CHICAGO – Chicago Mayor Rahm Emanuel’s proposed 2016 budget and record property tax hike plan won the Chicago Civic Federation’s endorsement, with a warning that more pain may be needed to fully stabilize the city’s fiscal condition.
Emanuel’s plan revises the 2015 property tax levy lifting it by $428 million to $1.26 billion. The levy would be raised again in 2016, 2017, and 2018 to generate an additional $543 million annually when fully implemented. All of the new revenue would go to fund the city’s increasing public safety pension payments under a 2010 state mandate to stabilize the police and firefighter retirement funds.
The two funds are responsible for about half of the city’s $20 billion unfunded pension liability that has dragged its rating from Moody’s Investors Service down to junk.
In its
“Mayor Emanuel and his team deserve credit for transparently outlining a plan to address one of the city’s most urgent financial crises,” said federation president Laurence Msall, who testified during a Chicago City Council public hearing on the budget Wednesday.
“Greater sacrifice will be needed to address the pension funding crises for non-public safety funds, the liquidity crises at Chicago Public Schools and the city’s ongoing structural deficit,” he added. “To minimize the demand on taxpayers, we urge the city to consider greater cost savings and efficiencies, especially in public safety operations that have largely avoided budgetary scrutiny in recent years.”
Police cuts would face a tough road given the city’s disturbing violent crime levels, but it was property tax hike that took center stage during questioning of Msall.
He told council members it was a difficult but necessary stance to back such a large tax hike because it’s “far cheaper” to address the pension crisis now than to further ignore the burden and allow the liability to grow.
In response to questions over whether the size of the increase could hurt the city’s economy, Msall countered that uncertainty over the city’s finances not only “drives your credit rating down” but also hurts the business climate.
The federation also praised Emanuel’s move to lower the previously planned level of debt restructuring – in the form of pushing of principal payment in a practice known as “scoop and toss” -- by $100 million to about $125 million in the 2016 budget.
That’s part of a debt management plan announced earlier this year that would phase the practice out by 2019.
Msall told aldermen the city should put into ordinance form Emanuel’s proposed debt management changes, including ending the use of borrowing to cover short-term operating costs. Putting the measures into law would ensure that any move to deviate from the more sound management policies would receive a full public vetting, he said.
Echoing concerns raised by rating agencies and investors, the Civic Federation expressed worry over risky budget assumptions. The city would need to come up with an additional $220 million next year in public safety pension contributions if legislation that has passed the General Assembly but has not been sent to Gov. Bruce Rauner does not take effect. Its fate is unclear as the state is stuck in its own budget gridlock.
The city also could face higher retiree healthcare costs if litigation challenging the city’s move to phase out most retiree healthcare subsidies is successful.
Msall also stressed with council members that the property tax hike is not a “panacea” for the public safety funds because the 2010 state mandate requires that the city make an actuarially required contribution amount, meaning annual payments could continue to rise over the long haul.
The federation also endorsed Emanuel’s proposal to levy a first time garbage collection fee and a proposal to privatize the city’s 3-1-1 service line.
Council members questioned Msall on other revenue alternatives such as a city casino and expressed frustration over the lack of detail the Emanuel administration has provided on a proposed expansion of the homestead tax exemption.
The aim is to hold properties valued at less than $250,000 harmless from the property tax hike putting much of the burden on commercial and rental properties. State legislation would be needed but has not been released.
During the council hearing, Alderman Edward Burke laid out the city’s legal responsibility to the public safety pension funds saying of the property tax hike
“It’s a tough vote but we are under an obligation,” he said.
The council will vote on the budget later this month.
Since release of the budget proposal, spreads on the city’s general obligation paper have narrowed to 250 basis points from 300 basis points over the Municipal Market Data’s top-rated benchmark.
Chief Financial Officer Carole Brown said in a recent letter to the budget committee that the reduced spreads, if they holds steady, would translate into $33.8 million in interest savings on the city’s upcoming sale of up to $500 million of restructuring and refunding bonds.
Brown also highlighted the recent closing on a new direct loan -- part of city’s revamped short term borrowing program -- from The Bank of China. Brown said it’s the first such credit support provided by the bank to a U.S. municipality.
The downgrade to junk by Moody’s in May triggered defaults on the city’s various forms of credit support in its roughly $1 billion short term borrowing program. The city paid off existing debt, moving much of it on to its long term debt load, and is finalizing new direct lines of support going forward.
The city's GO ratings range from a speculative-grade Ba1 from Moody's to A-minus from Kroll Bond Rating Agency.
