CHICAGO – Chicago City Council members will cast their vote Wednesday on Mayor Rahm Emanuel’s nearly $8 billion 2016 budget that relies on a record property tax hike to clean up a pension mess that's damaged the city's credit.
The vote will advance the city’s efforts to “right its financial ship,” Emanuel said after a council meeting last week in which the amended budget with the phased in $543 million annual property tax hike was formally submitted following key committee votes.
Emanuel said the budget provides the framework to eliminate the structural deficit in the next few years and end poor debt practices like scoop-and-toss debt restructuring while meeting the city’s mounting obligations to its pension funds. He was dismissive of speculation over how many of the 50 council members would reject the plan.
“At the end of the day this budget will be true to those goals and I think are essential to the city’s long term economic health,” he said.
The package also paves the way for Chicago Public Schools to levy an additional $45 million annually under a currently unused allocation allowed for capital spending.
Some changes adopted in the budget package since Emanuel unveiled it last month include a cap on a new garbage fee until 2019 with revenues being set aside in an enterprise fund. Emanuel also dropped a proposal to privatize the city’s 3-1-1 call center and the school system must report on how it spends the new property tax dollars.
Investors, rating agencies, and an influential civic group have praised the city’s move to address its pension woes but they warn the plans falls short of a full fiscal fix and question the city’s reliance on uncertain legal and state legislative outcomes.
Spreads on the city’s 10-year general obligation paper have narrowed by about 50 basis points since the package was announced. In a recent letter to the council's budget committee, Chief Financial Officer Carole Brown said the reduced spreads, if they hold 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.
The city’s GO ratings range from a speculative-grade Ba1 from Moody's Investors Service to A-minus from Kroll Bond Rating Agency. Fitch Ratings and Standard & Poor's assign BBB-plus ratings and all but Kroll take a negative view on the credit. Kroll has it at stable.
Rating agencies and the Civic Federation of Chicago have said the plan allows the city to make progress on stabilizing its fiscal condition but is no panacea given the scope of its pension burden.
“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,” federation president Laurence Msall said.
Investors and analysts also 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 doesn't take effect. It has not been sent to Gov. Bruce Rauner and may become a victim of the ongoing stalemate between the Republican governor and Democrat-controlled General Assembly, which has left Illinois without a budget for almost four months.
Chicago also could face higher retiree healthcare costs if litigation challenging the city’s move to phase out most retiree healthcare subsidies is successful. Oral arguments are set for Nov. 2.
On a separate legal challenge to its laborers and municipal fund reforms, the city will argue its case before the Illinois Supreme Court on Nov. 17. If the high court voids the reforms as unconstitutional, the condition of those two funds would worse.
The budget revises the 2015 property tax levy, raising it by $318 million. It would rise again in 2016, 2017, and 2018 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.
The budget lowers by $100 million to $125 million the amount of debt the city will push off for budget relief as part of a debt management overhaul announced earlier this year that would phase the practice out by 2019.
A separate $125 million package of other tax and fee hikes along with $170 million in savings from reforms, efficiencies, and other measures tackle a $233 million operating deficit and fund other spending proposals.
On the CPS levy, Emanuel said during questioning at a public appearance Monday that he expects the district to leverage the new funding source for borrowing to support a larger upfront capital budget.
The district has $6 billion of outstanding debt and has said it needs to curtail capital spending without new revenue or pension relief. The Chicago Board of Education in August approved a $6.4 billion budget that includes a $5.7 billion operating budget, a $178 million capital budget, and $539 for debt service. It gambles on nearly $500 million in state pension relief.
