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Chicago's Mayor Takes Aim at Deficit

CHICAGO — Chicago Mayor Rahm Emanuel unveiled a $6.3 billion 2012 budget Wednesday that whittles away a $635 million deficit with new revenue from a series of increases in fees, fines and taxes not including property or sales taxes, along with debt refunding savings, management reforms, and spending and job cuts.

Emanuel inherited the deficit when he took the reins in May from Richard Daley, who retired after more than two decades in the office.

Analysts, investors and Emanuel had warned that a day of reckoning was at hand in the next budget because the city’s revenue streams have failed to keep pace with mounting personnel, health care, and pension costs.

Daley’s last few budgets drew heavily from reserves, adding to the worsening structural budget woes.

“Smoke and mirrors and one-time fixes simply won’t get the job done. It’s time to provide Chicagoans with an honest city budget — one that focuses on current needs while still investing in our future,” Emanuel said in his budget address before the City Council.

Emanuel honored his pledge not to raise the city’s sales or property tax and to forgo enacting an income tax. He also won’t further drain remaining city reserves that hold about $624 million, and will add $20 million to them.

Though Emanuel vowed to avoid the use of non-recurring revenues to balance the city’s books, his budget proposal does rely on several one-shots, including $50 million in one-time debt service refunding savings and $12 million in revenue from tax-increment financing by freeing up 20% of surplus funds.

The budget marks a 2.1% increase over 2011 spending and includes a $3.1 billion corporate fund that is down 5.4% over 2011. The city’s capital budget totals $558 million for 2012 and would be funded from a mix of general obligation borrowing and other local, state, and federal funds. Figures on total GO and revenue-backed, water and sewer, and airport-related bonding were not immediately available.

The budget plan shaves $238 million off the deficit through revenue-generating measures, while reforms and spending cuts represent the remaining $417 million. Some of the measures depend on projections and savings estimates that will have to be reached over the year to keep Chicago on track.

The city would impose a premium congestion fee on downtown parking lots during the work week to raise $28 million, with the funds earmarked for downtown public transportation improvements. The budget raises the hotel tax to 16.4% from 15.4% to generate $14 million. A new vehicle-sticker fee tier for heavier vehicles would be established to generate $14.8 million in revenue to repair damage done by such vehicles.

The city would raise $25 million through municipal marketing and sponsorships. It would increase a slew of neighborhood safety fines to produce an estimated $14.6 million. The budget also imposes a valet and loading zone fee to raise $6.2 million.

The budget relies on a modest $39 million rise in revenues, $33.5 million in pension reimbursements from the public schools, and $50 million from savings by refinancing city debt. Previous cuts and reforms resulting in $100 million in savings are counted in the 2012 budget. Emanuel also will phase out the city’s head tax on companies beginning in 2012.

In a separate measure not tied to balancing Chicago’s corporate fund, Emanuel wants to raise an additional $147 million from a four-year water and sewer fee increase to accelerate planned upgrades to those enterprise systems. Rates would rise by 25% in the first year and 15% in each of the following three years.

“The budget I’m presenting today will allow the timely repair and upgrade of Chicago’s infrastructure of roads and water systems. It also will help us to bring city services into the modern age,” the mayor said.

The various reforms aimed at curbing costs and spending cuts include $82 million in savings from reorganizing the city’s police and fire departments through a consolidation of their headquarters, the shuttering of some police stations, and the elimination of 1,200 vacant positions. Emanuel said hundreds of other vacancies long left open as a budget ploy would be filled.

Chicago would eliminate more than 2,000 vacant positions. Another 510 senior and mid-level management employees would be laid off to save $34 million. The city would increase debt collection activities to generate $34 million, expand competitive bidding for the delivery of some city services and switch garbage collection to a grid system to save $20 million, eliminate some fee waivers to generate $9.3 million, and cut library hours for $7 million in savings. Officials also plan to implement a city wellness program to save $20 million.

City Council members approved of the mayor’s decision to leave property and sales tax rates alone, but some questioned other fees, the politically charged move to eliminate some police positions, and the proposed changes in garbage collection.

Emanuel’s budget leaves the issue of pension reform for another day. Chicago is grappling with $15 billion in unfunded liabilities and faces a $550 million increase in annual payments in 2015 under an Illinois mandate. The city’s current statutorily set payment for 2012 will rise to $476 million from $450 million this year. It is expected that the city will push for pension reforms in the state General Assembly’s upcoming fall legislative veto session or in the spring session.

“Our pension obligations are clearly unsustainable. That’s why I will continue to work with leaders in Springfield to solve the pension crisis — sooner rather than later. Our taxpayers, and our city employees, are counting on us to get this right,” Emanuel said in his address.

Economic pressures and the use of reserves last year drove rating agencies to downgrade nearly $7 billion of Chicago GOs. The city paid a premium to borrow due to both its own negative headlines and the effect of the state’s budget struggles.

Fitch Ratings assigns a AA-minus to the city’s GOs and Standard & Poor’s assigns an A-plus. Moody’s Investors Service rates the city Aa3. All three agencies have stable outlooks.

The budget release comes ahead of a first-ever city-sponsored investor conference set for late next week and the planned sale of up to $750 million of new-money GO debt and sales-tax refunding bonds later in the fall.

A local government research organization that tracks city spending habits and has pressed for the city to rein in spending, reform pensions, and end the use of nonrecurring revenues praised the plan.

“Our initial reaction is very positive. We believe Mayor Emanuel’s proposed $6.3 billion budget steers the city away from financial crisis and toward a much better position,” said Civic Federation of Chicago president Laurence Msall.

He said it appears the one-shots are limited to about $80 million to $90 million, moving the city budget closer to a structural balance. “But the city is not out of the woods yet,” Msall added. “It still faces enormous pension challenges.”

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