CHICAGO - A Chicago-based fiscal watchdog group this week endorsed the $6 billion budget proposed by Mayor Richard Daley primarily due to the elimination of 2,628 positions to help erase a $469 million deficit, but the organization also raised concerns over the city's long-term fiscal health.

"Chicago has no responsible choice other than cutting personnel spending to balance this budget," Laurence Msall, president of the Civic Federation of Chicago, said in a statement. "An economic downturn is precisely the wrong time to raise broad-based taxes such as property or sales taxes and further burden struggling businesses and residents."

Faced with growing expenses and faltering revenue collections, the job cuts are unavoidable if the city is to move towards a more structurally sound budget, because personnel costs make up more than 82% of the operating budget, the federation believes. The cuts come from a mix of layoffs and the elimination of vacant positions.

The federation also supports the mayor's proposal to consolidate nine city departments into four at a savings of $7.6 million and other reductions in non-personnel costs by $39 million. A series of fee increases and efforts to step up collections of outstanding fines and fees to raise about $52.3 million were called "reasonable moves" by the federation in its 53-page analysis of the budget.

While praising the city's proposed $2.52 billion lease of Midway Airport to private operators, the federation was critical of the city's plan to use $100 million from the deal over five years, including $20 million in the current budget and $20 million next year, and to use $150 million from the proposed lease of its parking meter system. Such short-term infusions of cash to cover ongoing expenses provide just temporary budget relief and contribute to structural deficits.

"Midway Airport is not a core asset of the city, making it a prime candidate for private management," the federation wrote. "The federation is concerned, however, that the city will use [some lease proceeds] for recurring operating expenses rather than using some of those monies to reduce liabilities."

Under state legislation that paved the way for the Midway Airport lease, the city must use 90% of its net proceeds for infrastructure or to fund pensions. The city hopes to receive federal approval for the lease to a consortium known as MIDCo by the end of the year. Officials have not yet announced a deal to lease the meters.

Over the long-term, the federation said it has "significant concerns" over the city's fiscal health. The federation cited the city's anticipation of going into the 2009 budget with an unreserved balance of just $1.5 million. "Such low reserves have already negatively impacted the city's ability to deal with the current economic downturn," the analysis read. The city has a $500 million permanent reserve that it established with proceeds of its 2005 Skyway toll bridge lease, but officials have so far resisted the pull to tap into that fund.

The federation also reiterated its calls for pension reforms as it warned that three of the city's four pension funds face a "severe funding crisis" as their low ratios will likely fall even further due to stock market declines. The city has a total of $9 billion in unfunded pension liabilities.

The City Council has been holding a series of budget hearings and will vote on the package Nov. 19. While Daley sought a hefty $86 million property tax increase last year, the proposed 2009 budget does not include another.

Finance officials plan to restructure some debt, pushing out maturities, to achieve $60 million in savings, including $41 million this year and another $19 million next year, to help close the deficit. The council this week approved the sale of up to $1.3 billion of new money and refunding bonds. The city expects to tap just $650 million of the authorization, including $350 million of new-money proceeds and $300 million of refunding bonds in a restructuring that "will be used to achieve budget relief through 2012," said budget spokeswoman Lisa Schrader.

Fitch Ratings rates Chicago's $6 billion of GOs AA, while Moody's Investors Service rates the city Aa3 and Standard & Poor's rates it AA-minus.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.