Chicago's $754 Million Budget Problem

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Rahm Emanuel, mayor of Chicago, listens during an interview inside the Bloomberg Link during day two of the Democratic National Convention (DNC) in Charlotte, North Carolina, U.S., on Wednesday, Sept. 5, 2012. Democratic officials have moved President Barack Obama's nomination acceptance speech tomorrow night to the Time Warner Cable Arena from the larger, outdoor Bank of America Stadium because of the possibility of severe weather. Photographer: David Paul Morris/Bloomberg *** Local Caption *** Rahm Emanuel

CHICAGO - Chicago heads into 2016 budget season in need of $754 million to cover an operating deficit and higher pension contributions, according to initial budget figures Chicago Mayor Rahm Emanuel's administration released Friday.

"A solution to our fiscal situation will require a team approach from elected officials and residents, and a willingness to consider new ideas. Solving Chicago's financial challenges must be a collaborative process in which all voices are heard," Emanuel said in a statement.

Investors and rating agency analysts are watching closely as the city's 2016 budget season kicks into high gear. The city's fiscal ills largely driven by the stains of its $20 billion unfunded pension tab, led Moody's Investors Service to downgrade Chicago to junk-level Ba1 in April.

Many analysts and investors, who demand steep interest rate penalties on city general obligation debt, expect a big property tax hike to stabilize the city's precarious balance sheet.

Emanuel will release his proposed 2016 budget in September, a month earlier than usual, as the city comes up with a plan to close the deficit. The administration plans to meet with council members and to hold town hall meetings to solicit ideas.

Emanuel, who took office in 2011, characterized the budget shortfall as being $426 million, including a $233 million operating deficit that the administration sought to highlight as the lowest since 2008 and the result of chipping away at spending and undertaking management efficiencies and structural reforms.

His $426 million figure further includes $93 million in increased city contributions owed to the municipal and laborers' pension funds under a reform package that took effect Jan. 1 and about $100 million in debt repayment the city previously intended push off further in its amortization schedule. Emanuel announced earlier this year his intention to phase out by 2019 the city's practice that dates back to 2007 of scoop and toss debt restructuring for budget relief.

The city's gap grows to $754 million when the $328 million hike in contributions for the city's police and firefighters' pension funds is added. The additional dollars are due in 2016 under a 2010 state mandate to stabilize local government public safety pension funds.

The administration's projections include several optimistic assumptions that are far from a given. Chicago owes $550 million to its public safety funds next year to move to an actuarially required contribution, or ARC.

The city trimmed that figure down to $328 million by winning state legislative approval for changes that phase in the shift and push off the requirement to get to a 90% funded ratio by 15 years. The measure has not been sent to Gov. Bruce Rauner. The freshman GOP governor has said he may support it, but it could get caught up in state budget gridlock between Rauner and the Democratic majority.

The numbers also assume that the Illinois Supreme Court will reverse a lower court's recent ruling overturning the municipal and laborers' fund overhaul. If the package remains void, the city won't owe the higher $92 million payment. The city also is banking on the courts allowing it to continue its phasing out of $100 million of retiree healthcare costs.

The administration said strides on the operating front are threatened by the city's pension woes and again portrayed that legacy burden - as well as the city's debt load -- as being inherited from the prior administration of Mayor Richard Daley. Emanuel has continued some of Daley's borrowing tactics - borrowing for operations and pushing debt repayment off for budget relief-- that have come under criticism, although he has pledged to phase them out.

The figures were outlined Friday in the city's annual financial analysis which offers a deep look into the city's operating budget, debt, pensions, the status of reserves, and fiscal projections in the coming years based on various revenue scenarios. Emanuel began offering the annual report after he took office in place of the city's release of preliminary budget figures by the end of July.

Chicago carries GO ratings of BBB-plus from both Fitch Ratings and Standard & Poor's with both assigning a negative outlook, and A-minus and stable outlook by Kroll Bond Rating Agency. Moody's Investors Service has a negative outlook on its Ba1 rating.

Kroll said in a special notice this week that it expects the upcoming budget "to outline revenue and/or expenditure actions to address the Police and Fire pension spike, as well as other critical budgetary issues. Failure to confront these issues in a fiscally responsible manner may result in a rating action."

 

 

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