Chicago mayor lays out her budget plan

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Chicago Mayor Lori Lightfoot proposed a 2020 budget that would close a more than $800 million deficit with a mix of permanent and one-time maneuvers that include spending cuts, new tax revenue, debt restructuring, and a record tax-increment surplus declaration.

The proposed $11.65 billion all-funds budget is based on $9.9 billion of local funds and includes a $4.465 billion corporate or general fund that doesn’t rely on a property tax. That could change, Lightfoot warned, if the state doesn't act on several measures needed to support the budget.

Lightfoot, who took office in May, put the deficit at $838 million in her state of the city address in August after her administration combined growing structural and operating costs looming next year — a number that exceeded past city warnings.

“Getting that number down to zero required ingenuity, but more than that it required hard choices across both expenditures and revenues,” Lightfoot said in her address to the City Council Wednesday that was delivered as Chicago teachers, in the fifth school day of a strike, crowded the streets around City Hall.

“In crafting this budget, we also knew that our gap would only grow over the next several years, which meant we needed to cut wasteful spending and establish structural reforms now which will carry us into the future. And that’s exactly what we did. I’m proud to say over 60 % of our gap was closed by creating structural solutions,” Lightfoot said.

Closing the gap
The budget hole rose by $51.8 million to accommodate new investments on housing, mental health, and congestion relief. To fill the gap, Lightfoot's spending plan relies on $537.6 million coming from a mix of one-time and structural changes billed as “savings, efficiencies, and reforms.”

They include: a $200 million one-shot from the refinancing of $1.3 billion of existing city debt announced earlier in the week by chief financial officer Jennie Huang Bennett; $148.7 million of “zero-based budgeting” spending changes; and $141 million in “improved fiscal management” initiatives.

New revenues expected from existing taxes or higher or new taxes and fees include $50 million from a change in the real estate transfer tax, $47 million from a rideshare tax hike, $37.2 million from existing sales and service taxes that includes a restaurant tax hike, and $23.6 million from other revenue streams including the future legalized sale of recreational cannabis approved by state lawmakers in the spring.

The city also is counting $163 million in new emergency services reimbursements through a partnership with the state and state fire chiefs association to increase to 50% from an 8% to 36% reimbursement recovery rate.

The city will also declare a record $300 million TIF surplus of which the city will pocket $31.4 million with other taxing districts receiving the rest, according to the city’s presentation. The budget overview, however, lists the city’s corporate fund as the recipient of $74 million.

The city has long declared surpluses but the $300 million exceeds the previous high of $276 million in 2011. It declared a $176 million surplus last year.

CPS is the biggest winner as it would receive $163 million which would help cover the costs of an eventual new contract. The district’s 2020 budget relied on a nearly $100 million surplus. Teachers walked out last week due to demands CPS and Lightfoot say the city and district can’t afford.

The real estate transfer tax shift to a graduated level that would raise the levy on higher-end properties would generate $50 million next year and $100 million in future years, but state lawmakers must approving the changes.

“If we don’t get the authorization we need, we will be forced to make more painful choices when it comes to new sources of revenue. And we all know what those choices are,” Lightfoot warned in a reference to a property tax hike.

The budget does not rely on pension obligation bonds. Lightfoot's predecessor, Rahm Emanuel, last year proposed a $10 billion POB issue to bring down the liabilities that now stand at $30 billion for a system just 23% funded. Lightfoot slammed that plan but was considering a more modest borrowing.

The budget also does not return to scoop-and-toss debt restructuring or borrowing to cover large settlements and judgments. They are practices Emanuel inherited from his predecessor, Richard M. Daley, and then shed in his final years in office.

The budget also meets the scheduled pension payments that total $1.68 billion, up from $1.31 billion this year. They are slated to rise to $1.8 billion in 2021 and $2.25 billion in 2022.

The rising number includes $280 million in additional funding as a ramp ends on contributions for the police and firefighters funds and hits an actuarial level as well as scheduled ramp payment hikes on the municipal and laborers funds.

Personnel costs account for $3 billion of the city’s $4.5 billion corporate fund. Spending in the corporate fund is up $649 million over 2019.

The city in 2022 will see another big jump of more than $300 million as the ramp ends for the municipal and laborers’ funds and they are required to make actuarial payments. The funding overhaul was proposed by Emanuel and enacted by state lawmakers.

Council hearings begin Monday when the CFO and budget director Susie Park will take the hot seat and a final vote is expected on Nov. 26.

Rating agencies
Fitch Ratings and S&P Global Ratings offered an initial reaction to the overall plan and debt refinancing that underscore the budget’s risks and the city’s difficult tasks in moving toward structural balance.

“While we think that structuring bonds for upfront savings isn’t a best practice, in Chicago’s case, we consider the savings a better alternative to other one-time measures, such as drawing down reserve balances,” said S&P's lead Illinois analyst, Carol Spain. “We understand that the city has no plans to extend final maturity dates and the bonds would still have net present value savings, distinguishing this structure from past ‘scoop-and-toss’ practices.

“We are not surprised that Chicago’s budget relies on one-shots given the magnitude of the budget gap. S&P is focused on whether the city has a plan to close the budget gap within the medium term — whether it be through gaining state legislative approval to increase real estate transfer taxes or realize casino revenues, or if it would implement contingencies, such as a property tax increase,” Spain added.

S&P rates Chicago BBB-plus with a stable outlook.

“As we expected, the 2020 budget relies on a mixture of recurring and non-recurring items,” said Fitch analyst and head of state and local government ratings Arlene Bohner. “A portion of the gap-closing measures rely on new revenues which require state action to implement. If these are not realized as expected, the city will need to make additional mid-year budgetary adjustments to compensate.”

Fitch will not consider the city’s budget to be structurally balanced until recurring revenues match recurring expenses including actuarial funding of pension contributions, which cannot begin to be achieved until the pension ramp is surmounted, Bohner added.

Fitch rates Chicago at the lowest investment grade level of BBB-minus with a stable outlook.

Moody’s Investors Service rates Chicago’s general obligation bonds one notch into the junk category at Ba1 and Kroll Bond Rating Agency rates Chicago at A. They assign stable outlooks.

"While Mayor Lightfoot’s budget address broadly outlines actions to close the estimated FY 2020 $838 million budget gap, KBRA will examine the details of the entirety of the City’s revenue and expenditure actions contained within the FY 2020 Budget," Kroll said in an email. "Our review will include an assessment of the viability and sustainability of the revenue and expenditure assumptions in that document." Moody's declined to provide an initial comment.

The summer fiscal forecast warned of deficits of $1.19 billion and $1.16 billion in 2021 and 2022, respectively, on a baseline forecast that doesn’t account for revenue or expense changes in 2020.

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