Chicago gets a structural budget balance warning from S&P
Chicago Mayor Lori Lightfoot needs to achieve her 2022 target of structurally balancing the city’s books to preserve the city’s BBB-plus rating, S&P Global Ratings said in a special report Friday.
The 2020 budget Lightfoot proposed Wednesday relies on roughly 60% recurring revenues and measures and 40% one-shots in order to wipe out a more than $800 million hole. Notably it does not turn to actions that S&P had warned could drive a downgrade, like an attempt to push off pension contributions or dip into reserves.
The significant use of one-time revenue to close the gap is a reasonable one-year approach even if it does not represent best fiscal practices, S&P said.
S&P has a stable outlook on its BBB-plus rating. Fitch Ratings rates Chicago BBB-minus, the lowest investment grade rating, and Moody’s Investors Service has it a notch below investment grade at Ba1. Kroll Bond Rating Agency rates the city A.
“The current proposal buys the city time to execute structural revenue enhancements and operational efficiencies that require a longer time frame to implement,” says the report from lead Chicago analyst Carol Spain and secondary analyst Jane Ridley.
“The city's ongoing ability to demonstrate a credible path to structural balance, including fully funding its pension ramp by 2022, whether it be through garnering state support for new revenue streams or evidence of political willingness to execute such contingent measures as a property tax increase, will be critical to our rating analysis,” the report said.
Lightfoot warned in her speech that the proposed budget relies on some gambles including state passage of legislation allowing the city to impose a graduated tax rate on property sale transactions, instead of the present flat fee, to generate $50 million next year and $100 million in future years.
The administration did not comment on the S&P report, but in an interview Thursday, Lightfoot’s chief financial officer, Jennie Huang Bennett, said the new revenues along with those that require state approval put the city on a path toward structural balance with the 2022 budget.
Long-term structural balance that includes meeting the city’s pension funding commitments hinges on passage of the property sale tax change and revisions to spring legislation that authorized a Chicago casino. A state gaming board-commissioned report warned that the tax structure is not viable for luring a private operator.
While the 2020 budget doesn’t rely on any casino revenue, Lightfoot warned that without those measures the city would likely need a property tax hike. Property owners have faced steep hikes in recent years to fund former Mayor Rahm Emanuel’s pension funding overhaul and new levies to help cover Chicago Public Schools capital and pension expenses, making them a harder sell for the City Council.
“Based on our understanding of estimates for these two revenue streams, we think that these sources, coupled with continued moderate savings measures or revenue growth, could feasibly address the next two out-year gaps,” S&P concluded. “However, we believe that these revenues carry significant implementation risk, and while the mayor asserts that a property tax increase remains on the table as a contingency, it still would require council support.”
The proposed 2020 structural revenue and savings “appear feasible despite implementation risks” while the one-time measures “do not impair the city's liquidity or liability profile," S&P said.
On the city’s plan to refinance $1.3 billion of existing general obligation and motor fuel tax bonds for savings, of which $200 million would booked in 2020, S&P called the proposal more palatable to the city’s past practices of pushing off debt repayment by extending maturities. The city will refund debt under its GO credit and Sales Tax Securitization Corp.
“The city has no plans to extend final maturity dates as part of the refunding structure, and the bonds would still have net present value savings,” S&P wrote. “We also expect that the city will preserve capacity within the STSC structure for future capital needs and understand that it maintains sufficient liquidity such that planned further securitization of sales taxes would not result in cash-flow pressures.”
The Chicago teachers’ strike poses limited fiscal risk to Chicago, S&P believes. The report was published as the students missed seventh day of classes as the union and city and Chicago Public Schools remained at loggerheads over issues of benefit, class size, social services and contract length. Lightfoot has warned that the district can’t afford the demands that carry a $2.4 billion and the city won’t “bail out” the district.
The city’s proposed $300 million tax increment financing surplus declaration would provide an additional $66 million for CPS above what CPS included in its fiscal 2020 budget with the expectation that would go to help fund the first year of a new contract.
“Given Chicago's history of limited financial support for CPS and challenged financial position, we do not expect it to provide significant, if any, additional funding for CPS,” S&P said. “The mayor's budget proposal, however, relies on council approval, and the resolution of the strike could potentially undermine public and council member support.”