CHICAGO – Chicago Mayor Rahm Emanuel unveiled a 2018 budget that relies in part on upfront savings from a new borrowing program, tax-increment financing surplus funds, and a ride-share fee to erase red ink and help out the city’s school district and transit agency.
Emanuel presented his proposed $8.6 billion 2018 budget to the City Council Wednesday in an address asserting that the city’s finances have stabilized in part due to an overhaul of pension funding and the phasing out of poor debt and fiscal practices. That includes an early end to "scoop-and-toss" debt restructuring, in which the city issues new debt to pay off old debt as it comes due.
“This year, Chicago is on firmer financial footing that we have been in many years. Together, we addressed longstanding challenges within the city, overcame obstacles in Springfield and confronted new headwinds in Washington,” Emanuel said in his address.
Emanuel called the city’s gains in Springfield historic. The city won approval for the final piece of its funding overhaul of the four pension funds that carry $35.7 billion in net pension liabilities, obligations that were at the heart of Moody’s Investors Service’s move to drop the city to junk in 2015. Chicago Public Schools garnered $300 million in additional state funding.
Emanuel thanked the council for passing tax hikes in recent years – that include a record property tax increase, a plastic bag fee, a water/sewer surcharge, and 9-1-1 charge -- and residents for paying them to get the city’s finance “back on track.”
“Together we took on a broken budget and with this budget we slashed our structural deficit by 82%,” he said. “We moved each of our four pensions from a path of insolvency to a path of solvency.”
The city’s overhaul did save the municipal and laborers’ fund from looming insolvency, though that isn’t the case with the police and firefighters’ fund. A state law required the city to begin in 2015 funding the plans at an actuarially required contribution rate, but the city’s overhaul pushed off the shift to an ARC and delayed the timeline to reach 90% funded status.
“The pension funds that contributed to doubts about Chicago’s fiscal health are now a factor driving Chicago’s fiscal stability,” Emanuel said, citing S&P Global Ratings’ decision to shift the city’s outlook for its BBB-plus rating to stable from negative.
The speech did not address how the city will fund looming spikes in contributions as the city begins to reach ARC funding requirements in the coming years.
“The days of fiscal smoke and mirrors are behind us,” Emanuel said, citing the raids on the city’s reserves and asset sales seen under his predecessor Mayor Richard Daley. Emanuel has made small deposits back into the rainy day funds in recent years.
Emanuel also said the city would phase out scoop-and-toss debt restructuring a year early. He initially pledged in 2015 to end it by 2019 along with the practice of borrowing for operating costs like settlements and judgements by 2019. Daley began those practices and Emanuel has continued them.
“I’m proud to say this year’s budget for the first time in over a decade the city of Chicago will not depend or use scoop-and-toss to balance our budget,” Emanuel said. “Every single financial practice we inherited in 2011 has now been eliminated. We have traded fiscal tricks for honest books.”
The city included scoop-and-toss restructuring savings for this year's budget into its billion dollar general obligation deal earlier this year. S&P noted in a report on the deal that a total of $440 million of debt restructuring was included to benefit budgets through 2018.
Without the big tax hikes of recent years, the budget is expected to prove an easy sell for most council members. But not all agreed with Emanuel’s portrayal of the city’s fiscal picture.
“Today, Mayor Emanuel painted a rosy picture of his budget. But the fact is, the city remains in a fiscal crisis that his administration has helped to create through years of irresponsible, high-interest borrowing that profits big banks and financial firms at the disproportionate expense of low-income Chicagoans,” said Alderman Scott Waguespack, chair of the council’s Progressive Caucus.
The budget tackles about $114.2 million of red ink and raises $123.8 million to help Chicago Public Schools close a budget gap and cover police reforms and the ongoing hiring of 1,000 new officers.
The budget relies on $19.35 million in savings from personnel reforms, management efficiencies, contract and professional services changes; $119 million from a tax-increment financing surplus and debt service savings from the city’s refunding of debt using its new securitization structure; $50.3 million in growth expected from various tax streams; $10.8 million from improved debt collections; and $38.8 million in new tax revenue. The city will also deposit $5 million into reserves.
The city will implement a $1.10 monthly hike in the 9-1-1 emergency surcharge already approved by the state, freeing up $19 million in the corporate fund that otherwise would have gone to fund planned emergency services improvements. The amusement tax is being restructured and raised for some events.
The city’s plans to begin tapping a new sales tax securitization bonding program to refund about $2.8 billion of sales tax and general obligation bonds for savings over the next couple years is projected to free up $94 million from the city’s corporate fund.
The city intends to achieve net present value savings from the refundings, but will be banking a good amount of savings upfront, with smaller savings likely in future years.
“These refunding bonds are expected to be structured to achieve accelerated savings providing budgetary benefit for 2018, while also keeping overall debt service level over the life of the bonds, mitigating future negative impacts on the city’s corporate fund,” budget documents say.
Several aldermen said after the address the securitization program and plan to take a good chunk of savings upfront and possibly push out maturities mirrors the GO scoop and toss practices.
The city will declare a $166.9 million TIF surplus. In addition to providing $40 million for the city, half automatically goes to the school district. It will cover the bulk of the city’s pledge to funnel $80 million for CPS safety expenses to help the district trim a current year deficit.
The city will collect about $60 million in higher property taxes due to the previously approved $543 million levy hike being phased in to fund police and fire pension contributions.
Amid a lack of a state capital budget to help the Chicago Transit Authority rebuild and enhance its system, Emanuel is proposing to a 20-cent-per-ride fee on ride share companies like Lyft and Uber. The fee would begin at 15 cents in 2018 with another five cents added in 2019. “All of the funds generated will be solely to the CTA, not to fill the city budget gap,” budget documents say.
The 2018 budget totals $8.58 billion, $3.77 billion of which makes up the corporate fund budget.
After the city’s annual investors’ conference held over the summer, market participants said Emanuel and his finance team deserve credit for raising taxes to fund pensions and phasing out poor debt practices.
But they remain worried over the pension system’s funded status, how the city will cover future higher contributions, and the risk of setbacks from poor returns. The city also remains exposed to CPS’ fiscal woes.
Chicago is rated BBB-minus with a stable outlook by Fitch Ratings and BBB-plus with a stable outlook from Kroll Bond Rating Agency. Moody’s rates it at the speculative grade level of Ba1.
The city’s 10-year GO spreads have narrowed to under 200 basis points to the Municipal Market Data’s top benchmark. Before the state budget passed in July, Chicago GOs were hovering around a 300 basis point spread and the city paid a record high spread of more than 330 basis points on its $1.2 billion GO sale early this year.