CHICAGO – Chicago will say that it has turned the financial corner at its annual investor conference Wednesday, but it's a message obscured by the city’s pension albatross.
"We are making good on the promises the mayor laid out on fiscal reforms," is what Chicago's chief financial officer Carole Brown said the city will emphasize.
Mayor Rahm Emanuel and his finance team hope to convince the buyside of its strides toward structural balance, shedding faulty debt practices, and stabilizing a pension system that has dragged one of the city's bond ratings down to junk.
They'll also highlight city infrastructure investment and promote the city's economic vitality, citing corporate relocations and foreign investment.
On the budget "we are getting to a point where we've dealt with a lot of the structural issues," Brown said in an interview along with city budget director Alexandra Holt. The city also hopes to show investors that the city's fiscal challenges haven't dented private investment in the city.
Any such progress is overshadowed by the persistent weight of a now $22.6 billion unfunded pension burden, up about $3 billion from a year ago. The liability is $33.8 billion when applying new accounting rules.
While winning praise for raising taxes to better fund pensions, concerns abound that Chicago's fixes fall short of what's needed to stabilize or improve its tarnished bond ratings, which all carry a negative outlook.
The pension solutions also are not complete; the city has yet to announce a plan to stabilize the largest of its four funds, and state legislative action will be needed.
BUDGET
Chicago's
The investor conference follows release Friday of the analysis, which underscored the city's headway in shrinking its structural deficit. The city heads into its 2017 budget season with a $137 million gap to close. That's down from $654 million when Emanuel took office in 2011.
"The fiscal picture of the city of Chicago, while not done, is much stronger," Emanuel said Monday as he introduced a speech Holt gave to the City Club of Chicago.
"The city's finances were in a very different place then they are today," Holt told the City Club. "We had one-time revenues that we were being using to fill the hole and they were masking the true cost of government. In addition, scoop-and-toss and the city's other debt management practices were adding more and more expense to the city's credit card every year."
The city has better aligned its spending with recurring revenue through savings and efficiencies on work rules and service changes, and by holding down healthcare costs while raising new revenue through various taxes and fees.
General revenue growth from an improved economy also helped.
Chicago halted the use of reserves to help balance the books bringing down one-time revenue use to $40 million this year from $570 million. The city continues to rely on scoop-and-toss, in which it issues new debt to pay off maturing debt, but it is scaling back and plans to eliminate the practice by 2019.
The city also continues to pare back its use of debt to cover operating expenses like retroactive pay raises and judgments, increasing its operating budget for settlements and judgments by 40% since 2013. The city, however, has not said how much is still being pushed on to its debt load.
Revenues are on target with budgeted levels this year.
Chicago projects a slight decline next year because the state is requiring local governments to return an overpayment of the local share of personal property tax replacement funds and further reduced the local share to fund help fund a stopgap budget.
Under a positive growth scenario outlined in the analysis, a general fund of about $3.6 billion in 2018 and a $102 million deficit would allow Chicago would continue to chip away at its budget gap. Under a negative outlook where the city sees stagnant growth in a $3.4 billion to $3.5 billion general fund, the city could face an estimated $581 million gap in 2018.
PENSIONS
The city's collective $33.8 billion of net pension liabilities -- which reflect the application of a blended discount rate of the municipal bond rate and the expected long term rate of return – equate to an average 23% funded ratio.
The city's contribution to its police and firefighter funds jumped to $619 million in 2015 from $300 million and will rise to $727 million next year and $792 million in 2018.
The scheduled payment amounts were lowered after Emanuel won legislative approval of a revised, slower amortization of a 2011 state mandate to stabilize local governments' public safety funds. The changes phase in the shift to an actuarially based payment and extend by 15 years the deadline for reaching a 90% funded ratio.
The city last year passed a record property tax hike that phases in a $543 million annual increase to cover the ramp-up. Payments will jump again by about $200 million to $1 billion in 2020 when the ramp-up to an actuarially based contribution is reached.
The city's 2016 contribution to its laborers' pension fund of $15 million is based on the existing statutory formula and puts the fund on pace to exhaust assets in 2027,after which contributions would skyrocket to more than $200 million to meet obligations on a pay-as-you-go basis.
The city's proposed fix, which requires state legislative approval, would boost the city's contribution next year to $43 million as the city phases in a shift to an ARC payment through 2020 to reach a 90% funded ratio by 2055. The city would earmark a 9-1-1 surcharge increase to cover rising payments.
The city's 2016 contribution to its largest fund, which covers general municipal workers, is $162 million. Without changes, the fund will become insolvent in 2025 after which payments would jump to more than $1 billion to meet obligations.
The city is expected to soon announce a proposed funding scheme that would reflect the same phasing in of an ARC.
"Everything is on the table," Brown said of funding, although sources say the mayor won't look to further burden the property tax levy.
The Chicago Sun-Times reported late Monday the administration is eyeing increases on the city's various utility taxes to generate the roughly $250 million needed to raise contributions.
Some rating agencies and investors have praised the city for finally acting to stabilize its pension burden, but have warned the reform plans take too long to improve funding levels.
The laborers' and expected municipal employees' funding plans still require state approval.
The contribution hikes are necessary to merely keep the city's unfunded pension problems from getting worse, "assuming the pension plans even achieve what are in our opinion aggressive investment return assumptions," Gurtin Fixed Income Management LLC said in a July report.
To restore its investment grade, "the city's unfunded pension liability would need to begin to stabilize and decline. The actions the city has taken to date have only enabled their pension problem to get worse at a slower pace," Moody's Investors Service said. Moody's rates Chicago general obligation debt at speculative-grade Ba1.
"I get the approach Moody's is taking, but we do think …. that the city has made tremendous progress," Brown said.
DEBT AND RESERVES
The city has $22.6 billion of debt, including $8.4 billion of property-tax funded general obligation paper, $500 million of non-property tax funded GOs, and $7.3 billion of O'Hare International Airport bonds. Water, wastewater, and sales tax revenue bonds account for much of the remainder. That's up from $14.9 billion a decade ago.
The city highlights in its annual financial analysis the conversion of floating-rate GOs to fixed and the elimination of all non-airport swaps to reduce bank risks in the city's debt portfolio.
While the plans were already in the works, Moody's downgrade of the city's GOs to junk in May 2015 added urgency, sparking a potential $2.2 billion liquidity crisis by triggering defaults on swaps and bank support on credit lines and floating-rate bonds. The city resolved the crisis but it was costly.
The city added $700 million in principal and $1 billion in interest to its debt tab as it pushed defaulted credit lines on to its debt load. The city paid a total of $395 million to cancel swaps, including $192 million for GOs, $70 million on wastewater, $102 million on water, $29 million on sales tax bonds, and $2 million on tax increment financing debt.
The city's GOs are rated BBB-plus by Kroll Bond Rating Agency and S&P Global Ratings. Fitch Ratings has the city at BBB-minus.
The city's reserves stand at $620 million including a $500 million Skyway lease fund, water and sewer stabilization funds, and an operating liquidity fund. Emanuel halted former Mayor Richard Daley's practice in his final years of using reserves to balance the books and returned $40 million. The infusion, however, hasn't bolstered the reserves. Instead, they have offset further dips that would have occurred as the city made good on prior commitments on reserve use for various programs, Holt said.
