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Chicago Mayor Floats $8B Budget, Warns of Pension Reckoning

CHICAGO — Chicago Mayor Rahm Emanuel rolled out a proposed $8.3 billion budget for 2013 that closes a $300 million deficit without tax or fee hikes, but he also painted a stark picture of the looming fiscal reckoning in 2015 when pensions will consume $1.2 billion of city revenue.

“I am proud to deliver for your consideration a budget that balances our city’s finances without raising a single tax or introducing a single new fee,” Emanuel said Wednesday in his budget address to the City Council. “This is a budget that allows us to make critical investments by reforming government instead of raising taxes.” 

The spending plan may go over more smoothly with council members than Emanuel’s first budget last year that raised a laundry list of fees and fines and cut library hours. But the looming $700 million pension payment spike casts a cloud over the city’s fiscal health.

The city faces an increase to $1.2 billion in 2015 from $476 million this year in its contributions under an Illinois state reform package adopted several years ago that puts the police and firefighter funds on the path towards full funding status. The Municipal and Laborers’ funds are headed toward insolvency in the mid to late 2020s. Chicago estimates it will close out 2012 with $19 billion in unfunded liabilities across its four funds. 

Emanuel intensified pressure on state lawmakers, calling on them to “step up” and warning that action is needed to preserve the city’s structural fiscal achievements.

“Here is the hard truth: in less than four years, payments to meet our pension obligations will comprise 22%of the city’s budget — one out of every five dollars. That’s $1.2 billion of taxpayer money, and growing, each year after that,” the mayor said of the crisis.

The amount equals all spending on police salaries and could finance 10 new high schools and 12 libraries. “If we choose to keep those services and make no changes to our pension system, you and I would have to ask taxpayers to pay 150% more in property taxes,” he said.

Emanuel last spring rolled out a series of pension reforms including freezing cost-of-living increases, but the General Assembly’s approval is needed. Political bickering has derailed state level reforms this year and few expect action until after the November election.

“There is this budget and then there’s the larger problems the city faces,” said Shawn O’Leary, senior research analyst at Nuveen Asset Management. “We are confident that the city can balance the 2013 budget, but the question is what will they do when they approach their pension wall.”

The city currently abides by a statutory payment plan that falls short of the actuarially required contribution needed to keep the funds healthy. O’Leary said the difference between the city’s payment in 2011 of $416 million and the ARC of $1.36 billion equals 34% of Chicago’s corporate fund budget, up from 5.3% in 2003. Any pension changes also likely face a legal battle as the state constitution affords strong contractual rights to current employee benefits.

The $8.3 billion all-funds budget includes a $3.16 billion corporate fund that is up 2% over 2012. Enterprise and grant funds bring the budget to $8.3 billion, up 3% over 2012.

The city’s pension payment in 2013 will total $479 million and it will spend $531 million to service its general obligation debt, up from $483 million this year. The city’s tax levy is set at $801 million.

Chicago started the 2013 budget season with a projected $369 million gap, half of what Emanuel faced a year ago in crafting his first budget. The shortfall was whittled down to $298 million due to improved revenue projections and various savings.

The remaining deficit was shaved with a mix of recurring and non-recurring revenues, including $40 million in debt refinancing and $10 million from tax-increment financing reforms and surpluses.

The city anticipates $67 million in savings from spending reforms and cuts, $45 million in personnel-related savings including $20 million by cutting 275 positions mostly through attrition and leaving positions unfilled; $70 million in health care savings, and $24 million from improved debt collections. Officials also anticipate $42 million in additional revenue growth.

Tax revenues for the corporate fund are expected to rise to $1.9 billion from an original estimate in 2012 of $1.8 billion, while non-tax revenues will fall slightly to $978 million from $986 million.

Sales and use, income, hotel, property transfer, and recreation taxes are expected to rise by varying degrees while utility taxes are projected to fall.

Emanuel highlighted fiscal and policy achievements he said have paved the way for improvements in the city’s balance sheet, including private competition to deliver some city services, improving debt collections, and shifting garbage collection to a grid system.

The budget also ends the employee head tax on businesses in 2013.

The spending plan funnels $15 million into city reserves. Emanuel’s 2012 budget put $20 million back into reserves which were hit hard in former Mayor Richard Daley’s last budgets. The city’s credit benefits from solid, remaining reserves of $634 million, primarily from the $1.8 billion Skyway bridge lease in 2005.

O’Leary said at first glimpse the budget’s mix of recurring savings, one-shots, and conservative revenue growth estimates appears reasonable. He also praised the Emanuel administration for moving towards a more structurally sound budget and confronting the pension crisis, saying it marked a “real departure” from the Daley administration.

“The budget looks reasonable. It reduces the structural deficit, but it doesn’t eliminate it” due to the one-shots like the debt refinancing, said Laurence Msall, president of the Civic Federation of Chicago. “The big issue is still pensions.”

Though the city has some time, the state may ultimately fail to provide pension relief and investors may eventually expect Chicago to come up with an alternative. City officials have said they don’t want to increase funding alone but it may need to lay out “an alternative path” should the state fail to act.

The mayor also outlined additional spending planned for early childhood education, afterschool programs and recycling, and he promised to keep the police force at full strength. The city faced negative national headlines this year over its murder rate.

With the city still facing difficult labor negotiations with some unions, Emanuel praised those unions that have cooperated on various initiatives and reforms to save $30 million over the next six years.

The city has paid a premium to borrow due to Illinois’ liquidity problems and its own fiscal woes. Earlier this year, Moody’s Investors Service revised its outlook to negative on Chicago’s $8 billion of Aa3-rated GO debt, primarily because of its pension crisis. Fitch Ratings affirmed the city’s AA-minus rating and Standard & Poor’s affirmed its A-plus rating. Both assign stable outlooks.

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