Chicago's mayor offers an easy-to-swallow budget
CHICAGO— With pension funding strains looming large over Chicago’s fiscal future, Mayor Rahm Emanuel Wednesday unveiled a $10.7 billion 2019 budget that covers a more than $200 million gap without any new taxes or fees.
Emanuel, who has hit taxpayers hard to rescue the city’s retirement systems, will leave it to his successor to tackle upcoming pension funding spikes after announcing in September that he won’t seek a third term in the February municipal election.
Emanuel has said in recent interviews he intends to put forward further plans to deal with the city's pension system by the end of year. It remains unclear whether he will still pursue a $10 billion pension obligation bond proposal.
His $10.67 billion all-funds package for 2019 is divided into $8.86 billion of local funds – including a $3.82 billion corporate fund -- and $1.81 billion of grant funds.
The budget absorbs the initial $25.7 million price tag for police reforms under a consent decree, $15 million more needed for settlements, and the next phase of police hiring. There’s also additional spending for youth and workforce programs.
The spending plan accounts for the cost of some new labor contracts, but deals ones for police and firefighters have not yet been reached and so the potential expense is not included.
Emanuel used the occasion of his last budget address to make the case for his fiscal stewardship.
“We have done the hard work of putting our fiscal house and priorities in order; this budget builds on the steady progress we have made together over the past seven years,” he said. “Without sound, strong, stable finances nothing else is possible.”
The all-funds budget is up by $300 million compared to this year's. The budget relies on about $43 million in natural growth of existing taxes and $21.6 million from the ground transportation tax due to the growth of the ride-share industry. About $38 million is available in cash from the unassigned fund balance and $43 million of revenue will come from the city’s $175.5 million tax-increment financing surplus declaration, said Chief Financial Officer Carole Brown and Budget Director Samantha Fields.
About half of the TIF surplus goes to Chicago Public Schools. The city doesn’t consider it to be one-shot revenues as it has declared a surplus every year for years, totaling $1.2 billion since 2011.
The budget further relies on sweeping some old accounts and debt service savings as it continues to refund debt under its sales tax securitization structure established last year to refund $3 billion of GO and sales tax bonds.
About $73.7 million in savings are carved out of the budget through cost-saving initiatives such as cutting vacant positions and from healthcare savings, and another $26.5 million from various cost recovery efforts. The city anticipates an unassigned fund balance on par with recent years at around $150 million.
Emanuel focused the brunt of his speech on a review of the last seven years and the fiscal, economic, and academic gains accomplished during his tenure.
“The city of Chicago’s fiscal crisis, brewing for years, had reached a boiling point,” Emanuel said of the city’s fiscal state when he took office in May 2011. “We faced a structural deficit of $635 million, 20% of the entire budget was in the red. For each of the previous three years, the city had taken more than $300 million dollars out of the reserves just to balance the budget. All four city pension funds were hurtling towards insolvency. Companies and jobs were leaving the city.”
Emanuel has trimmed the structural deficit to under $100 million and funneled modest annual additions to city reserves totaling $70 million -- $50 million in asset reserves and $20 million in a liquidity account -- with another $10 million in the proposed budget. The city also reversed the annual 10% growth in healthcare costs to reduce expenses by $33 million.
In his second term, his administration phased out fiscal gimmicks he inherited such as scoop-and-toss debt restructuring and using debt to fund legal settlements and judgments.
The city shed its floating-rate general obligation exposure, a move planned in 2015 that was made more urgent after Moody’s Investors Service junked Chicago’s rating that May over the weight of its pension woes. The cut triggered a $2.2 billion potential liquidity crisis on bank support contracts and swap defaults that was resolved by debt restructurings.
Emanuel’s most material gain in the municipal market’s view has been his funding overhaul of the city’s four pension funds and use of his political muscle to push tax hikes to cover escalating contributions. They included a $543 million property tax, a new water-sewer surcharge, and a 9-1-1 fee.
While critics say the overhaul falls short, as it will take longer than a decade to improve funded ratios, they saved two funds from insolvency.
The city’s net pension liabilities total $28 billion and are just 26.5% funded.
“We stopped kicking the can down the road and started putting our pension funds on the road to solvency,” Emanuel said. “We are sending a clear statement unambiguously that we believe in saving for Chicago’s future, not mortgaging it.”
Emanuel attributes the city’s record number of corporate relocations and private investment to fiscal gains. At the same time, he said, Chicago Public Schools expanded pre-school, full day kindergarten, and expanded the school day with academic and graduation rates improvements that have received national recognition. Emanuel appoints the board and handpicks the district chief.
Pensions, however, loom large. The city will contribute $1.31 billion next year, up $121 million from this year. Contributions rise to $1.67 billion in 2021 as actuarial funding requirements hit for two funds and then $2.1 billion in 2023 when the two other funds are required to receive actuarially based payments.
The city appeared over the summer to be fast-tracking a $10 billion pension obligation issue publicly pitched for the first time in early August by mayoral advisor Michael Sacks. Emanuel’s announcement that he would not run again took the air out of those plans and rising interest rates have cut into a deal’s potential value with some market participants suggesting it no longer works.
Brown has said the deal does still work based on current rates and it remains under consideration.
Emanuel intends by the end of the year to engage in a “comprehensive discussion around the pensions” and “lay out in more detail the pension issue and talk about all the components he thinks are necessary,” Brown said Wednesday.
Chicago Civic Federation president Laurence Msall said the mayor deserves credit but the budget only goes so far.
“He’s leaving the city in a better place financially. There’s plenty of evidence he’s brought down the structural deficit and attempted to address the city’s challenges and been creative” in overcoming the state’s political and budgetary dysfunction, Msall said.
The budget proposal, however, falls short in addressing long-term challenges on pensions and deficit forecasts that range from $100 million to $600 million in 2020 depending on the economy, and the city remains ill-prepared to manage through an economic downturn, Msall said.
“It’s not a long-term financial plan. There’s evidence of growing stability and lot of the heavy lifting has been done so that a balanced budget can be presented but it doesn’t address where we get the revenue” to address the future pension funding spikes or deficits, he said.
The city’s strains are evidenced in its junk rating from Moody’s, Msall said. The city’s GO bonds carry two other ratings in the triple-B category and one at the A level.
Hearings on the budget begin Monday.