Chicago budget that relies on debt deal sails through council
CHICAGO – With little dissent, the Chicago City Council approved Mayor Rahm Emanuel’s $8.6 billion 2018 budget that relies in part on upfront savings from the city’s new securitization bond program and tax-increment financing surplus funds to erase red ink and keep new police hiring on track.
The budget also dips into TIF funds to aid Chicago Public Schools in balancing its books and imposes a ride-share fee to help out the Chicago Transit Authority. A hike in the 9-1-1 emergency surcharge will fund infrastructure upgrades for emergency services.
The 2018 spending plan sheds the city’s practice of scoop-and-toss debt restructuring a year early than Emanuel had previously pledged and ends routine borrowing for settlements. However, the city dumped $400 million onto the debt load for the latter and $225 million for the former in its January general obligation issue.
The package relies on limited tax and fee hikes compared to past years although the $543 million annual property tax hike and a new water-sewer charge will continue to be phased in to fund higher pension contributions. Further pension payment spikes loom in the coming years but the city has yet to outline a plan to address them.
Emanuel sought after the budget passed in a 47-to-3 vote Tuesday to highlight strides since taking office in 2011. They include a steep cut in the structural deficit, shedding poor fiscal practices he called “shenanigans” although he previously used some of them, and pension funding changes.
The pension overhaul saved the city’s municipal and laborers’ funds from looming insolvency but stretched out a state imposed requirement to move its police and firefighters to actuarially based contributions and delayed the timeline to reach 90% funded status. Three rating agencies stabilized the city’s outlook after the pension fund overhaul and new tax revenue to support it was adopted.
"Rather than do what was easy, we did the hard thing,” Emanuel told the council. “Chicago is fiscally on solid and sounder and more stable ground...our work isn't done....but we are nowhere near where we were in in 2011.”
After the council meeting when pressed on how the city will tackle a spike in pension contributions as the city shifts to an ARC, Emanuel said the city would answer that question when the city arrives at that moment.
“We have never run away” from doing what’s needed, he said. The city has stabilized its healthcare costs, sped up water and sewer infrastructure investments, hired more police officers, and is seeing strong private investment, he noted.
The budget tackles about $114.2 million of red ink and raises $123.8 million in revenue to help Chicago Public Schools close a budget gap, cover police reforms and the ongoing hiring of 1,000 new officers.
The budget relies on savings from personnel reforms, management efficiencies, contract and professional services changes, a tax-increment financing surplus and debt service savings from the city’s refunding of debt using its new securitization structure, and improved debt collections. About $50.3 million in growth is expected from various tax streams.
The city will implement a $1.10 monthly hike in the 9-1-1 emergency surcharge, freeing up $19 million in the corporate fund that otherwise would have gone to fund planned emergency services improvements. The city’s amusement tax is being restructured and raised for some events.
The city plans to tap its new sales tax securitization bonding program to refund about $2.8 billion of sales tax and general obligation bonds for savings over the next couple years with the 2018 budget relying on $94 million in debt service savings. Those savings won't be repeated in coming years, but the program will help level out debt service schedules.
The city will launch the program in a $575 million refunding of sales tax revenue bonds early next month and return in early January with a $905 million GO refunding. The city will lower costs with double-A and triple-A ratings on the new structure, but some market participants warn that the program will diminish the value of existing city GOs and could still be tested in a restructuring – as Puerto Rico Sales Tax Financing Corporation’s bonds have been in the commonwealth’s bankruptcy. Illinois lacks a path to Chapter 9.
Alderman Scott Waguespack, chair of the council’s Progressive Caucus, Alderman John Arena, and Alderman Carlos Ramirez-Rosa cast the no votes.
“I’m voting no on this budget because working Chicagoans are tired of being nickel and dimed,” Ramirez-Rosa said during debate.
“The city remains in a fiscal crisis that the administration has helped create over the years….they would like us to believe the city’s finances are on track, but our neighborhoods and public schools and classrooms tell a different story,” Waguespack said.
Emanuel’s floor leader, Alderman Patrick O’Connor, countered the critics. “We do have issues that confront us but this budget goes a long way to at least setting priorities to address some of those problems,” he said, highlighting the lower borrowing interest costs from the securitization and police hiring and reforms.
The city will declare a $166.9 million TIF surplus. About $40 million will go to the city with other taxing bodies in line for the rest. It will cover most of the city’s pledge to funnel $80 million for CPS safety expenses to help the district trim a current year deficit.
The budget levies a 20-cent-per-ride fee on ride share companies like Lyft and Uber to help out the CTA. The fee would generate $16 million next year and $21 million in 2019 and beyond. The CTA said during budget hearings it might borrow against the new revenue stream.
Some aldermen opposed providing the CTA and CPS with aid without a greater say or oversight on their use. Proposed amendments to allow the council a say were never considered.
The budget won the endorsement of the Chicago Civic Federation but it was tempered with concern.
“This year’s budget proposal is the product of a lot of heavy lifting, painful but necessary decisions and important investments made by Mayor Emanuel and the Chicago City Council over the past several years” said federation president Laurence Msall said in a recent report. “However, the city will face many more tough decisions in the coming years to fully stabilize its financial situation.”
The city won praise for management efficiencies and reduced spending and phasing out poor financial practices although the federation noted the city will pay a “high cost” due to debt restructuring completed earlier this year.
The federation raised concerns over how the city will cover $630 million in increased retirement costs once ARC funding is reached beginning in 2020 for two funds and 2022 for two others. “Maintaining the city’s aggressive pension schedules beyond 2020 will likely require significant cuts or significant increases in property taxes or other fees,” said Msall.
The 2018 budget totals $8.58 billion, $3.77 billion of which makes up the corporate fund budget. Chicago is rated BBB-minus with a stable outlook by Fitch Ratings and BBB-plus with a stable outlook from Kroll Bond Rating Agency. Moody’s rates it at the speculative grade level of Ba1.