CHICAGO – Chicago has turned the fiscal corner, Mayor Rahm Emanuel said Tuesday.

That was the mayor's message as he unveiled his 2017 budget proposal to close a $138 million gap while absorbing some of the expense of hiring 1,000 new police officers over the next two years.

It's an assessment that some analysts and buyside representatives share – to some extent – but it  ignores the concerns many retain over the fragility of some of the city's gains and worries that Chicago has a long way to go to clear the woods.

"It is a budget free of an immediate pension crisis, free of the black cloud of insolvency threatening the retirements of city employees and the financial future of Chicago," Emanuel said.

No new major taxes were announced, but the city has already hit taxpayers' pockets deeply. After turning to various fee and tax increases in recent years to cut the structural deficit and improve water infrastructure, the city council passed a record $543 million annual property tax hike late last year and a new water/sewer tax this year to help stabilize its pension system.

Both phase in hikes over the coming years. The pension funds' collective $33.8 billion of net pension liabilities – for a funded ratio of 23% -- have dragged the city's ratings down as low as junk from one rating agency.

"Five years ago, Chicago was on the financial brink. Today, Chicago is back on solid ground," Emanuel said. "Our city is finally out of the pension penalty box. Both Fitch and Standard and Poor's have upgraded their outlooks for the future of Chicago's finances from negative to stable."

Emanuel did not stop at pensions, highlighting the steady reduction in the city's structural deficit from $635 million in 2011 when he took office to $138 million in 2017. He stressed the elimination of $600 million in costs through various efficiencies since taking office and his reversal of his predecessor Mayor Richard Daley's use of asset reserves to cover deficits.

Emanuel will continue his practice of making small deposits into reserve accounts and of slowly phasing out of frowned-upon debt practices.

Emanuel plans to phase out by 2019 the city's decade-old practice of pushing off bond principal payments for budget relief.

The 2017 budget reduces the previously planned amount by $63.5 million.

The city's upcoming $1.275 billion general obligation sale will push off debt repayments to cover the remaining budget relief sought through scoop and toss restructuring. The city did not immediately say how much in judgments or settlements would be funded in 2017 with debt, a practice the Emanuel administration has also said it is winding down.

To balance the books and fund new programs, the budget carves out $282 million in reform savings, debt collections, new tax and fee revenues, and natural growth in current revenues. The budget puts $5 million back into previously drained asset lease reserves and preserves the city's main $550 million permanent reserve from the privatization of the Skyway toll bridge.

The city will squeeze out $33.7 million in savings from energy reforms, lease consolidations and reforms, and land sales. An additional $148 million in revenue is expected from growth of existing taxes. About $37 million will be swept from various non-general fund accounts and grant funds. Additional revenue is expected from collection enforcement but a figure was not immediately available.

The budget frees up $175 million from surpluses in the city's tax-increment financing districts. About $87 million will go to the Chicago Public Schools with the city getting about $40.5 million and the rest going to other taxing bodies. New taxes and fees will raise $25.4 million including $9.2 million from a disposable bag tax and $16.2 million from a downtown special event congestion parking pilot.

The most high-profile new spending being proposed covers the hiring of 500 officers with plans for another 500 the following year. The budget provides $40 million in salaries and benefits for the new sworn positions and another $13 million for other related costs and $9 million for other public safety initiatives. Another $25 million from the city's upcoming general obligation bond issue would finance the purchase of new police vehicles.

Chicago will create a neighborhood investment fund and funnel $100 million into it over the next three years with hopes of raising private capital to expand it and will cover half of the costs of a new mentoring program with a three year price tag of $36 million. Private entities will cover the rest.

Emanuel acknowledged the city's persistent challenges and need to make progress. "While the crisis has receded, while Fitch and S&P have both individually recognized that our finances and our pensions are stable, our work of righting the ship is not complete," he said. "The next chapter is to advance our finances from stable to secure."

All funds for 2017 total $9.81 billion, up from $9.3 billion this year. The budget includes $8.22 billion of local funds and $1.59 billion of grant funding. The city's corporate fund – which serves as the general fund – totals $3.72 billion.

The budget includes a property tax levy of $1.32 billion, which includes $839 million for required pension payments by the city and is up $53 million to reflect the increase being phased in for public safety pensions. Total pension contributions rise to $1 billion from $849 million.

Fitch and S&P Global Ratings shifted their outlooks on Chicago to stable from negative recently citing the city's strides in providing new funding for its pensions that stave off nearing insolvency for two of the funds, but S&P's action was tempered with warnings that near-term fixes are fragile and mid-term strains loom large.

That's because the city will see big spikes in funding demands after the five-year phasing in of an actuarial based contribution is completed. The tax increases cover only the funds needed during that phase-in period.

Both rating agencies acted after the City Council's recent passage of the 29% increase in water and sewer rates through a new tax on water usage to rescue the city's municipal employees' fund – the largest of the city's four pension funds.

"In our view, this measure temporarily forestalls immediate credit deterioration by providing short-term stability and predictability to the city's budget over the five year ramp," S&P wrote. "We also recognize, however, that this measure falls short of providing long-term stability to the plan because it currently does not identify how larger contributions in and beyond 2022 will be accommodated."

While market participants have praised the administration's move to phase out scoop- and-toss debt rollovers and praised the deficit reductions, S&P notes that debt restructuring still remains in the budget and the rising deficits are forecast for future years including $233 million in 2018 and $324 million in 2019.

"There are forecasted budget gaps to close and growing pension contributions to fund" and "the city's continued reliance until 2019 on "scoop and toss," which delays debt payments and increases interest costs, adds to our view that the city's budget remains unbalanced and structural deterioration is likely without continued deliberate and determined responses from the city," analysts wrote.

Moody's Investors Service, which rates Chicago speculative grade Ba1 and assigns a negative outlook, has been toughest on Chicago's pension restructurings warning they only serve to ease the growth of unfunded liabilities for decades.

Chicago spreads have narrowed by about 50 basis points, Nuveen Investments recently noted in a report comparing Chicago and Illinois in their efforts to stabilize finances. The spreads still represent the highest credit spread for a city with the exception of Detroit.

The city's GOs are rated BBB-plus by Kroll Bond Rating Agency and S&P. Kroll assigns a negative outlook. Fitch has the city at the lowest investment grade level of BBB-minus.

The city plans to spend $1.9 billion on aviation, neighborhood, and water/sewer capital projects throughout the city in 2017. About 10% relies on general obligation borrowing with the rest coming from water/sewer fees and borrowing, airport revenues and borrowing, state and federal funding and TIF funds. The city expects its 144 TIF districts to generate between $437 million and $475 million in 2017. The city’s upcoming $1.275 billion GO sale will include 2017 capital funding as will water and sewer transactions planned for the fourth quarter. 

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