Chicago Mayor Rahm Emanuel

CHICAGO – The solution to Chicago’s police and fire pension problems does not lie in Mayor Rahm Emanuel’s newest budget.

The budget, announced Wednesday, does not deal with a looming $550 million annual pension reckoning and Emanuel offered no hint in his budget address as to how the city will eventually address it.

He did announced his solution for a $300 million gap in the budget, including higher parking and leasing taxes, spending cuts and other savings.

"For the fourth year in a row we will balance our budget and hold the line on property, sales, and gas taxes," Emanuel said in his budget address to the City Council. "Like our past budgets, this budget restores money to the rainy day fund instead of raiding it for total of over the last four years of $45 million."'

The proposed $7.34 billion budget includes a corporate fund that will rise to $3.5 billion from $3.3 billion. When grant funds are added the budget rises to $8.9 billion. Emanuel proposed a mix of measures to close the nearly $300 million deficit he faced going in.

They include $50 million in non-personnel savings and spending reforms, raising $26 million from improved debt collections, $31 million from eliminating vacancies, and healthcare savings by continuing with plans to phase out most retiree healthcare. That plan is the subject of a legal challenge.

The city would trim another $60 million by capturing some surplus tax-increment financing revenues.

An additional $75 million is expected in higher than anticipated tax revenue growth. Revenues from hotel taxes are expected to grow by 3%, property tax transfer taxes by 5%, and building permits by 7%. The city would raise $54.4 million from various tax increases and by closing tax loopholes.

The city would raise its parking tax for the third year in a row, and raise vehicle, software and other leasing fees. Emanuel would extend an amusement tax on stadium skyboxes and cable television, and the city would crack down on sales tax collection loopholes companies capitalize on by receiving products in the suburbs.

Emanuel, who is expected to seek a second term next year, laid the groundwork for his campaign message by highlighting fiscal strides that include reining in a structural budget gap and reforming two of the city's four pension funds.

"Finally we are doing something," Emanuel said of increased contributions due under the reform package for the laborers and municipal funds state lawmakers approved earlier this year.

The city initially planned to raise the property levy by $50 million in 2015 but state lawmakers gave Chicago the go-ahead to raise its emergency services surcharge on phone bills to offset the need to rely on property taxes.

The city has not said whether it will alter its original plans to rely on the property tax levy to fund annual increases of $50 million over the next five years after 2015.

Emanuel spoke of remaining challenges but did not speak directly of the $550 million payment hike due in 2016 for its police and firefighters pension funds under a prior state mandate to make actuarially based contributions.

If the city is to cover the payments with property taxes, it must raise its levy in 2015.

The city's $19 billion of unfunded pension obligations and the looming contribution spike have battered the city's bond ratings. Investors and analysts are watching closely to see how the Emanuel administration will deal with the higher payment schedules.

The mayor is banking on state lawmakers passing a reform package that overhauls the public safety pension funds while delaying the shift to an actuarially required contribution level. Police and firefighters have refused city attempts to negotiate reforms with a challenge to state level reforms pending before the courts.

Too steep a delay in the pension contribution hike would be viewed negatively for making the underfunding situation worse, but immediate implementation next year would severely strain city coffers, requiring steep tax increases and deep spending cuts.

The city's GOs are rated A-minus by Fitch Ratings, Baa1 by Moody's Investors Service, and A-plus by Standard & Poor's. All assign a negative outlook.

"What we heard today is more of the same and not a proposal….election-year fluff," said Alderman Bob Fioretti, who has declared his candidacy for mayor. "Aldermen were not approached about this budget. People were not approached about this budget."

Emanuel sought to highlight $470 million in spending cuts and savings achieved through management initiatives that included the renegotiation of leases and contracts, the sale of city property, and trimming healthcare expenses.

"We are making real progress, but we still have a long way to go," the mayor said.

"Three years ago our city finances were broken," Emanuel said of his first year in office, when the city faced a nearly $600 million preliminary budget shortfall.

The budget would double the size of the city's pothole and street repair team, double the number of police trained on bikes to serve neighborhoods, increase funding for graffiti removal, rodent control, and tree trimming, and increase spending on veterans homeless programs and early childhood education.

The city's capital improvement program totals $2.19 billion, including $972 million for aviation projects. About 12 % of the non-aviation capital spending would be funded with GO borrowing.

The proposed budget appropriates $623.9 million to service the city's GO bonds, including $370.5 million from the property tax levy. In 2014, $595.1 million was budgeted for debt service.

Pension payments total $557 million, up $79 million from 2014. The payment will be funded with $359 million from property tax collections, and $198 million from other sources, including $55 million from enterprise funds.

Hearings on the budget begin Monday and the City Council will vote on the plan Nov. 19.

Market participants may not have been surprised by the lack of a solution to the public safety payment spike since the Emanuel administration in July did not include the payment in its preliminary budget figures, but they still expressed disappointment.

"Chicago is the poster child for local governments dealing with large unfunded pension liabilities so for the city to refuse to make a meaningful attempt to deal with it is disappointing," said Matt Fabian, a managing director at Municipal Market Advisors. He added that tackling the municipal and laborers funds still falls short of resolving the city's pension woes.

The budget presented an opportunity to gain positive momentum on the credit front with analysts and investors, but either the city "isn't hearing or choosing not to hear the message," Fabian added.

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