The Springfield City Council heard a presentation on the current state of its finances from William McCarty tonight. McCarty is the Director of the Office of Budget and Management and had worrying, but not unexpected, news. Revenue decreases as well as expense increases have put strain on the city’s finances.
Tax revenue for the city has been flat or declining for several years. The rise of e-commerce has been a drain on local sales tax, which is one of the main revenue sources for the city. It is only partly true that online purchases pay zero sales tax. Most major online retailers do collect some sales tax. The problem for Springfield is that money rarely makes it back to the city.
Sales tax money is allocated based on where a transaction takes place. If the online retailer has a distribution hub in the state of Illinois, that city gets all of the sales tax. If they are outside the state, then the State itself collects the sales tax as a “use tax.” That money is redistributed back to the cities, but only on a per-capita basis. This deprives the city of much of what it could be receiving if the purchases were made locally.
The state is also sharing less money from the state income tax. Compared with FY 2015, the city is getting five percent less, or over $600,000 in lost revenue.
At the same time revenues are declining, city expenses are rising. The primary driver of expenses are the police and fire pensions. These rates are set at the state level, and cannot be controlled by the city. That is why they are growing much faster than other areas of the city budget.
For the last several years, the city has cut other expenses substantially. While this has been effective at controlling costs so far, virtually all of the easy cuts have been made. McCarty said that the only areas where significant savings can be made are in public works, police, and fire. The council has worked hard to spare these departments from cuts in the past, but now they represent the vast majority of the city’s budget.
The current situation
The result of rising costs and lower revenue is a structural imbalance. In FY 2018, the Fund Balance saw a 17.2 percent decline. There have not been any negative cash balance days so far, but McCarty warned it was only a matter of when, not if, those days would come. Either cuts are going to need to be made in the public works, police, and fire, or there will need to be more tax revenue.
Although the current situation is not good, there is hope on the horizon. A case making its way to the US Supreme Court may make it easier for states to collect online sales taxes. If this case ends up with a favorable for South Dakota, Illinois could pass a similar law to South Dakota’s and bring back some of the lost revenue.
The city also voted to invest $250,000 in the new Land of Lincoln Economic Development Corporation (EDC). The EDC is a county-wide public/private partnership designed to help recruit new businesses to the county. Most of the large employers in the area have already pledged their support for the EDC.
Overall, the council was very supportive of the EDC. Mayor Langfelder said that the Q5 initiative had run its course, and now it was time for something new. Alderman Hanauer pointed out it had been quite some time since a new business had been successfully recruited to the area, and looked forward to the EDC taking a more active role in that capacity.
Alderman McMenamin was the lone dissenting vote. In pervious meetings he has cited the city’s lack of money for any project, and said the city should focus on municipal services and leave economic development to private businesses. Hy Bunn, who chairs the EDC, responded saying that the best practice for economic development requires a public private partnership.
Local Airbnbs to City Council: let us pay taxes
Who wants to pay more in taxes? Normally, business owners point to Illinois’ high tax burden as a problem, but some property owners in Jacksonville actually want to be allowed to pay more. One of these owners is E. Scott DeWolf, who runs an Airbnb location in Jacksonville. But when DeWolf went to the city to voluntarily pay the hotel motel occupancy tax, he was told he wouldn’t be allowed to do so.
Airbnb is a short-term rental service where property owners can rent out rooms or buildings that they own. DeWolf was joined by Professor Kevin Klein and Bryan Leonard to discuss the positive impact Airbnb has had on the local tourism environment. They shared how the experience they can create in their properties fills a niche that regular hotels don’t, and that this draws visitors from across the state and even some from over seas.
However, despite being an internationally recognized brand, Airbnb still operates in a legal grey area. Listings aren’t considered rental properties, because visitors have short stays like at a regular hotel or bed and breakfast. But they aren’t recognized as hotels either because they are otherwise residential properties. As a result, since the start of Airbnb, taxation has been an issue. While Airbnb has taken some voluntary steps to collect the occupancy tax, this collection has varied from jurisdiction to jurisdiction. To further complicate matters, not every area wants Airbnb to operate there. Adding new rooms may impact the viability of existing hotels, and adding new traffic to residential areas can disrupt neighborhoods. In Jacksonville’s case, Airbnb is not recognized as a hotel, which is why they cannot pay the local occupancy taxes.
