts. Last year there were 90,056. Illinois, the fifth-most-populous state, has by far the most. Texas ranks second, Pennsylvania third and then California. Those four alone have more than 10,000 special districts.

‘Imperfect Union’

In the past half century, a new government was created in the U.S. every 18 hours, said Christopher Berry, an associate professor of public policy at the University of Chicago who wrote “Imperfect Union: Representation and Taxation in Multilevel Governments.”

“Any one of these looked at in isolation doesn’t look like a problem -- but when you have so many thousands of them, that adds up to really consequential numbers,” Berry said. “People don’t think about special districts as a place to cut because most people don’t even know they exist. The persistence of them speaks to their invisibility.”

In Illinois there is plenty of material to work with -- 102 counties, almost 1,300 municipalities, about 1,400 townships and 900 school districts, along with the more than 3,200 special districts.

Growing Collections

Special purpose districts in Illinois took in $2.9 billion in 2011, up 32 percent from 1999, according to state records. That growth is eight times the increase in the state’s population. That figure doesn’t include four large Chicago-based agencies such as its transit authority.

As the number of special districts and their budgets has grown, federal spending dropped in the past two years, adjusted for inflation and excluding entitlement obligations such as Social Security and Medicare, according to U.S. Commerce Department data. Combined state and local spending rose from 2006 through 2009 before turning down over the past three years in the aftermath of the biggest economic downturn since the Great Depression, except for state-funded entitlements such as Medicaid.

State and local levies, including the property taxes that support schools, consume 9.9 percent of the average American’s income, compared with 10.2 percent in Illinois, according to the Washington-based Tax Foundation, a nonprofit that favors a simpler tax system. American households pay 17.8 percent of their income, on average, to the federal government, according to the nonpartisan Tax Policy Center in Washington.

Highest Taxes

Joining Illinois among states with the highest tax burdens are New York, Pennsylvania and California, which also rank among the top 10 for units of local government.

The taxing districts -- parks, libraries, fire protection and others -- make their presence known in the small print on tax bills, through property and other assessments. Residents in the Cook County suburb of Roselle alone pay into 14 separate districts.

Small-government activists such as the Tea Party concentrate on cutting federal and state spending. Cronin, a Republican running the second most-populous county in Illinois, said he’s puzzled by their inattention to the growth of local government, calling it “an astonishing inconsistency.”

Financial Footprint

The broadening financial footprint of special districts comes as Illinois struggles to maintain solvency and has the lowest credit rating among U.S. states. The five major public employee pension systems have a combined unfunded liability of $97 billion as of June 30, 2012, according to the Civic Federation.

Many special purpose districts share a common trait -- maintaining cash balances that are twice what they spent, on average, in 2011, according to state records of districts with less than $850,000 in revenue.

In Waterloo, Illinois, on the southern edge of metropolitan St. Louis, the local cemetery district spent $57,000 to tend the burial grounds in 2011, while its bank balance sat at $775,000.

Dan Kennedy, who manages the Waterloo Cemetery District, said he doesn’t know where the money came from. “It was there when I got here 10 years ago,” Kennedy said, adding that the funds could be used to purchase land to expand the grounds. When asked if the district has plans to do so, Kennedy said no.

Public Trust

While the fund balance includes some private donations, civic watchdogs say the amounts are indefensible.

“There is no justification for any local government to be levying property taxes when they have fund balances in excess of one year’s expenditures,” said Laurence Msall, president of the Civic Federation, a Chicago-based nonprofit that tracks state and municipal finances. “It’s a violation of the public’s trust.”

In Cook County, with 5.2 million people including Chicago, there are at least 205 special purpose districts, according to the Illinois comptroller. Four of them have been battling mosquitoes for more than a half-century -- and fending off allegations that they’re ineffective and waste money.

Consider the fight against mosquitos in Evergreen Park. It involves government entities spreading larvicide in parks, ponds and golf courses, removing standing water from old tires and contracting with a private company to spray, when necessary. Just one of those agencies, the South Cook County Mosquito Abatement District, gets $8.84 annually from each of Evergreen Park’s 6,900 households, said Sexton, the mayor, who is still undergoing physical therapy from his bout with West Nile.

Mayor’s Death

Sexton, 61, was fortunate. The mayor of west suburban Lombard, William Mueller, died from the disease last year --even though various local governments in his home county of DuPage had signed more than three dozen contracts for a local company to provide various levels of spraying service. All told, the Chicago region has 11 mosquito abatement districts.

Critics question both their effectiveness and their necessity.

“Mosquito season lasts four to five months a year,” said state House Republican Leader Jim Durkin, who wonders what employees do during the remaining seven-to-eight months.

“Yes, there needs to be control and abatement, but do you need to have a tax-funded district to address the problem?” said Durkin, the sponsor of a bill to do away with the four districts in Cook and put their functions under the control of the county health department.

Fighting Malaria

It’s a familiar debate involving districts that were created in the 1920s to fight malaria. Twenty-one dot the state in 12 counties. The Civic Federation wrote in a 2003 report that mosquito abatement districts “are one of the best examples of unnecessary special district government.”

