Chicago Mayor Rahm Emanuel has sought to avoid a property tax increase but many market participants have said it’s inevitable given the city’s fiscal position.

CHICAGO - Chicago Mayor Rahm Emanuel will reportedly propose a $500 million property tax for police and fire pensions when he unveils his 2016 budget Sept. 22.

The property tax increase, which would include a separate levy of $50 million for school construction, could range from $450 million to $550 million, according to local reports citing City Hall sources. The Chicago Tribune called it the largest in modern Chicago history.

The Sept. 22 budget unveiling is a month earlier than usual to give alderman time to digest the proposals. The spending plan needs to cover a $754 million shortfall from an operating deficit and higher pension contributions, according to the mayor's office.

In addition to the property tax hike, the mayor reportedly wants to tax Chicagoans for garbage pickup and impose a $1-per-ride charge on ride-sharing services like Uber as well as tax e-cigarettes and other smokeless tobacco products. The city is also considering a penny-an-ounce tax on soft drinks.

The city's problems are largely driven by a $20 billion unfunded pension tab, with only a 35% funding level. Investors and ratings agencies are watching closely to see how the city closes the gap. Citing the pensions, Moody's Investors Service downgraded the city to a junk-level Ba1 in April.

Emanuel says the $754 million shortfall is due to a $233 million operating deficit; $93 million in increased city contributions owed to the municipal and laborers' pension funds; a $100 million debt repayment the city had intended to push off but now plans to make as it curtails the use of scoop-and-toss restructurings; and a $328 million increase in contributions due for the city's police and fire pensions.

Chicago owes $550 million to its public safety funds next year under a 2010 state mandate to bring its annual contributions to an actuarially based level. The city would be allowed to trim the $550 million down to $328 million under terms of a bill lawmakers have approved that would phase in the shift and push off the requirement to get a 90% funded ratio by 15 years.

That measure has not been signed by Gov. Bruce Rauner, who has not made his position clear.

Chicago carries GO ratings of BBB-plus from both Fitch Ratings and Standard & Poor's with both assigning a negative outlook, and A-minus and stable outlook by Kroll Bond Rating Agency.

Emanuel has sought to avoid a property tax increase but many market participants market participants have said it's inevitable given the city's fiscal position. In a commentary in May, Municipal Market Analytics said the measure would likely buoy the city's bonds. "Should the city actually move to raise property taxes in consequence, look for immediate positive action in prices and spreads," MMA said.

 

 

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