It may seem strange that Airbnb operators would want this to change. Why ask the council to raise their taxes? There is a very pragmatic reason: if Airbnb locations do not pay the occupancy tax, they cannot advertise with the local tourism boards. This keeps them out of some of the main local referral networks. They cannot even leave brochures with the tourism board.
But their request is also driven by a genuine commitment to the community. These owners have heavily invested in building up their properties and enhancing local tourism. And adding more rooms is necessary for Jacksonville’s busiest tourism days. When sporting events take place, or the college host graduation, visitors often have to room as far away as Springfield or Lincoln. Building up a healthy community is good business for everyone.
In the mean time, DeWolf said that they were still willing to contribute to the community even if they cannot pay taxes directly. He personally offered to donate 5% of his sales, equivalent to the tax he can’t pay, to the Jacksonville Heritage Culture Museum.
You can watch their full presentation in the player above, and the rest of the city council meeting below.
Integrated Resource Plan recommends shift towards renewables
What does the future hold for CWLP? Currently, four coal-fired Dallman units provide almost all of Springfield’s power. But that may change soon. At the Monday meeting of the Public Utility Committee, experts from The Energy Authority (TEA) unveiled the results of their months-long integrated resource plan (IRP), which called for major changes to the utility.
The IRP is based on economic models. Energy markets are impacted by many different factors, including the price of fuel, government regulations, market demand, and even the weather. It is impossible to know how the future will play out, but by running many scenarios, TEA was able to come up with recommendations that fit the most likely futures. By 2031, power generation will be evenly split between renewables and coal (53-43), up from the current 100 percent coal generation. Improvements to energy efficiency will account for the remainder.
Phasing out coal
Coal will play a much smaller role in CWLP’s future. Every scenario called for retiring Dallman units 1 and 2. These units should be retired in the next few years; possibly as early as 2020. Additionally, Unit 3 was also recommended to be retired. However, because of the logistics of the plants, unit 3 will take longer to decommission.
This recommendation was based on the economics of coal. Kevin Galke, who presented for TEA, said that fracking was a “game changer” for energy markets, and one that no one saw coming. At the same time, renewable energy has also become substantially more competitive. This combined with the high capital expenses at the units, made them economically unviable.
But coal is not totally eliminated from the portfolio. Unit 4 is expected to provide energy for the city for at least the next decade. Its ultimate fate depends in large part on the price of coal. If the city can keep coal costs low, unit 4 remains much more viable than if prices continue to climb. However, in the event its capacity needs to be replaced, a gas plant is a more likely choice than a new coal one.
Adding in renewables
Renewables are the source of choice to replace coal. TEA acknowledged that many renewable projects in the past had been motivated by social consciousness rather than economics, but that new technologies were changing that landscape. Under the TEA plan, renewables will account for nearly half of the city’s power by 2023 and into the 2030s.
The transition from the Dallman units to renewables will be facilitated by a few years of heavy market purchases. But after the transition is complete, the city should return to being a net seller of energy.
What comes next
The IRP was just the first step in creating the future of CWLP. Now that the city knows what direction it needs to go, the task of implementing this plan will fall to the city council. Their task will not be easy. Taking coal plants offline is in many respects just as hard as building them, due to the complicated machinery and environmental issues with coal waste. And although CWLP may be eligible for certain Future Energy Jobs Act (FEJA) grants, creating the renewable capacity will also require significant planning.
But there is also a human element to CWLP. The three units recommended for retirement employ a large number of workers directly, and supports the coal mines and trucking companies that keep the units fueled. Even if this move is the right one for CWLP and the city as a whole, many people stand to lose their current employment. The council acknowledged that they will have to find a way to transition these workers to other jobs either in the utility or in the private sector. They cannot simply be abandoned with no plan.
In the mean time, the public comment period for the report is now open. The public is invited to comment either by email to IRP@cwlp.com or by mail to CWLP General Office, 4th Floor, Attention IRP, 800 East Monroe St, Springfield IL, 62757. There will also be an open house May 20th at Lincoln Library from 5:00 to 7:00 PM.
To learn more about the IRP, you can visit CWLP’s website, or watch the live presentation in the player above.
LIVE | Springfield City Council Committee of the Whole April 9th
Follow along live with the Springfield City Council committee of the whole meeting. The council will be discussing proposals to allow businesses to access the local fiber optic network. Fiber optic connections can dramatically increase network speeds over other technologies.