Chicago Mayor-elect Lightfoot names her fiscal team

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Chicago Mayor-elect Lori Lightfoot named Jennie Huang Bennett, the chief financial officer of Chicago Public Schools, to lead a finance team tasked with solving a potential $700 million or more operating gap next year due to swelling pension, debt, and personnel costs.

The $700 million figure is a rough estimate of the rising operating demands on the next budget that are not incorporated in structural budget estimates. The 2020 projections remain highly fluid and subject to swings given that the city is just five months into the current budget and economic projections for next year could shift, said Chicago's current CFO, Carole Brown.


The bottom line for the new administration is that it needs to come up with at least $200 million more in revenue or through cost cuts to balance the books at least on a cash basis next year than it previously believed.

Whether it closes the gap with recurring revenues and/or savings or one-time revenues will influence the size of the structural gap — currently estimated at $252 million — going forward and the rating agencies will be watching closely.

With Monday's inauguration approaching, Lightfoot on Wednesday rolled out key cabinet announcements that included the appointment of Bennett to role of CFO. The Bond Buyer had previously reported that she was the top candidate and had been meeting with Brown and the transition team.

City hall budget veteran Susie Park was named budget director. No announcement was made on the comptroller position.

“I’m confident that the talented team we are announcing today will help drive our key policies and initiatives over our first 100 days and beyond,” Lightfoot said in a statement.

The municipal market has been watching closely for the finance team picks. Lightfoot, a political novice who was a partner at Mayer Brown LLP and former head of the city’s police board, beat Cook County Board President Toni Preckwinkle in the April runoff to replace Rahm Emanuel, who did not seek a third term.

The market is looking for clues about how Lightfoot will tackle rising payment demands on $28 billion of unfunded pension liabilities without losing the fiscal ground Emanuel had gained. The market is also watching for how Lightfoot will balance fiscal restraint with her progressive promises on neighborhood investment and governance reforms.

Investors have awarded the city for raising taxes for pensions and trimming the structural deficit by sharply narrowing yield penalties but rating agencies have been a tougher sell and one city rating remains stuck in junk territory.

Bennett left her public finance banking position after 12 years at Morgan Stanley to join CPS in 2012 as treasurer. She was elevated in 2016 to the CFO post and led the cash-strapped district’s finances along with Ronald DeNard, senior vice president for finance. Since last year, Bennett has also served as chief internal auditor.

“Jennie brings a wealth of public sector and extensive experience in municipal finance to the role,” Lightfoot's announcement said. “Jennie is skilled at managing large complex capital structures, developing governmental budgets, and finding paths toward financial sustainability. She helped lead CPS through significant financial difficulties, which have now been relieved through new, fairer educational funding.”

Bennett will face tougher questioning from the new City Council than she did from the mayor-appointed school board but her experience should serve her well, bankers said. “What she brings to the table is the ability speak directly to the market and hit the ground running. She brings the experience of marketing the city’s most difficult credit,” said one banking source.

Park is deputy chief for the Chicago Police Department’s Bureau of Organizational Development. Before taking that job last year, she served as budget liaison to the police department for the city’s office of budget and management. She has held various finance positions with the city since 2011 and previous worked as director of financial control for Cook County.

Maurice Classen was named chief of staff and Mark Flessner corporation counsel. The transition committees will present their reports to Lightfoot on Friday and they will be available at www.bettertogether.com.

Lightfoot recently called the city’s fiscal condition more “dire” than she originally thought and that triggered new questions for the city’s current finance team.

The red ink numbers that have been widely used include a $252 million structural deficit that was forecast last July in the city’s annual financial analysis and a $280 million public safety pension funding spike. That put the need for new revenue or cuts at $532 million. The city this year is operating on a $10.7 billion budget.

But that figure doesn’t account for operating costs next year as the budget absorbs the end of scoop-and-toss restructuring, the added costs of still-be-determined public safety personnel raises and the full cost for settlement and judgments that are not known. They carry a possible price tag of $300 million to $350 million.

The city also is now warning that the public safety pension contribution could go up by as much as $100 million to a possible $380 million.

The city separates its near-term operating costs that must be solved in the next year from its structural budget position. The administration has made it a priority to bring down the latter based on rating agency indications that to raise the city’s ratings structural balance was needed, Brown said. Emanuel inherited a more than $600 million structural gap that was cut to $98 million in his final year.

Brown said it’s too early to know if the 2020 projection of $252 million is accurate as the official projection is announced in the next annual financial analysis published at the end of July and the city is currently focused on finalizing its 2018 figures and unassigned fund balance figure for release in its comprehensive annual financial results.

“This discussion is happening now because a new administration is coming in but it's early to be having this discussion because we don't know what the numbers will look like but I do think it is good that they are focusing on them this early,” said Brown, whose last day as CFO is Friday.

The city has always said the structural deficit did not include retroactive raises expected once new public safety contracts are resolved this year. Brown declined to put a number on the cost but some believe that number could run between $100 million and $150 million.

On pensions, the city has long estimated a $280 million spike for the city’s police and firefighters’ funds when the five year ramp up in contributions ends next year and an actuarially based contribution is due.

The spike is now expected to grow, possibly by an additional $100 million, due to negative returns for 2018 that the actuarial contribution will be based on, Brown said this week. The city won’t know for sure until next month when its four funds submit their actuarial reports.

“We are speculating," Brown said, adding the $280 million figure "was always just an estimate.”

The city’s public safety contributions are fixed through this year with the police set at $579 million and the firefighters set at $245 million. Beginning in 2020, the city must levy a tax annually that increases funding ratio to 90% by 2055.

When the actuarial contribution requirement hits in 2020 for police and fire funds, contributions were originally projected to jump by $170 million and $110 million, respectively. The spike hits for municipal and laborers' funds in 2022 when payments rise by $277 million and $33 million, respectively.

The structural deficit doesn’t include a portion of rising debt service that in past years was pushed off through what’s known as scoop-and-toss debt restructuring. The amount needed from the corporate fund to avoid scoop-and-toss has been whittled down to about $130 million from $370 million by identifying recurring revenues to cover it and through the use of the Sales Tax Securitization Corp. to refund general obligation debt, Brown said.

Debt service rises to $681 million in 2020 from $513 million this year. It grows to $719 million in 2021 then begins to fall annually with some modest increases in the 2030s.

The projected operating red ink also will fluctuate depending on the size of judgments and settlements. The city budgeted $55 million this year for that expense but it has often consumed more than $100 million. The city previously borrowed for larger, or unexpected settlements and judgments.

Moody’s Investors Service rates the city at the junk level of Ba1. In July it shifted its outlook to stable from negative. Fitch Ratings has the city at BBB-minus with a stable outlook and S&P Global Ratings has it at BBB-plus with a stable outlook. Kroll Bond Rating Agency rates the city at A and stable. It upgraded the city two notches last year.

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