CHICAGO — Chicago heads into its 2015 budget season with a $297 million gap to close, according to projections that delay the city's funding of a $550 million spike in police and fire pension fund contributions.

The deficit estimate released Thursday is down from a $339 million shortfall the city faced heading into the 2014 budget year and down $100 million from a previous estimate of the red ink looming in 2015. The higher police and fire pension payments are not actually due until 2016 but Mayor Rahm Emanuel had long called 2015 the city's day of reckoning as he sought state help in solving the city's pension woes. The city primarily funds its pension contributions from property taxes, and the levy request for 2016 must be made in late 2015.

The administration has also now backpedaled on its previous insistence that state law requires property taxes must be used to fund the higher contributions, with officials now suggesting that the city could tap other revenue sources.

The mayor, who faces re-election next year, is banking on reaching an agreement with union officials and winning state legislative approval to overhaul the two funds and phase in the spike required under a prior state mandate to move to actuarially-based contribution levels. Other local governments who face similar strains are also clamoring for action.

The gamble allows the administration to avoid a steep election year property tax hike or deep cuts in a $7 billion budget. Lawmakers approved a reform package earlier this year to stabilize the city's other two pension funds — reached after negotiations with unions — that cover municipal workers and laborers. Both funds were headed to insolvency.

The city's unfunded liabilities dropped slightly in 2013 to nearly $19.2 billion from $19.5 billion for a collective funded ratio of 37%, according to city documents. The size of the obligations has driven the city's credit deterioration. Pension payments will rise from $478 million this year to $1.1 billion next year, although that figure reflects the higher police and fire payments the city has not accounted for in its spending.

Emanuel sought to stress that the shortfall is the lowest in seven years. He also underscored strides made in aligning the city's ongoing revenues with expenses that have resulted in a 50% cut in the gap since he took office in 2011.

The city's structural gap grew in the waning years of former Mayor Richard Daley's administration as his last few budgets relied on one shots like debt restructuring and the heavy use of reserves.

"By making the tough but necessary choices over the past three years, we are able to continue chipping away and have cut our budget gap in half," Emanuel said in a statement. "While a $297 million budget shortfall is substantial, we are making progress in righting the city's financial ship."

The budget estimates are required to be released by the end of July and are included in the city's 90-page annual financial analysis that lays out a more comprehensive picture of the city's fiscal position. It includes revenue and expense patterns over the last decade, data on city debt, reserves, the pension funds, capital spending, and a three-year fiscal forecast based on varying degrees of economic health.

Emanuel highlighted improvements in the city's financial outlook that "shows the progress that has been made towards bringing operating expenses in line with revenues, reforming service delivery while reducing costs, and by reforming two of the city's four pension funds."

The city has reduced some long term cost pressures by renegotiating new contracts, including healthcare deals, introduced managed competition for some city services, and transitioned to grid-based garbage collection. At the same time, the city has raised various fines, fees, and taxes to generate more cash.

The city projects corporate fund revenues of $3.22 billion with expenses projected at $3.52 billion. The revenue estimates rely on modest economic growth and a return to normal trends in revenues impacted by the severe weather this past winter. Expenses will rise due to higher wages owed to employees under new collective bargaining agreements.

Emanuel will unveil his budget proposal in October.

The documents do not reveal how the city intends to close the gap. Officials have said a property tax or sales tax hike is off the table. The reform package approved for two of the city's pension funds initially relied on a $50 million property tax hike next year, but instead the city raised its emergency services surcharge on phone bills which will free up general fund revenue to cover the pension contribution. The package requires annual $50 million increases for five years.

Under mid-level economic projections, the city faces a $430 million deficit in 2016 and $588 million one in 2017. Those figures include the annual $50 million increase required under the laborers' and municipal funds' reform law but don't include the looming spike in police and fire pension payments. Under a negative scenario, the gap rises to $729 million in 2016 and $1 billion in 2017.

The city closed out 2013 with $628 million in reserves and $21 billion of total debt with debt service almost doubling from $793 million in 2004 to $1.56 billion in 2014 and rising to $1.7 billion in 2017.

Chicago suffered two, triple-notch downgrades since last summer, one from Moody's Investors Service and the other from Fitch Ratings. Moody's stung the city anew earlier this year when it dropped the GO rating one more level to Baa1. Fitch Ratings rates Chicago's $8 billion of GOs A-minus and Standard & Poor's rates them A-plus. All three assign a negative outlook.

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