CHICAGO — Accompanying his announcement last week that Chicago faces a $635.7 million gap in its next budget, freshman Mayor Rahm Emanuel
The report — dubbed the Annual Financial Analysis for 2011 — presents an overview of city revenues, spending, and an examination of key areas affecting its fiscal health. They include the city’s asset lease and reserve funds, capital investments, tax-increment financing, debt load, and pension funding. It’s the first of what’s intended to be an annual exercise.
Along with a current snapshot, the analysis also offers a retrospective. In addition, a three-year fiscal forecast is presented based on scenarios that range from negative to positive revenue growth. “The goal of this document is to clearly state the city’s financial condition so that all Chicagoans can participate in the discussion about our city’s budget and long-term fiscal health,” Emanuel writes in the report’s opening letter.
Absent significant change in the city’s spending habits, the prognosis is grim.
Chicago faces red ink under all three revenue forecasts if no structural action is taken. The deficit could hit $790 million in 2014 because revenue growth has fallen short of keeping pace with the growing costs of personnel and health care.
Former Mayor Richard Daley and the City Council — which generally followed Daley in lockstep — did take some structurally sound steps such as establishing the city’s first reserve, cutting back on expenses, trimming the workforce, implementing management efficiencies, and raising taxes and fees.
But the day of reckoning is at hand as deficits over the last few years were primarily managed with one-shots such as debt restructuring and by tapping city asset reserves as debt service and pension obligations mounted.
“This makes evident the city’s long-standing structural deficit — it costs more to operate the city than the city receives in revenues, and the city has been using one-time revenue sources to fill the resulting gap,” the report warns.
Economic pressures and the use of one-shots last year drove a round of downgrades of the city’s nearly $7 billion of general obligation debt. Fitch Ratings last year dropped Chicago’s GOs one notch to AA-minus and Standard & Poor’s dropped the credit to A-plus. Moody’s Investors Service in August lowered the credit to Aa3. All three agencies have stable outlooks.
Emanuel — who has avoided openly criticizing his predecessor since taking office in May — vowed last week to avoid one-time revenue gimmicks and not to raise major taxes or cut the police force to deal with the deficit in the budget he will submit to the City Council in October.
The analysis helps the new mayor lay the groundwork for an overhaul in city government spending, said one buy-side analyst. “The mayor is trying to create a fresh slate for himself by identifying the gaps in the city’s financial structure and the adequacy of revenues to support services,” said Richard Ciccarone, chief research officer at Oak Brook-based McDonnell Investment Management LLC.
While the fiscal analysis may not provide much new information to investors or analysts who closely follow the city, Ciccarone said it may lay the political groundwork for sweeping change and at least catch the eye of investors who have been skittish on city debt. “The information gives them something to monitor,” he said.
Chicago’s long-term debt hit a peak this year at $19.4 billion, up from $15.1 billion in 2007 and $11 billion in 2001, as the city increased borrowing to fund capital projects and pay for expansions at Midway Airport and O’Hare International Airport. The figure includes the city’s GO borrowing, sales tax and motor-fuel tax revenue bonding, tax-increment financing debt, water and sewer bonds, and airport borrowing.
Debt paid primarily by taxpayers totals $10.6 billion. The costs to service the debt has risen to $1.2 billion for all debts, up from $535 million in 2001. “This pattern of increasing long-term debt load is not financially sustainable,” the report warns.
The document provides a dismal overview of the city’s pension obligations with unfunded liabilities of $15 billion because payments to the systems are set by state statute and fall short of the actuarially required contribution level. The city faces an annual increase of $550 million in its contributions beginning in 2015 in the wake of legislation Illinois adopted last year, adding to the strain on the city’s books.
Most city tax revenue flows through the $6.15 billion fiscal 2011 budget into a $3.27 billion general operating fund known as the corporate fund. Taxes account for 40% to 50% of corporate fund revenues.
Those revenues come from taxes on utilities, real estate and other transactions, transportation, and certain recreational and business activities. Local tax revenue grew at an average clip of 6.5% between 2003 and 2006, then by less than 1% in 2007 before falling 3.3% in 2008 and 9.1% in 2009. Last year, the city saw a rise in revenues though they remained below 2007 levels. A slight increase is expected this year.
Revenue from the tax on real estate transactions is down dramatically. After peaking at $242 million in 2006, collections dropped to $81 million last year. A 16% drop is anticipated this year.
The city collects about $714 million in property taxes annually for general use, most of which covers debt service and pension obligations, along with $83 million for the library system. Debt and pension obligations will exceed the city’s levy amount beginning next year.
Another $471 million in property taxes that were collected last year within tax-increment financing districts are set aside to cover the costs of improvements within those districts.
On the expense side, salaries and wages eat up 72% of the corporate fund and benefits another 13%. Total personnel costs rose by 11.6% between 2003 and 2010 because of wage and benefit increases even as the workforce was trimmed to 36,512 in 2010 from 42,242 in 2003.
The average cost per employee rose to $91,000 in 2010 from $74,700 in 2003. Public safety personnel represent about three-fourths of the city’s personnel costs. Emanuel is pressing for union concessions and competition with the private sector to deliver city services to help bring down costs.
While the city has long projected shortfalls heading into the next budgeting season, they skyrocketed in 2008. The gap was less than $100 million for 2006 and 2007 before the deficit rose on a steep slope to nearly $218 million in 2008, $420 million in 2009, and $520 million in 2010.
Chicago faced a $655 million shortfall last year and this year the projected gap is $635.7 million. The city expects to close out 2011 with an unreserved balance of $81.2 million and a tax growth rate of 1.9% over the past year. Expenses are down by $57 million over original budget estimates following various cost savings Emanuel implemented after taking office.
Corporate fund revenues are expected to slip by 19% in 2012 to $2.66 billion as some taxes are expected to decline and one-time revenue sources won’t be available, including $330 million from reserves set up with the city’s parking meter and Skyway toll bridge leases. Corporate fund expenses are expected to rise to $3.3 billion resulting in the $635.7 million gap.
The report takes a longer view of city finances and warns of a $741 million deficit at the same time next year and $791 million the following year in a steady revenue scenario. The gaps rise to $781 million and $864 million if revenues plunge. They fall to $728 million and $768 million if strong growth returns.
“The purpose of these three-year projections is to ensure that the 2012 budget is viewed in a broader context and that decisions about next year are made with an understanding of future conditions and consequences,” the report reads, making the case for structural change.
The city established various mid- and long-term reserves with its $1.8 billion Chicago Skyway toll bridge lease in 2005 and the $1.15 billion 2009 lease of its parking meter system. Before 2005, the city’s only fiscal cushion was its narrow ending balances.
A total of $624 million remains in the various reserves. The city has exhausted most of the mid-term lease funds and only $80 million remains in the $400 million long term meter lease account. The $500 million Skyway fund remains intact.
