CHICAGO — Retiring Chicago Mayor Richard Daley unveiled a $6.15 billion 2011 budget Wednesday that relies heavily on a series of one-time revenues from reserves, surplus tax-increment financing funds, and debt restructuring to close a record $654 million shortfall without the need for tax, fee, or fine increases.
“I don’t believe it’s right to raise taxes with the economy as bad as it is,” said Daley, who announced last month he would not seek a record seventh term, in his last budget address before the City Council.
The budget is up $49 million from the 2010 spending plan and it includes a $3.26 billion corporate fund.
Though the budget relies on the dwindling reserve account set up with proceeds from the city’s 75-year, $1.15 billion parking meter system lease in 2008, it leaves intact the $500 million reserve set up with the $1.8 billion raised from the city’s 1995 lease of the Skyway toll bridge. That reserve bolstered the city’s financial position and won it a round of rating upgrades.
Aside from some modest cuts, the spending plan squarely places the tough decisions needed to better align city spending with recurring revenues into the lap of the next mayor. Daley’s successor will face limited flexibility to address the city’s challenges without tax increases or service cuts when he or she takes office next May, fiscal experts have warned.
“The Civic Federation is concerned that this appears to be a short-term budget plan for a city that is facing a long-term structural financial crisis,” said Laurence Msall, president of the Civic Federation of Chicago, which follows local and state government finances.
Daley will take an initial stab, albeit a small one, at addressing the city’s $14.6 billion of unfunded pension liabilities by proposing state legislation to changes benefits for future police and fire employees. His proposal is similar to legislation approved earlier this year that impacted new laborer and municipal fund employees. The move would save Chicago over the long term but it is viewed as a minor step toward improving the status of the city’s four pension funds, which are collectively funded at just a 43% ratio.
The one-time revenues being used to shore up the 2011 budget include “borrowing” $120 million from the meter lease, leaving just $76 million from that transaction and $142 million from debt restructuring to provide budget relief. The city did not provide additional details, but likely intends to push maturities coming due off into future years.
The city will declare a surplus in more than 20 of its 160 TIF accounts, freeing a total of $180 million for the region’s various taxing bodies. The city will get $38.5 million and the Chicago Public Schools will receive $90 million. The city expects to collect $98 million by “maximizing reimbursements from other governments,” although no additional details were provided. Another $68.2 million would come from “strategic financing options” that including modifying interest rate contracts and freeing up escrow funds, and from Build America Bond subsidies.
Daley’s proposed spending plan limits new spending and includes modest cuts with the elimination of 277 positions. Chicago will maintain a hiring freeze and require furlough days for non-union employees that will trim $96.9 million from the deficit in combination with other personnel cost reductions.
The budget further relies on the expectation that tax revenues will climb by $91.3 million. Daley also is proposing the consolidation of some city departments and the privatization of some city services to generate additional savings.
Daley, who has led the city for 21 years, will provide some relief for some businesses by reducing the number of employees that fall under the city’s head tax based on their salaries and will create a $2 million small business fund to provide loans for start-up companies. The city plans a $1.9 billion capital budget for 2011, but no details were provided on the GO borrowing levels needed to support it.
Daley defended his budget plan as the best alternative to see the city through a tough financial time, stressing the decision to leave the Skyway reserve intact. “This will leave a half-billion dollars in that account — a reserve fund that most cities don’t have,” he said. “We’ve helped protect Chicago’s future with this decision.”
Fitch Ratings and Moody’s Investors Service recently downgraded the city’s $6.8 billion of GOs one level to AA with a negative outlook and Aa3 with a stable outlook, respectively, due to concerns about the deficit and evaporating financial reserves. Standard & Poor’s rates the city AA-minus with a stable outlook.
Fitch maintains a negative outlook on the rating due to concerns about Chicago’s ability to structurally balance future budgets. The city’s failure to adopt long-term fiscal solutions, a weakening of the economy, and the inability to come up with a plan to address its unfunded pension liabilities could lead to another downgrade, Fitch warned in its August report.
Chicago’s balance sheet is being strained by poor collections from economically sensitive taxes as the city contends with rising labor costs. City GO debt increased to $6.8 billion under Daley as he sought to raise funding for neighborhood improvements.
Daley leased the Skyway toll bridge in 2005 and went on to strike leases involving downtown city parking garages and the parking meter system. The latter has come under fire due to skyrocketing meter costs and operational problems early in the lease. The mayor used $350 million from its various lease reserves to balance the 2009 budget and used $500 million this year.
Reaction among council members was mixed but they face re-election and are unlikely to push for tax hikes. The City Council is expected to vote on the spending plan next month.