CHICAGO — Chicago's rising pension and debt service tabs, and a persistent, albeit shrinking, operating deficit, pose a long-term strain to the city's balance sheet.
That's the picture painted in the city's annual financial overview, which kicks the 2016 budget season into high gear.
Chicago Mayor Rahm Emanuel's administration released the
The shortfall rises to $754 million after adding in an optimistic $328 million projection for higher public safety pension contributions, $100 million the city plans for debt service payments that officials previously planned to push off, and $93 million in higher contributions under 2014 legislation that overhauled its municipal and laborers fund.
"The city is in a very difficult financial situation," said Laurence Msall, president of the Chicago Civic Federation, a government research organization.
It's difficult to see how Mayor Emanuel can meet growing pension and debt costs, Msall said, "and maintain adequate essential services and avoid too huge a tax increase that could drive residents and businesses out of the city."
Emanuel wants to highlight reductions in the operating deficit since taking office in 2011.
"We have made significant progress, while continuing to make investments important to Chicago's families and neighborhoods, but this progress is threatened by the massive pension liabilities that must be addressed this year," Emanuel warned.
The numbers lay out a daunting picture of the long-term challenges weighing down Chicago as it seeks both to tackle a pension albatross while also moving away from much-maligned debt practices.
Emanuel continued such practices from the preceding Richard Daley administration, including scoop-and-toss debt restructuring and using debt to paper over operations. The near-term budget relief those practices provided further burdens the city's long term debt load.
Chicago operates on a roughly $7.3 billion budget that includes a $3.5 billion general fund-like corporate fund. The city's economically sensitive taxes, including those on sales, hotels, and its share of state income taxes, are doing better than previously projected but some non-tax revenues are down.
Progress in curbing growing deficits has been helped in recent years by cost cutting, an improved economy, and a shift in how the city has covered expenses with a reduction in one-time revenues. From 2009 through 2011, 16% of corporate fund revenues came from one-time resources with a heavy reliance on reserves from the city's 2009 parking meter system lease. The report says the reliance on one-time transfers into the fund is down to about 1%.
That doesn't mean the city doesn't still rely heavily on one-time maneuvers for budget relief when short-term borrowing to cover operations and debt restructuring is counted.
The city has long borrowed to cover judgments, with figures ranging $69.3 million to $204.4 million over the past 10 years. In 2014, borrowing covered $58 million of $110 million paid compared to $138 million of $200 million paid in 2013, and $112 million of $180 million paid in 2012.
The city holds about $625 million in reserves from various asset leases that serve as a buffer for narrow ending balances.
Chicago has long left alone the $500 million reserve set up with proceeds from the $1.8 billion lease of the Skyway toll bridge in 2005 but Daley nearly drained reserves set up with the $1.1 billion parking meter system lease after city tax revenues tumbled in 2008 and 2009.
The city's base outlook projects a $335 million operating deficit in 2017 and $436 million in 2018, or $577 million in 2017 and $801 million in 2018 using negative economic projections. Those figures don't account for growing pension or debt service costs as the city phases out debt restructuring by 2019.
DEBT
The city will pay $1.66 billion in 2015 to service $22.8 billion of debt, including general obligation paper and enterprise system borrowing for water, wastewater, airports, and other programs.
The $22.8 billion figure includes $8.4 billion of property tax supported GOs. Those figures are up from $19.9 billion including $6.8 billion of GOs in 2011 when Emanuel took office. Of the $1.66 billion needed to cover debt, about $593 million goes to cover property tax supported GOs. Those figures are up from $1.2 billion of overall debt service including $368 million for GOs in 2011.
Much of the debt funded capital projects, but parts of it funded "working capital" expenses such as tree planting, garbage carts, retroactive salary payments and legal settlements, the report says.
Debt service is projected to rise to $1.9 billion in 2018 including $685 million on GOs on a lower overall debt total of $20.6 billion including $7.8 billion of GOs. Those figures don't incorporate future bond issues.
The report notes the city's downgrade on May 12 by Moody's Investors Service to a speculative Ba1 rating. "Future debt issuances are expected to be more expensive due to higher interest rates caused by the downgrade," it says.
The city's five-year capital improvement program totals $8 billion and relies on about $660 million of GO borrowing.
The city reported $681 million of short-term borrowing over the last two years. That debt was converted to a long-term obligation with the city's recent $1 billion GO borrowing as part of its effort to eliminate $2.2 billion of liquidity risk from rating downgrades that triggered default events on bank contracts.
The city's $831 million property tax levy, outside of a small piece for libraries, is consumed by pension and debt service costs. The city began the practice of scoop-and-toss restructuring in 2007 to cover debt service payments coming due that would require other revenue. The city pushed off $170 million in 2014 and $200 million in the current budget; Emanuel has vowed to eliminate the practice by 2019 while also further curbing the use of long term debt for operating expenses.
PENSIONS
The city owes $886 million to its pension funds this year based on the requirement that it set the levy a year ahead, but the city has not yet said how it would pay for higher public safety contributions. Its budget provides only $557 million.
The city's pension contribution projections hinge on several gambles that rely on court and legislative action and could drive up future deficits.
The $886 million figure is up from $478 million paid in 2014. The increase is due to higher contributions owed by the city for the city-sponsored 2014 reforms, and the public safety pension spike under a state 2010 actuarial funding mandate that is taking effect.
The burden rises to $976 million in 2016, $1.1 billion in 2017, and hits $1.6 billion in 2021 after holding steady between $400 million to $500 million over last decade.
The figures could jump by more than $200 million next year if legislation lawmakers approved this spring is not signed into law. It would phase in the city's higher public safety contribution requirements and delay the full funding target date.
It's unclear when the legislation will go to Gov. Bruce Rauner, or whether he will sign it, as lawmakers and the governor remain in a budget impasse.
At the same time, if the Illinois Supreme Court doesn't overturn a recent lower court ruling voiding the city's 2014 overhaul of its municipal and laborers' fund, the city will save $93 million in higher city contributions that are part of the overhaul. The downside is that the funds will return to their path toward insolvency between 2026 and 2029.
The city carried $20 billion of unfunded liabilities at the close of 2014.
SOLUTIONS
The report doesn't lay out solutions. Investors believe a big property tax hike is needed. Emanuel has left that option on the table. He hasn't raised the property, sales, or gasoline tax during his term.
"A solution to our fiscal situation will require a team approach from elected officials and residents, and a willingness to consider new ideas," Emanuel said in a statement.
The administration is meeting with council members who has have offered up a menu of revenue ideas and will hold public forums ahead of the release next month of a 2016 proposed budget, which will come one month ahead of the traditional October release.
Chicago faces a tough balancing act.
"Should the city begin to increase its tax rates in order to meet its required pension contributions, we believe there is significant risk that the very strengths that many identify (people, jobs, and a growing economy) may be at risk as residents and businesses seek lower tax rates in surrounding suburbs or other metropolitan areas," Gurtin Fixed Income Management LLC said in a July piece.
The Civic Federation's Msall said state help is needed because the city's pension woes are driven in part by the 2010 mandate and the fact that its unfunded liabilities are so high because its contributions are set in state statute with the levels falling far short of an ARC.
"It's the Civic Federation's hope that the city administration will produce both a long and short-term fiscal stabilization plan" with the state's assistance that recognizes the need to meet obligations, maintain essential services, and raise taxes without "driving business and residents out of the city."
