CHICAGO — Chicago voters pick a mayor Tuesday after a seven-week runoff contest in which the city's fiscal ills have taken center stage.
Challenger Jesus "Chuy" Garcia, a Cook County commissioner, and Rahm Emanuel, who is seeking a second term, have both cast themselves as best suited to tackle the city's daunting fiscal woes.
The city faces a roughly $400 million budget gap next year, not counting a scheduled $550 million increase in its required public safety pension contributions; the city is carrying $19 billion of unfunded pension obligations.
Emanuel was the top vote-getter in the first round Feb. 24 but failed to capture a simple majority, forcing him into the runoff.
Garcia has challenged Emanuel over the city's battered credit rating, its borrowing practices, and the looming pension payment, plus a fresh downgrade from Moody's in late February that triggered swap termination events.
The fresh downgrade "contributed to the higher profile" of finances in the run-off election, said Richard Ciccarone, president of Merritt Research Services. "That's a good thing because the city's finances need to be front and center and dealt with a sense of urgency."
Emanuel says Garcia has no answers of his own for the city's problems.
"He said four years ago that he would put the fiscal house in order and four years later we are in a much worse situation, in a financial freefall," Garcia said during a candidate's forum last week. "Chicago's finances are among the worst in the country." Emanuel defends his stewardship, stressing his administration's strides toward righting the city's fiscal direction.
He takes credit for cutting the city's structural budget gap in half without raising property, gasoline, or sales taxes. He's halted the practice of dipping into reserves and won legislative approval for an overhaul of two of the city's four pension funds.
He says he needs more time to correct the problems he inherited. "We got here because politicians kicked the can down the road," Emanuel said at the forum.
At stake are the city's future borrowing costs and its blemished reputation in the market, which has drawn comparisons with Detroit, despite Chicago's diverse economy. More conservative investors have for some time steered clear of the city's general obligation paper; the city paid 60 basis points more to borrow last year than it did in its previous sale.
The city has suffered a steep credit rating slide and further credit deterioration is threatened.
Chicago's GO ratings range from a low of Baa2 — two notches above speculative grade — from Moody's to a high of A-plus from Standard & Poor's. Fitch Ratings and Kroll Bond Rating Agency fall in between at A-minus. All but Kroll assign a negative outlook. Kroll assigns a stable one.
When Emanuel first took office in May 2011, the city had been hit with a round of downgrades the previous year. He inherited ratings of AA-minus from Fitch, A-plus from Standard & Poor's, andAa3 from Moody's. At the time, all assigned a negative outlook.
Finances served as the central focus of the final candidates' debate-forum last week.
"The stakes in Chicago's mayoral election could hardly be higher. The city's bond rating now teeters just two notches above junk status, the city faces what appears to insurmountable pension debt, and a longtime reliance on borrowing now threatens every other function of government," said Phil Ponce, moderator of the forum broadcast on public television and co-sponsored by the City Club of Chicago.
Solutions
Both candidates say they can solve the city's fiscal problems.
Emanuel wants police and fire reforms that include benefits cuts in a legislative package that would slowly phase the city's increased contributions under the prior state mandate to make actuarially required contributions.
Emanuel also would tap tax-increment financing surpluses and wants state approval for a Chicago-owned casino that could generate an estimated $100 million annually. He also wants to broaden the sales tax.
Emanuel needs state legislative help on his key proposals and that cooperation has so far eluded him. Lawmakers approved a casino plan but former Gov. Pat Quinn vetoed it, and police and fire reforms remain on hold as the legality of state pension reforms are before the Illinois Supreme Court.
Emanuel says a property tax hike is a "last resort," but acknowledges it would be needed without state legislative help.
Garcia has frustrated market participants and provided fodder for Emanuel attacks by offering little detail on his fiscal plans.
He's acknowledged "shared sacrifice" would be needed on further pension reforms, but has suggested that benefits should be preserved for retirees and current employees and says he wants discussions with stakeholders before endorsing any model for reform.
Garcia has not detailed how the city could afford his proposal to hire 1,000 police officers or compensate for the loss of $70 million in annual revenue if the city pulled all its red light cameras.
He has proposed a tax on the purchase of luxury items and wants the state to shift to a graduated income tax. When questioned about he would tackle the looming pension contribution, Garcia insisted that he first needs a good look at the city's books and said he would appoint a special task force of experts to come up with recommendations. He has mentioned only a few names for the task force, including Woods Bowman, a professor who previously served in the General Assembly and was CFO of Cook County.
