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Chicago Watchdogs' Report Urges Reforms

JUN 30, 2011 7:53pm ET
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CHICAGO — Chicago could shore up its balance sheet by cutting employees, reducing future retirement benefits, slicing the City Council in half, and resurrecting efforts to lease Midway Airport, according to a new report from a Chicago-based government research group.

The Civic Federation’s 115-page report outlining 40 recommended reforms to be implemented throughout city government over the next three years comes as new Mayor Rahm Emanuel’s finance team faces an estimated $600 million to $700 million deficit in its more than $6 billion budget and a $1 billion ongoing structural  deficit.

The city is challenged by a reliance on revenues that can’t keep pace with rising personnel costs and pension and debt obligations.

The city’s reserve levels have dwindled as they were tapped to erase red ink in the last few years over deep spending cuts. The pressures drove a round of rating downgrades of the city’s $6.8 billion of general obligation debt.

“The Civic Federation sees a need for the mayor and aldermen to work together to improve the long-term fiscal sustainability of our city, including implementing significant reforms,” said president Laurence Msall.

Personnel costs continue to rise and now eat up 83% of Chicago’s $3.3 billion corporate fund even as the workforce has been cut by nearly 6,000 positions since 2002, underscoring the need for layoffs and benefit cuts, which would carry a high fiscal impact towards balancing the city’s budget, according to the report.

About two-thirds of personnel costs are spent on police, fire, and emergency management staff — areas that have escaped past changes — and should be part of a city review on cutting unneeded management layers and increasing productivity, according to the report “Recommendations for a Fiscally Sustainable City of Chicago.”

“With a growing structural deficit, high levels of debt, and staggering unfunded pension liabilities, every option to control costs must be on the table for discussion,” Msall said.

Emanuel has not shied away from angering the city’s unions. Earlier this week, he warned them that workplace concessions were needed to avoid 625 layoffs in the 2012 budget.

Emanuel’s predecessor, Richard Daley, had relied on furloughs to generate $30 million in savings in the current budget, but Emanuel is opposed to further furloughs. A spokesman said the administration was reviewing the federation’s ­report.

The analysis raises concerns over the city’s growing debt and pension obligations. It presses the city to tackle its $14.6 billion of unfunded pension obligations by reducing the future benefits not yet accrued by current employees and raising city and employee contribution levels to an actuarially accrued level. The report also suggests merging funds and overhauling management.

The police and firefighters’ pension funds have funded ratios of just 43.6% and 36.5%. Reforms imposed by the state of Illinois will force the city to contribute an additional $550 million annually beginning in 2015. The laborers fund is at 79.4% and the municipal fund is at 57%. Without action, they could deplete assets over the next two decades.

The report recommends Chicago set up a trust to fund its $1.3 billion unfunded retiree health care liability, of which it is responsible for $787 million, with the pension funds responsible for the remainder. A mix of city and state legislation would be needed for the pension and retiree health care reforms.

Chicago should explore the further use of public-private partnerships and asset leases after adopting a policy to govern such initiatives that includes more public review and oversight, the report said.

Public appetite for privatization sourced following the city’s controversial 2009 $1.15 billion lease of its parking system that was fraught with operational problems. The city also has used most of the proceeds to balance its budgets.

Chicago should resurrect its effort to privatize Midway Airport after adopting a policy for the use of proceeds not governed by state legislation. The city struck a $2.5 billion lease agreement in 2008 but it fell through when the winning bidder could not raise the financing needed due to the credit crisis. Under state legislation, the city was required to use 90% of the proceeds to pay down pension and debt obligations and for capital.

Emanuel has said he no plans to revive the Midway lease effort.

The federation also suggests reducing the size of the City Council to 25 members from 50, which would bring Chicago in line with other major metropolitan council sizes on a per-capita basis, and to reorganize its infrastructure department to improve efficiency.

Fitch Ratings last year dropped Chicago’s GO rating one notch to AA-minus and Standard & Poor’s dropped the credit to A-plus. Moody’s Investors Service in August lowered the GOs to Aa3. All three agencies have stable outlooks.

A handful of Chicago-area bankers, financial advisers, and former city officials contributed to the report, including former chief financial officer Dana Levenson and former budget director Bennett Johnson.

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