CHICAGO — The Chicago City Council adopted Mayor Rahm Emanuel's $7.3 billion 2015 budget, pushing off a fix for a pension-related fiscal cliff until after next year's municipal elections.
Emanuel stressed the city's fiscal strides, including passage of reforms for two of the city's four pension funds and its improved structural balance, after Wednesday's 46-4 vote in favor of his spending plan.
"This is the fourth year in a row we have balanced a budget without raising property, sales, or gas taxes. This will be the fourth year in a row we have put money back into the rainy day fund rather than take money out," Emanuel said. "This is the fourth year in a row that we have increased our investment in the basic infrastructure that people have come to rely upon."
While the city won state legislative passage of a reform package to shore up its municipal employees and laborers funds earlier this year, a $550 million spike in pension payments to the firemen and police funds looms in 2016.
Rating agency analysts have blamed the city's massive unfunded pension obligations of $19.2 billion for its steep credit deterioration. They are watching closely to see how the city deals with the higher, state-mandated public safety payments to decide whether to act on the negative outlook all assign to the city's general obligation bonds.
The vote came after supporters lauded Emanuel and his administration for holding the line on major taxes while shaving the structural deficit in half and increasing funding for some city services and expanding early childhood education.
"We don't have a property tax increase, we don't have a sales tax increase, and we don't have a gasoline tax increase," said Alderman Danny Solis. "At the same time, when I go through my neighborhood there is infrastructure work going on in every neighborhood that I represent."
Dissenting council members attacked the budget for its reliance on police overtime pay instead of hiring more sworn officers. Alderman Bob Fioretti, who is challenging Emanuel in next February's mayoral contest, also blasted the plan for cutting retiree healthcare, debt restructuring for budget relief, and borrowing to cover short-term expenses.
"This budget does not give us a road map to long term financial security. It continues to use long term bonds to fund operations and pushes the burden of payment on our children," Fioretti said.
The city faced a nearly $300 million deficit in the budget, half the deficit Emanuel faced when he took office in 2011. The budget closes the gap with $62.4 million in higher parking, leasing and other tax and fees, as well as $80 million of spending cuts, and savings from various initiatives including $27 million from the ongoing phasing out of most retiree healthcare subsidies. The city will also dip into tax increment financing surpluses and eliminate some vacancies.
An additional $75 million is expected in higher-than-anticipated tax revenue growth. Revenues from hotel taxes are expected to grow by 3%, property tax transfer taxes by 5%, and building permits by 7%.
The proposed $7.34 billion budget includes a corporate fund that will rise to $3.5 billion from $3.3 billion. When grant funds are added the budget rises to $8.9 billion.
On the public safety pension contribution spike, the city contends it can't afford the higher taxes or cuts such an increase would require. Officials want approval for a reform package that includes benefit cuts and payment increases and phases in the payment spike, but unions have halted talks as a legal challenge to state pension reforms makes it ways through the state court system. If the city is to cover its higher payments with property taxes, it must raise its levy in 2015.
The city's GO bonds are rated A-minus by Fitch Ratings, Baa1 by Moody's Investors Service, and A-plus by Standard & Poor's. The city's capital improvement program totals $2.19 billion, including $972 million for aviation projects. The proposed budget appropriates $623.9 million to service the city's GO bonds, up from $595.1 million this year. Pension payments total $557 million, up $79 million from 2014.
The city closed out 2013 with $628 million in reserves and $21 billion of total debt with debt service almost doubling from $793 million in 2004 to $1.56 billion in 2014 and rising to $1.7 billion in 2017.
The Chicago Civic Federation, a budget research organization, gave a lukewarm endorsement to the budget.
"Mayor Emanuel and his team are continuing to make the reasonable changes and bold decisions necessary to stabilize Chicago's finances," the federation's president, Laurence Msall, said in the report. "Two issues, however, threaten to erase all recent progress: the pension funding crisis and the administration's continued use of borrowing for operations through the issuance of refunding bonds."
The city cut about $120.8 million owed in 2015 for debt service by rolling it into a GO offering in March. Payments were extended for an additional 30 years at an interest rate of 6.3%, leading to an additional interest cost of $228.8 million, according to the federation.
Spreads on a 2040 GO maturity have recently exceeded more than 200 basis points and Municipal Market Advisors in a recent weekly outlook warned of ongoing volatility for holders of Chicago's GOs noting its pension strains, rising debt, and slow amortization.
