Chicago mayor lays out grim budget picture

Register now

CHICAGO — Chicago Mayor Lori Lightfoot is eyeing new taxes, debt refinancing and state action to help close an $838 million deficit that threatens the city’s progress toward a sounder fiscal footing.

“We have some hard choices to make,” Lightfoot said in long-anticipated speech Thursday afternoon that accompanied the release of the 2020 budget forecast. “There is no doubt about that and I will not sugarcoat that reality.”


Lightfoot learned after taking the city’s reins in May that the city faced a “staggering” deficit and “what was worse, we were not left with any credible plan on how to fix this massive problem.” She put the initial number at $1 billion but said her administration has chipped away at it through various belt-tightening measures.

The well-known numbers before this year's election centered on a $280 million increase in pension funding costs and a structural deficit projected last year at $250 million. Former chief financial officer Carole Brown then put the operating deficit at about $700 million.

“The key problem is the decades-long failure to meet our pension obligations and fix the structural problems that have led to this crisis,” Lightfoot said.

The mayor and her chief financial officer, Jennie Huang Bennett, said the city would continue to rein in spending and implementing reforms to chip away at the gap, but they left all options to close the hole on the table.

The gap doesn’t account for any revenue growth, with a slight decline actually projected in the corporate fund to $3.83 billion from $3.84 billion, and it counts as part of a structural deficit some costs not included by the prior Rahm Emanuel administration, which would have driven previous projections up.

Lightfoot said among the ideas she rejected was pushing through another historic property tax or a “massive borrowing scheme,” both hallmarks of Emanuel, who raised property taxes by nearly $550 million to cover rising public safety pension costs. Emanuel last year proposed issuing up to $10 billion of pension bonds to cut the city’s now $30 billion net pension burden.

Despite that comment, Bennett declined to rule out some form of POBs as part of a fix or borrowing to cover operating costs like settlements and judgments which her predecessor eventually phased out along with the city’s longtime practice of scoop-and-toss debt restructuring.

“We are still taking a look at all of our options,” Bennett said after the speech.

“I cannot in good faith promise you that I will take any option off the table to tackle this crisis, whether it's through budget reductions or by raising revenue,” Lightfoot said.

Light on detail
Lightfoot offered a few more details on revenue proposals under consideration but the speech lacked the road map market participants had been hoping to hear.

Lightfoot attempted in recent days to lower expectations that she would offer a detailed financial plan, portraying the speech as laying out the depth of the city’s fiscal woes and the need for state help in raising new revenue and addressing pensions and fixing a flawed casino license tax structure.

Lightfoot spoke of the statewide pension struggles of local governments and the need to be part of a broad solution. A state task force is exploring local government pension consolidation but the administration did not provide details on exactly what the city is seeking. The governor recently rejected the idea of the state taking over local pensions. The administration also did not say whether a reamortization of the current pension funding structure is under consideration.

“This is the beginning of a process” on a dialogue on “the different ways we can be a part of a broader solution,” Bennett said.

Pension funding changes would require state action. Lightfoot said in her speech she would seek “structural” changes while also honoring the city’s pension obligations. Benefit cuts are prohibited under the state constitution.

The city is exploring some form of debt refinancing to save $100 million, Lightfoot said.


Bennett did not offer specifics on what’s being considered, saying only that the finance team was “looking at the different types of structures but it will be some sort of refinancing of higher costing debt for lower costing debt …w e are looking at different structures.”

Lightfoot said she is “committed” to seeking state approval for a graduated real estate transfer tax that would lower the fee on homeowners whose houses sell for under $500,000, while raising the tax on owners with higher-valued homes.

The city is also exploring traffic congestion in a way that would both raise revenue and ease traffic and pollution. Bennett refused to call it congestion pricing or a congestion tax. No state approval is needed.

The city will also push during the state legislature’s veto session in October for changes to the tax structure for a Chicago-based casino approved in a statewide gambling expansion bill last spring. An independent study recently concluded the tax structure is too onerous to attract a private operator to finance and operate the casino.

