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Chicago Mayor Lays Out Budget With Pension Cliff Looming

CHICAGO – Chicago Mayor Rahm Emanuel  unveiled a balanced, nearly $7 billion 2014 budget Wednesday that was overshadowed by his dire warning that the city faces a “fiscal cliff” a year from now without state action on pension reforms.

Emanuel stuck by his long-held position that a “balanced” solution is needed to stabilize the city’s pension system that relies on both reforms and new revenue. He did not offer an alternative should lawmakers fail to act. The General Assembly is currently in session for a brief veto session but there has been little movement on a new state pension overhaul being crafted by a conference committee.

“Should Springfield fail to pass pension reform for Chicago soon, we will be right back here in council early next year to start work on the city’s 2015 budget – a budget that will either double city property taxes or eliminate the vital services that people need,” Emanuel said in his budget address to the City Council. “Without reform, we cannot make the critical investments in our future.”

The city faces deficits of around $1 billion in 2015 and in 2016 without pension benefit changes due to a required hike in its contributions by $600 million in 2015. The city has seen its credit fall under the strain of its pension obligations. Moody’s Investors Service over the summer dropped the city’s GO rating three notches as it applied new rating criteria putting more emphasis on a local government’s pension health. 

Other city credits as well as those of several city-related governments like the Chicago Board of Education and Chicago Park District have also deteriorated. At A3 with a negative outlook from Moody’s, Chicago’s GOs have never been rated lower.

Fitch Ratings in June put the city’s AA-minus GO and sales tax ratings on negative watch and Standard & Poor’s shifted it outlook on the city’s A-plus rating to negative in September. The downgrades and negative headlines drove up the city’s interest rate penalties in secondary trading on its 10-year paper to a high of 190 basis points in August over the triple-A benchmark.

The General Assembly has failed despite pressure from political and public corners to tackle the state’s $95 billion of unfunded obligations, which Gov. Pat Quinn has said must come before legislation addressing local government funds. Emanuel said the situation is just as urgent for local governments.

“The pension crisis in Illinois is not solved until relief is brought to Chicago and all of the other local governments across our state that stand on the brink of a fiscal cliff because of our pension liabilities,” he said.

The city faces dual pressures. Posing a near-term budget strain, a state mandate to put the city’s police and firefighters’ funds on a solvent course will drive up the city’s pension payments to $1.1 billion in 2015 from $467 million in 2014.

The longer-term pressure is the city’s growing unfunded obligations in its four funds which totaled $19.5 billion in 2012 for a funded ratio of just 35%. The municipal employees and laborers funds are headed to insolvency in the next decade without change.

City contributions and benefits are set in state statute with payments based on a formula that results in contributions falling far short of the actuarially required contribution to keep the funds healthy. “Chicago is willing to do its part” with added revenue, Emanuel said, but not without benefit changes. “The two go hand- in- hand to resolve this crisis.”

The 2014 budget when all local funds are counted, including a $3.29 billion corporate fund, totals nearly $7 billion, up 7% from this year.

Emanuel underscored that the budget is balanced for the third year without a hike in property, sales, or gasoline taxes. He also sought to highlight advances made in trimming the city’s structural imbalance by $230 million. The city faced a much higher $790 million deficit heading into 2012 in Emanuel’s first budget.

Emanuel signed an executive order that targets the transfer of at least 10 % of the city’s unreserved fund balance to city reserves. That figure will be modest as the city’s ending balance in recent years has been narrow. The 2014 budget earmarks $5 million for the city’s reserve. Emanuel’s 2013 allocated $15 million and his first budget in 2012 put $20 million into the reserve. 

Though modest, it marks a reversal of former Mayor Richard Daley’s practice of using reserves to balance his last few budgets. The city closed 2012 with $231 million in general fund reserves and $625 million in asset lease reserves.

The 2014 budget proposed by Emanuel chips away at a $339 million gap through a mix of tax, fee and fine hikes, along with spending cuts, and new revenue from the installation of traffic speed cameras and natural economic growth in various taxes.

The budget relies on a 75 cent-per-pack increase in the tax on cigarettes to raise $10 million and a 50% increase in amusement taxes on cable television bills, expected to generate $9 million. Various parking and vehicle impound fine increases would generate $11 million. Overall, tax and fee increases are expected to raise a total of $34.2 million.

The budget counts on $101 million in fines from an expansion of red-light and speed traffic cameras and higher than previously expected growth in economically sensitive taxes on sales, hotel rooms, and property sales. Cuts and reforms would trim $66 million off the budget gap and $137.4 million through other fiscal maneuvers.

Some of those measures capturing $66 million in savings from shifting retiree healthcare over to state run healthcare exchanges opened as part of federal healthcare reform, cancelling some leases, and other management measures. Some vacant jobs would be left open and $53 million comes from an ending balance expected this year. Another $30 million come from surplus and expiring tax-increment financing funds and $35 million from a sweep of other revenue accounts and grant funds.

The budget provides additional dollars for summer, after-school, and children’s health programs. With Chicago crime receiving national attention, Emanuel said the city’s police recruit training is at its highest level since 2000, but the budget appears to fund just enough positions to make up for retiring officers.

On the pension front, the city hopes for relief from the payment spike in legislation which calls for an incremental increase in city property tax levels between 2018 and 2021 and delays the full shift to an ARC payment for the police and fire finds until 2022. While providing short-term salve it would worsen the funded ratios. Emanuel has previously struck a deal with the leadership of the Chicago Police Sergeants Association on pension reforms but the rank-and-file rejected it.

Any delay in shoring up the firefighters fund is problematic as it’s on path to exhaust its assets. “We will be broke in 2021 unless something happens,” council member and finance committee chairman Edward Burke said. “Keep in mind the city of Chicago does not have home rule when it comes to pensions. These are all matters that have to be dealt with by the General Assembly.”

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