The South Cook County Mosquito Abatement District, which began operating in 1955, spent $2.3 million last year serving 52 municipalities, with about $1.8 million on salaries, insurance, Social Security. About $261,000 went to pension costs, about $100,000 more than was devoted to the purchase of pesticides, according to public records.

“It’s patronage 101,” said Durkin.

The district’s manager defended its services and expertise. “I don’t know that the county health department is equipped to do the work that we do,” said Douglas Wright.

Political Endurance

The endurance of special purpose districts is a tribute to the politics of public-sector budgeting and the desire to evade spending limits. The 1870 Illinois Constitution included rigid expenditure restrictions on local governments, prompting the state legislature to authorize the creation of special purpose districts, starting with sanitary districts in 1907.

Then came fire protection and mosquito abatement in 1927; soil-and-water conservation and tuberculosis sanitary districts in 1937; public water in 1945; parks in 1951; cemeteries in 1957 and roads two years later. That was only the beginning.

Delegates to the 1970 constitutional convention sought to stem the growth by lifting tax limitations on municipalities and counties. Yet legislators continued to create more, including forest preserves, libraries, roads, museums, civic centers, and rescue squads.

To their supporters, the taxing districts make good political sense as they don’t have to compete with police departments and others in annual budget battles in municipalities and counties. They’re well protected in Springfield, the state capital, through lobbying associations representing them.

Oversight Need

That’s all the more reason they need greater oversight and consolidation, said Msall of the Civic Federation.

“It is bewildering to people in Illinois who look at this situation and say, ‘How can we not consolidate our local governments when we have more than twice the number of local governments of any state in the country and have a difficult time paying for our most basic services?’ ” Msall said.

They’re also often hidden from public view. Some don’t have their own websites. They schedule their meetings at the same time as county or village board sessions. Others resist inquiries for information, even from elected officials.

Two government entities caught Cronin’s attention after he became DuPage County chairman in 2010. Federal audits found the county’s housing authority misspent or failed to account for $10 million, and its water commission accidentally spent $69 million in budget reserves.

‘Little Empires’

Cronin, 53, sought oversight authority after two state representatives requested financial records from the Highland Hills Sanitary District in Lombard: They were told to file a freedom of information act request.

An 18-year veteran of the legislature, Cronin went to the state capital to get authority to obtain information and impose more control over what he calls “all these little empires.”

“These are nice little opportunities to take care of friends and relatives,” he said, “a nice thing to hand out to people.”

Cronin hired a private accounting firm to examine sanitary, fire protection, street lighting and mosquito abatement districts, as well as other independent boards and commissions involving 900 jobs and $300 million in annual revenue. They are a sliver of the 400 taxing units in the county of 928,000 people.

Among those examined was the Wheaton Sanitary District, which handles waste water for 62,000 people. Its chief executive was paid $146,000 in 2012, more than the state’s lieutenant governor, treasurer or comptroller.

Turf Battle

His effort to rein in the taxing bodies comes as their outstanding debt levels rise. Park district debt in 2012, for instance, jumped 143 percent to $383 million in 10 years.

Cronin realized that pushing to roll back a broad array of taxing bodies would almost guarantee defeat because the opposition is rooted in the protection of “turf, people, relationships and bread on the table.”

“Our strategy is to be incremental,” Cronin said in his office in suburban Wheaton, holding out his thumb and index finger, with a tiny space between the two.

In Springfield he was forced to trim even those modest ambitions. He didn’t get expanded authority of fire protection districts. Similarly, Durkin said his bill abolishing mosquito control districts in Cook County is dead in committee.

Then there’s the Civic Federation’s call to abolish the 18 sanitary districts in Cook County that serve a total of 205,000 customers. That recommendation came 10 years ago. Each is still operating.

To contact the reporters on this story: Tim Jones in Chicago at tjones58@bloomberg.net; John McCormick in Chicago at jmccormick16@bloomberg.net

To contact the editors responsible for this story: Jeffrey Taylor in San Francisco at jtaylor48@bloomberg.net; Stephen Merelman at smerelman@bloomberg.net.

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Photographer: Daniel Acker/Bloomberg

In Waterloo, Illinois, on the southern edge of metropolitan St. Louis, the local cemetery district spent $57,000 to tend the burial grounds in 2011, while its bank balance sat at $775,000.

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Photographer: Daniel Acker/Bloomberg

In Waterloo, Illinois, on the southern edge of metropolitan St. Louis, the local cemetery district spent $57,000 to tend the burial grounds in 2011, while its bank balance sat at $775,000. Close

In Waterloo, Illinois, on the southern edge of metropolitan St. Louis, the local cemetery district spent $57,000 to... Read More

Photographer: Daniel Acker/Bloomberg

While the fund balance at Waterloo Cemetery includes some private donations, civic watchdogs say the amounts are indefensible. Close

While the fund balance at Waterloo Cemetery includes some private donations, civic watchdogs say the amounts are indefensible.

Photographer: Daniel Acker/Bloomberg

“The big focus is on Washington D.C. and deficits and tax increases,” says Cronin. “But people frequently overlook a significant chunk represented by under-the-radar government -- quiet, sleepy, unaccountable.” Close

“The big focus is on Washington D.C. and deficits and tax increases,” says Cronin. “But people frequently overlook a... Read More

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