CHICAGO - Faced with a $50.5 million budget shortfall that is expected to grow, a top aide to Chicago Mayor Richard Daley yesterday announced $9.2 million in cuts and warned that further action, including layoffs, might be needed to keep the $6 billion budget in the black.

"The reality is that because our nation has never experienced this kind of continuing and worldwide economic downturn, no one really knows just how bad things will get, although we expect things to get worse before they get better," said Paul Volpe, Daley's new chief of staff who previously served as chief financial officer.

To chip away at the deficit, Chicago will implement a 3% across-the-board cut in non-personnel costs, renegotiate some contacts, reduce the number of employee car leases, and audit city employee phone contracts. The new action comes on top of $21 million in spending reductions announced last month.

The city first revealed a $31 million shortfall in the 2009 budget last month and then last week added another $19.5 million to the figure. Most major city revenue streams are down, including income, sales, cigarette, and real estate transaction taxes, with the slide becoming more steep since last fall. Utility taxes improved slightly.

Officials are seeking meetings with union representatives to review the current fiscal situation. It is unclear what concessions the city might seek from the unions.

The city also now expects to further dip into a mid-term $325 million rainy-day reserve fund that is to be established with proceeds of the $1.2 billion lease of its parking meters that is expected to close later this month, although Volpe warned against a deep raid on the funds. Chicago had previously planned to tap $150 million from the fund, which is supposed to support the budget through 2012.

"We must be judicious and ensure that the funds are available over the next several years, until the economy turns around," Volpe said. "While we hope the rainy-day fund will help cushion us from the worst cuts, we still may be forced to reduce spending and services, or have additional layoffs in the months and years ahead."

Chicago closed a $469 million combined deficit last year in its 2008 and 2009 budgets through a combination of tax increases, layoffs, debt restructuring, and proceeds of the pending parking meter and Midway Airport leases.

Chicago's $6 billion of general obligation bonds are rated AA by Fitch Ratings, Aa3 by Moody's Investors Service, and AA-minus by Standard & Poor's.

At the state level, new Illinois Gov. Pat Quinn yesterday ordered state agencies to cut spending by 1%, and said he will limit employee travel, leave positions open, and delay planned purchases. The state is facing a roughly $9 billion deficit in its current and next budgets. Quinn said he hoped the new round of cuts would save "hundreds of millions of dollars," but he did not specify the potential savings. The fiscal 2010 budget will be released next month.

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