CHICAGO – Chicago’s rising pension costs and other budgetary pressures cast a wide shadow over big gains the city has made in whittling down its structural budget.
The city projects a $114 million structural deficit heading into the 2018 budget season, Mayor Rahm Emanuel's administration said this week as it released its annual review of the city’s fiscal health. That’s down 82% from the more than $600 million gap Emanuel inherited in 2011.
“We are more financially secure today than we were six years ago,” Emanuel said in a statement.
The administration has chipped away deficit by cutting expenses, raising taxes and fees, and through natural revenue growth – and it’s made strides in putting the city’s four pension funds on a more stable funding path. Emanuel's overhaul staved off looming insolvency for two of the city's funds and prompted two rating agencies to shift the city's outlook to stable.
But on both the budget and pension fronts, challenges persist and are growing.
The deficit projection doesn’t take into account $70 million in costs to pay for new police hiring and other expected contract or police reform expenses, because the city considers them new initiatives or one-time expenses and not part of structural spending. Red ink also is projected to rise.
Pension payments make a big leap in 2020 and again in 2022 as the funds fully shift to actuarially based payments under legislative changes.
The city is facing a leap of about $300 million in 2020 in payments for its public safety funds and a $330 million increase in muni and laborers fund payments in 2022. Total payments will rise from $1 billion this year to nearly $2.2 billion in 2022.
The AFA provides the first assessment of how much the shift to an ARC for the muni and laborers fund will cost the city. It’s also tentative as investment returns and other changes could affect the actuarial calculation.
“They have a long way to go but that’s what the city should be paying already,” said Richard Ciccarone, president at Merritt Research Services LLC. “We’ve already seen taxes go up, and taxpayers are going to really feel the pain of the accumulation of contributions as the city steps up.”
The political will to raise taxes could be blunted by any economic downturn so “it could be more politically difficult to get this job done,” he said. “We have the capability to pay from a broad economic base, but the anxiety is in the speed and steepness” of tax hikes. The latest is Cook County’s penny per ounce tax on sweetened beverages that took effect Wednesday.
Over the last two years, Emanuel has won a big property tax hike, secured a 9-1-1 surcharge fee, and implemented a new water-sewer tax to funnel billions in new funding to the city’s four pension funds. The 9-1-1 fee was raised again this year, which could free up general funds for higher contributions. While some of the new water/sewer surcharge is being set aside to help ease the impact of the future payment jump, the city has yet to fully outline how it intends to cover the $2.2 billion tab.
The city’s net pension liabilities grew to $35.7 billion in 2016 from $33.8 billion a year earlier. The municipal fund accounts for $18.9 billion, the laborers fund accounts for $2.5 billion, the firefighters fund accounts for $4.1 billion, and police fund for $10.2 billion of the obligations.
The city is ramping up police and firefighter payments from 2015 to 2019 with an actuarially based contribution set in 2020.
The 2017 budgeted contribution totaled $727 million, including $500 million for the police fund and $227 million for the fire fund. The payments leap for both public safety funds by about $300 million in 2020. That includes increases in the police fund contribution to $782 million in 2020 from $579 million in 2019 and in the firefighters fund to $340 million from $245 million.
The city is ramping up contributions to the municipal and laborers funds from 2017 to 2021 when an ARC payment then begins in 2022.
The city is paying $303 million this year to the two funds, up by $126.5 million from a year ago. Contributions rise to $866 for the muni fund in 2022 from $576 in 2021 and the laborers fund jumps to $124 million from $84 million.
In 2011, the city paid $459 million toward all four funds based on the former statutorily based rates. Contributions jumped to $798 million in 2015 as the police and fire contributions rose. Collectively the contributions to all four funds of $1 billion this year will rise to $1.2 billion next year and then $1.3 billion in 2019 before jumping to $1.7 billion as the police/fire ARC hits.
Total payments then jump from $1.8 billion in 2021 to $2.17 billion in 2022 and then $2.2 billion in 2023 as the ARC takes effect for the muni/laborers funds.
Kroll Bond Rating Agency in a recent report said its review of local data and a comparison to other cities shows the city can support higher taxes. “KBRA estimates that Chicago would need to increase annual revenue by almost $1.3 billion by 2023, of which roughly $885 million will require new political action,” it wrote. Another $339 million is needed for overlapping governments.
Total corporate fund resources are tracking at about $11 million above budgeted levels at $3.7 billion this year. Some expenses are down and revenues are mixed. The city will see less sales tax revenue as the state’s new budget imposes a 2% fee on collections that began July 1.
Looking ahead, the city forecasts a $212 million gap in 2019 and a $330 million gap in 2020 based on hold-steady projections. Under a positive outlook, the gap narrows to $21 million in 2019 and $90 million in 2020 while in a negative scenarios it rises to $605 million in 2019 and $812 million in 2020.
The figure projections and the report underscore how variations can occur. The city’s 2015 AFA projected a $436 million base outlook structural budget gap for 2018, and this year, the 2018 projected gap is $114.2 million.
Chicago is carrying a total debt load of $23.9 billion including $9.3 billion of property tax supported general obligation bonds that marked a sharp jump from $8.4 billion in 2016 when the total was $22.1 billion.
The city highlights how it's phasing out the use of scoop-and-toss restructuring by 2019 and shifting more of its working capital expenses and such one-time expenses as retroactive pay hikes off the debt load. It has pledged to end the practice of borrowing for routine settlements of judgments by 2019. Market participants will be watching closely for the administration to abide by the pledge.
Chicago’s reserves stand at $620 million. They have held steady and some small deposits have been made during Emanuel’s tenure. The city saw its unassigned fund balance grow to $154 million in 2016 from $93 million a year earlier and a narrow $34 million in 2013.
A review of the deficits since 2005 shows the gap was at a low of $64.5 million in 2007 and then rose to a high of $655 million in 2011. The city hasn't said how it intends to close the current $114 million gap. The city will release its proposed 2018 budget in October. It’s currently operating on an $8.2 billion budget that runs through December. The city carries that range from a low of junk to a high of BBB-plus.