Regional News

Chicago Faces Modest Gap in 2014 Ahead of 2015 Pension Reckoning

CHICAGO — Chicago faces a more modest gap in its 2014 budget of $339 million before its financial reckoning arrives the following year when public safety pension payments will spike by $600 million, according to the city's new annual financial analysis that kicks off its official budget season.

The gap will grow to $995 million ahead of the 2015 budget and then $1.16 billion in two years absent action by Illinois to reform local government pensions and ease the city's dramatic payment spike or formation of a city backup plan.

The city released the projections Wednesday in its annual financial analysis report launched by Emanuel's administration in 2011 to replace the release of a preliminary budget by the end of July.

The 2014 shortfall that must be closed ahead of Chicago Mayor Rahm Emanuel's submission of a proposed budget to the City Council in October is around $30 million less than the gap officials faced a year ago. Emanuel's administration faced a more than $600 million deficit heading into its first budget in 2012.

"By making the tough but necessary choices during the past two years, we were able to cut our budget gap again this year," the mayor said.

He added that the shortfall is still substantial "and we are continuing to make the difficult but necessary choices as we right the city's financial ship and stabilize its fiscal future."

City budget director Alexandra Holt will look to close the hole with savings through reforms and efficiencies before turning to new or increased taxes, fines or fees. No new or increased taxes are currently under consideration and the city did not say if it was considering layoffs.

The city turned to $220 million of tax, fine and fee increases to help close the 2012 deficit. Officials credited the much smaller hole in 2013 to savings generated from various initiatives launched in 2012 and a reduction in one-shots along with an improving economy and revenue picture.

The 2013 budget also relied on savings from changes in garbage collection and new revenue-generating initiatives such as the installation of speed cameras that ticket drivers and electronic billboard leases. While some of those projects have yet to come to fruition, taxes are performing well and expected to generate $56 million more than projected this year. Some, like amusement, hotel, sales and use taxes, are expected to continue to grow modestly next year while some others will dip slightly, according to the analysis.

General corporate fund revenues are projected at $3 billion and expenses are expected to total $3.35 billion net next year.

The looming hike in pension payments is due to previous state pension reforms that shift city payments for its police and firemen's funds to a new funding schedule designed to reach a 90% funded ratio with payments based on an actuarially required contribution, or ARC. Chicago's current payments are based on a statutory formula and fall short of the ARC.

The city's current $19 billion of unfunded liabilities along with a shift in how the agency assesses local and state government pension obligations drove a recent three-notch downgrade to A3 of the city's $7.7 billion of general obligation debt by Moody's Investors Service. The credit agency also lowered the city's sales tax bonds to the same level and dropped its water and sewer bonds by two notches.

The strain of the pension obligations is heightened due to the city's debt load and spending demands for public safety and other city services along with a "limited political appetite for tax hikes."

Moody's assigns a negative outlook "based on the dramatic spike in annual pension … which will place material strain on the city's operating budget."

Fitch Ratings has the city's AA-minus GO rating on watch for a downgrade and Standard & Poor's assigns an A-plus and stable outlook.

Chicago has some other revenue options to deal with its deficit and pension woes. It could declare a surplus in its tax-increment financing program to free up some funds but only about $200 million in the fund is unallocated and not all would go to the city.

Officials are advancing plans to possibly privatize Midway Airport under a federal pilot program and the competition is reportedly down to two investment groups. After paying off airport debt, the city could use proceeds for infrastructure or to pay down pensions. Officials have said in the past that pension reforms are needed before funneling additional money into the system.

State legislative action on an overhaul has stalled for two years, driving Illinois' bond rating down. A legislative conference committee hopes in the coming months to reach an accord on a new plan. Quinn and others have said those changes could then be passed on to local governments.

Chicago has no backup plan should lawmakers fail to act. Emanuel struck a pension reform deal with the leadership of one of the city's smaller unions earlier this year that included phasing in the shift to an ARC payment, but the rank and file rejected it.




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