"More secrecy surrounds Chuy's committee every day, said Emanuel campaign spokesman Steve Mayberry, "even though Chicagoans want to know what they'll consider to balance our budget — whether it's revenue hikes or service cuts."
Neither candidate has acknowledged what investors and analyst want to hear — that a property tax increase is inevitable as part of a financial fix.
Municipal Market Analytics in a recent outlook piece warned that "the upcoming mayoral run?off election illuminates how politically difficult it is to address the city's budget problem, which most municipal credit analysts would prefer be solved with a mix of tax hikes, spending cuts, and legacy liability reforms."
That's due to the political challenges of winning the passage of reforms supported by new revenues like a property tax increase and the strong protections afforded to benefits by the state constitution. Combined, they "make the future financial course of the city uncomfortably unpredictable," MMA warned.
Borrowing
Garcia has attacked Emanuel for employing practices used by the prior administration of Mayor Richard Daley, including debt restructuring and borrowing, to cover operating expenses like judgments and pay raises and for near-term budgetary relief.
"That's been irresponsible. It's very expensive and not sustainable," Garcia said during the forum.
The city pushed off $120.8 million in principal owed in 2015 when it sold bonds in 2014. The so-called scoop-and-toss followed a 2012 issue that restructured $133.8 million in principal for relief the 2013 and 2014.
Under the 2014 restructured amortization schedule on the $120.8 million, principal was delayed for 30 years resulting in additional interest costs of $228.8 million; additional interest on the 2013/2014 bond restructuring was $218 million, according to a report last year from the Civic Federation of Chicago. An additional $14 million in principal payments due in 2016 and 2017 were also pushed off. The federation urged the city to end the borrowing maneuvers.
The Emanuel administration has defended the practices as needed to manage the city's books and "smooth out" spikes in the already backloaded debt service schedule on $8.3 billion of GOs.
The administration says it has reduced borrowing for budgetary relief compared to the Daley administration and highlights its ability to shed some bank credit risk inherited on floating-rate paper and the renegotiate some swap termination terms. Chief Financial Officer Lois Scott has also expanded city financial disclosure and improved investor relations through investor conferences and more outreach.
The city saw spreads on its 10-year tax-exempt paper in a March 2014 sale widen to 145 basis points over the Municipal Market Data's benchmark on top-rated municipals from 84 basis points on its previous GO issue in May 2012.
MMA said it doesn't view Chicago as nearing a Detroit-like situation and said default is a very low probability, but expects pricing on city bonds will weaken over the near-to-medium term. "This implies that investors should not (yet) get comfortable or see Chicago bonds as an easy trade for incremental yield," the report cautioned.
Other Issues
The fiscally stressed Chicago Public Schools — stung by its own steep bond rating slide and facing swap termination events — has also come into campaign play because the mayor appoints board members and handpicks the top administrator.
Garcia blames Emanuel for the city and CPS's weakened fiscal conditions. Emanuel has sought to turn the tables on Garcia, accusing him of helping push the school district to the financial brink in delaying its growing pension problem by approving a three-year partial pension holiday while he was a state senator.
Garcia accused Emanuel of seeking to deflect criticism. "The pattern here is that he promised four years ago to fix the finances. Now he seeks to highlight a vote I took on the Illinois budget," he said during the forum last week.
Emanuel countered that he inherited the challenges: "The crisis on pensions didn't happen overnight," he said.
Garcia has also accused Emanuel of bowing to business interests on refusing to pursue financial firms for selling Chicago Public Schools on the use of auction rate securities on $1 billion of borrowing. Since the 2008/2009 collapse of the auction rate market, CPS incurred higher borrowing costs as its borrowing rate shot up before it restructured the paper.
"While other public agencies have challenged these rigged deals, Mayor Emanuel has refused. He hides behind legalisms, but this is not a question of law, it is a question of political will," Garcia said in a press release. Garcia supports an elected school board. Garcia has also sought to turn Emanuel's fundraising prowess against him accusing him of pay-to-play. Garcia cites a Chicago Tribune report that found half $30 million raised between 2010 through 2014 came from 100 wealthy donors, 60% of whom received city contracts, appointments, or investment work. Unions that oppose Emanuel have provided deep pockets for Garcia's campaign.
Emanuel's campaign says its fundraising tactics follow all laws including city ethics rules.
