CHICAGO – Chicago's effort to right its fiscal path remains an uphill battle given the state's political gridlock and potential taxpayer anger over tax hikes.
Chicago's fiscal progress so far – and the distance it still needs to cover -- took center stage Tuesday in a City Club of Chicago panel discussion called "Chicago's Financial Storm."
Mayor Rahm Emanuel and the city council have taken steps in the right direction but concerns remain, said panelist Laurence Msall, president of the Chicago Civic Federation. He was referring to tax increases approved to fund higher contributions to the city's underfunded pension plans.
While the pension reform plans put all four of the city's funds on a path to a 90% funded ratio in 40 years, they improve funded ratios very slowly, and after a five-year payment ramp to an actuarially based contribution the city will need to come up with hundreds of millions in new revenue to meet higher funding levels.
Msall warned that the state's budget impasse and the political gridlock due to tensions between Gov. Bruce Rauner, a Republican, and the General Assembly's Democratic majority threatens city efforts.
"If the state of Illinois does not get its financial act in order….if it doesn't provide some assistance to the city of Chicago" and other local governments, "it is unlikely that we will stabilize the state's finances or our local governments," Msall said.
The city needs the state to sign off on the overhaul of its municipal and laborers' pension funds. Even if a bill passes, Rauner may veto such a measure, and it's unclear if supporters could muster an override.
Chicago Public Schools' precarious fiscal condition is partially dependent on $215 million in pension aid from the state that assumes state action on pension reforms.
The city would like a new revenue stream to bolster its finances after hitting taxpayers with a big property tax hike, a new water/sewer tax, a garbage fee, and other fines and fees.
Extending the sales tax to cover services is a top choice but state approval would be needed.
"How much more can the taxpayers of Chicago take?" said Fran Spielman, the longtime City Hall reporter for the Chicago Sun-Times.
In addition to grappling with the looming spike in pension payments at the end of the payment ramp, the city must fund the costs of 1,000 new police officers it plans to hire over the next two years and it also faces labor contract negotiations.
Spielman said council members and Emanuel face a potential backlash in 2019 because it remains to be seen whether voters will throw them out for the tax increases or credit them with helping to solve the city's woes.
After Moody's Investors Service dropped Chicago to junk in May 2015 following an Illinois Supreme Court ruling that voided state reforms, the specter of a potential bankruptcy filing was raised. Asked if that would ever be considered by the city, Spielman said Emanuel "would move heaven and earth" to avoid that as he would not want such a black mark on his legacy.
Such a filing, in any case, would require a new state law to emerge from the gridlock in the state capitol.
The city's ratings have taken a beating because its pension strains but panelist Jennifer Boyd, an S&P Global Ratings analyst, said it's unlikely to take any additional negative action on the BBB-plus rating over a two-year outlook period.
The rating agency recently revised the city's outlook to stable from negative after it passed the water/sewer tax to fund higher payments to the city's municipal employees' pension fund.
"We think it's unlikely that the rating will be improved over the next two years but we don't expect to lower it," she said, adding that the position is conditioned on the city's maintenance of current reserve levels and no reversal of strides trimming its structural deficit.
Boyd's panel appearance followed the rating agency's release last week of a special report noting that the recent passage of the city's 2017 budget would not result in a rating change. The report underscored S&P's position that the city's budget remains structurally imbalanced and that sustainability of the city's pension overhaul is key to its rating.
"Chicago's adopted 2017 budget narrows the corporate fund budget gap but remains structurally imbalanced," analysts wrote. The city's $137 million gap was the smallest since 2011. "Credit quality could be threatened if the measures taken to date by the city prove insufficient to achieve structurally balanced budgets in the next two years."
Chicago's financial forecast projects widening budget gaps of $233 million in 2018 and $324 million in 2019. Unplanned increases in pension contributions and public safety expenses could pressure budget gains.
The city continues to rely on one-time measures like this year's $40.5 million in tax-increment financing surplus, a sweeping of aging non-corporate fund accounts, $3.5 million from land sales, $37 million from the prior year's fund balance, and scoop-and-toss debt restructuring to balance its books. Scoop- and-toss is supposed to be phased out by 2019.
The city faces challenges in balancing the budget while phasing out debt restructuring and reducing its use of long-term debt to cover expenses like retroactive salary increases and settlements, S&P said.
On the pension front, the report offered praise but also warned of the need to keep the funding plans on track. "All four of the municipal employee pension plans now have fairly predictable revenues to support increasingly larger annual contributions, which are on a fixed, five-year schedule that provides a measure of predictability in the near term.
"However, the sustainability of the pension plan for municipal employees may be short-lived; poor market returns in the pension plans could cause further budget stress if assets were to fall to a degree that was not anticipated by the city," analysts wrote, saying the need to identify additional revenue once the ramp up to actuarial payments ends in 2022 provides additional pressure.
The $1.03 billion appropriated in the 2017 budget for pension payments is up from $849 million in 2016 and $480 million in 2015, but still falls short of $1.87 billion in actuarially determined contribution levels.
