CHICAGO — Chicago faces a record $654.7 million deficit as work begins in earnest on a $6.3 billion 2011 budget, while expectations of a slight improvement in revenue collections can’t keep pace with growing personnel costs.
The red ink could increase by another $40 million due to pending fire department raises under arbitration.
“As the nation’s economic recession continues to have an impact on every person, business, and level of government, we have yet to see any major improvement in city revenues,” city budget director Eugene Munin said at a news conference Friday.
The city anticipates an all-funds budget for next year of about $6.3 billion, including a $3.39 billion corporate fund. It faces an additional $207 million in spending due mostly to increased employee costs from contractual raises and growing health care expenses. Wages, benefits, and pension costs make up 80% of the city’s corporate fund.
A slight improvement of 1.1 % in economically sensitive revenue collections is expected in 2011, but the funds will still fall more than $300 million below peak 2007 levels. Sales taxes are expected to rise by 1% and individual income taxes by 1.4%.
Chicago annually launches its budget season by releasing preliminary financial figures by the end of July. The size of the deficit marked the bleakest projected number to date and was up from a deficit of $520 million last year.
Munin said the city’s finance team will focus on cutting expenses first, but he left the door open to layoffs, union concessions, the use of reserves, and taxes and fee increases, with the exception of a property tax increase.
Mayor Richard Daley, who has not said whether he will seek re-election next year, has ruled out a property tax increase.
Seeking to avoid deep service cuts or major tax hikes, Daley last year relied heavily on reserves from privatization of city assets to balance the budget, using $350 million in mid- and long-term reserves from the $1.14 billion, 75-year parking meter system lease. Some of those reserves remain, but not enough to close the balance. The city Friday also announced it had trimmed about $60 million off the level of parking meter reserves used in 2010.
Daley last year kept his hands off the city’s $500 million permanent reserve set up with proceeds of the $1.8 billion, 99-year lease of the Chicago Skyway toll bridge in 2005. Chicago’s narrow ending balance of just $2.7 million in 2009 highlights the importance of leaving the fund intact. Rating analysts upgraded the city after it established the reserve and have said it remains central to the current rating levels.
Chicago’s general obligation bonds are rated AA-plus with a negative outlook by Fitch Ratings, Aa2 with a stable outlook by Moody’s Investors Service, and AA-minus with a stable outlook by Standard & Poor’s. Fitch and Moody’s raised the ratings by one notch as part of their recalibration processes.
While Munin did not rule out drawing from remaining reserves, he acknowledged that the city could not again rely on them to balance the budget. “Drawing down on the reserves every year is not a long-term solution,” he said, though he said their use over the last two budget years was prudent.
Some options floated by various officials and City Council members include freeing up the city’s portion — about 20% — of $700 million in tax-increment financing surplus funds and privatizing recycling. If TIF revenues were freed up, other taxing bodies such as the Chicago Public Schools would also benefit.
Chief financial officer Gene Saffold said debt restructuring also remains on the table. About $118 million of debt was restructured to balance the 2010 budget.
Chicago continues to eye privatizing Midway International Airport for an up-front payment. Saffold declined to comment on whether the city would attempt to resurrect the plan in 2011, but he said officials met last week’s deadline to report quarterly to the Federal Aviation Administration its interest in preserving the single large hub slot under the government’s pilot program allowing for the privatization of five airports.
City officials had planned to tap some revenue from a proposed $2.5 billion lease of the airport to help shore up its pension funds and for infrastructure, but the deal fell apart last year when the bidder could not raise the capital to finance the deal amid the financial crisis.
Chicago is planning up to $3 billion of debt by the end of the year.
The City Council last week approved up to $900 million of GOs, including $500 million of new money; up to $750 million of water revenue bonds, including $450 million of new money; and up to $400 million of wastewater revenue bonds, including $225 million of new money.
All the authorizations include plans to use the taxable Build America Bond program ahead of its expiration this year in its current form. “Use of the BAB program is advantageous to the city on all three sales,” Saffold said.
The finance department also introduced an ordinance last week allowing up to $1 billion of O’Hare International Airport general airport revenue bonds, with the proceeds earmarked for the city’s ongoing $8 billion expansion project known as the O’Hare Modernization Program.
The city this past spring wrapped up borrowing needed for the $3.3 billion first phase of the program and is still in negotiations with the airport’s airlines on the next phase. Chicago received federal letter of intent funds for the next phase and also plans to tap passenger facilities charges.