“If we get the tax structure right, this will represent a structural solution to address long-term problems, not a one-time fix,” Lightfoot said. Profits would go to pay down the public safety pension liabilities.

Even if the tax issues are resolved, casino license fees and other revenue can’t be counted on for 2020. “By way of the financials of the city, it isn’t just about 2020, but what’s the long-term structural balance and what’s the plan for us to get there?” Bennett said.

The need for state cooperation set the stage for Lightfoot’s warning that without it she will be “forced to make painful choices on finding other revenue sources — and we all know what those are, the sources we wish to desperately avoid,” Lightfoot said. Property taxes are at the top of that list.

Lightfoot did not reference a tax on high end accounting and legal transactions that she’s named as a potential revenue source in recent months. State approval would be needed on that one.

Some state lawmakers in recent days have warned that state approval for casino tax changes or any taxes is a heavy lift given since the gambling expansion is a done deal. State Democrats are also worried about tax fatigue ahead of a November 2020 vote on a Democratic-backed constitutional amendment to shift to a progressive income tax from the current flat one.

Gov. J.B. Pritzker’s administration released a statement saying: “In the weeks ahead, as Chicago pursues assistance from the legislature, it will be important for the mayor to reach out to leaders and lawmakers across the state and across the aisle to build a coalition for her ideas. The governor looks forward to working with these stakeholders as the General Assembly weighs all these ideas carefully.”

Deficit
The mismatch in 2020 revenues and expenses is primarily due to personnel, pension and debt obligations, the administration says. The 2020 projection anticipates a $300 million increase for total spending of $2.8 billion of personnel costs for wage increases in place and under negotiation.

The city anticipates a $90 million increase in budgeted settlements, claims and judgments that for years was piled on to the city’s debt load until being phased out several years ago.

The city will owe $277 million more in police and firefighter pension contributions as part of a multi-year schedule to ramp those payments to an actuarial level. The total 2020 contribution for all four funds is projected to be $1.68 billion compared to $1.3 billion this year and will rise to $2.25 billion in 2022 when the muni/laborers actuarial contribution hits.

Reimbursements and financial expenses are also expected to increase by $98 million to $153 million in 2020. That figure accounts for a $114 million increase in debt service, offset by short-term borrowing savings. “The increase in debt service is primarily due to lower savings realized from the Sales Tax Securitization Corporation in 2020 when compared to 2019,” the forecast says. Other expenses on the rise account for the remainder.

“If $838 million sounds big, it’s because it is. It’s the largest in our recent history,” Lightfoot said.

Comparisons to past deficit projections may be hard, however, because the new administration is shifting what costs are counted in the structural figure. Going forward, the city will include long-term liabilities due in future years as part of the structural imbalance.

Future pension contribution hikes and rising debt service were not previously included in the structural deficit figure by Emanuel, who inherited a more than $600 million gap in 2011 that was narrowed to under $100 million heading into 2019.

“Beginning with the 2020 structural budget deficit presented here, the methodology for projecting the structural budget deficit includes known long-term liabilities such as pensions and debt service. This projection does not reflect new revenue sources, new investments to be added in the upcoming budget, or unanticipated long-term liabilities for future years as these are not current structural budget imbalances,” the budget forecast says.

The administration will host investors at an annual investors’ conference Sept. 20 and Lightfoot will unveil her 2020 budget in October. The 2019 budget totaled $10.67 billion.

Lightfoot inherited one junk-bond rating, from Moody’s Investors Service, which rates the city Ba1 with a stable outlook. Kroll Bond Rating Agency last year raised the city’s rating two notches to A. S&P Global Ratings rates the city BBB-plus and stable and Fitch Ratings rates it BBB-minus and stable.

For reprint and licensing requests for this article, click here.
State and local finance Budgets Public pensions Buy side Lori Lightfoot City of Chicago, IL Illinois
MORE FROM BOND BUYER