Chicago Faces $369 Million Deficit Next Year

CHICAGO — Chicago heads into next year's budget season with $369 million of red ink to erase, a figure down by half from what Mayor Rahm Emanuel and his finance team faced as they crafted their inaugural budget last year.

The city released its preliminary budget figures on Tuesday, heralding the traditional start to the budget process. The announcement has long been marked by warnings of deficits. The $369 million marks the lowest gap since 2009. Emanuel will submit his proposed spending plan for the next year to the City Council in October. It is traditionally adopted in November for the budget cycle that begins Jan. 1.

The city also released its second annual financial analysis, begun last year by Emanuel's administration, that provides an overview of the city's revenues, spending, and debt load, and includes projections for the next several years under varying economic scenarios.

Emanuel attributed the reduction in deficits to structural budget changes enacted last year in the 2012 budget.

"By making the tough but necessary choices in 2012, we were able to cut our budget gap in half in one year without using one-time fixes," Emanuel said. "But this will not be done in one year, and while a $369 million budget shortfall is a substantial gap, we are continuing to make the difficult but necessary choices as we right the city's financial ship and stabilize its fiscal future."

The structural savings were accomplished through various reforms including improved debt collection, shifting to a grid garbage collection system from the previous ward-by-ward method, a consolidation of police facilities, job cuts and reduced health care spending.

The garbage shift is currently expected to save $15 million to $20 million, but the city hopes to raise that level to $60 million annually.

The city also raised a host of fines and fees in the current budget while leaving the property tax and sales tax alone.

The projections for the coming years show a worsening of the city's budget gaps, with a $466 million deficit expected in 2014 and a $580 million one in 2015 unless additional reforms are adopted that achieve long-term savings, or revenues rise beyond projections.

"Even under optimistic projections, the city will continue to experience a sizable annual budget shortfall for several years. This makes evident the city's long-standing structural deficit. The difficult process of reforming government to address this deficit began last year, and must continue into 2013 and beyond," the financial analysis reads.

The future figures also don't reflect the public safety pension payment spike looming in 2015 of at least $700 million due to state-imposed reforms adopted several years ago. Emanuel wants Illinois lawmakers, as they work on state-level reforms, to include an overhaul of the city's pension system, including a temporary suspension of cost-of-living increases, and some form of relief from the 2015 increase.

Gov. Pat Quinn called a special session of the General Assembly for Aug. 17 to take up state pension changes. Lawmakers, however, remain deeply divided over how to accomplish savings at the state level, making the fate of local government changes all the more uncertain.

The City Council approved the mayor's $6.3 billion 2012 budget unanimously last November. The city whittled down the $741 million deficit to $636 million. The remaining gap was closed with $529 million of recurring savings in the form of cuts, layoffs, reforms and fee hikes. The remainder came from one-shots such as debt restructuring.

Ahead of its last general obligation bond sale this spring, Moody's Investors Service revised its outlook to negative on Chicago's $8 billion of Aa3-rated GO debt, primarily because of $15 billion of unfunded liabilities in the city's four pension funds and the looming pension payment hike. Chicago's current annual pension payments total $476 million, while a payment of $1.1 billion this year would be needed to meet the annual required contribution to fully fund the system.

Fitch Ratings affirmed the city's AA-minus rating and stable outlook. Standard & Poor's affirmed its A-plus rating and stable outlook. All three rating agencies praised city's move away from a heavy use of non-recurring revenues such as reserves to cover budget shortfalls. Former Mayor Richard Daley used $288 million in reserves to balance the 2011 budget.

The credit also benefits from solid, remaining reserves of $634 million primarily from the city's $1.8 billion Skyway toll bridge lease in 2005.

The 2012 budget also called for adding $20 million to reserve accounts.

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