CHICAGO — Former Illinois congressman and presidential chief of staff Rahm Emanuel will take office as Chicago's next mayor in May, inheriting daunting fiscal challenges as a new era in city government is ushered in that could shake up the local public finance field.

Emanuel, 51, won 55% of the vote among a field of six candidates in Tuesday's municipal election. On May 16, he will replace Richard M. Daley, who announced last fall that he would not seek a record seventh term after two decades in office.

The end of Daley's tenure comes as the city faces a $500 million to $600 million deficit in its next budget and a dramatic $550 million increase in pension contributions in the coming years due new state legislation.

The fiscal woes are driven by rising labor costs and a growing debt load amid lackluster revenue growth and mounting unfunded pension liabilities.

Daley has relied on more than $1 billion in proceeds from asset leases to balance the last three budgets and most analysts have warned that a mix of cuts, new revenues, and labor concessions will be needed to stabilize the city's balance sheet.

"Mayor-elect Emanuel faces an enormous challenge to come up with a means of stabilizing the city of Chicago's finances," said Laurence Msall, president of the Civic Federation, a local government review organization that recently released a report outlining the city's financial challenges. "The first thing he has to do is get a handle on spending."

A round of downgrades and headlines over the city's struggles has driven up borrowing costs. To shore up investor confidence in the city's credit, Emanuel needs to act within his first 90 days in office to set an agenda that calls for meaningful action to address the city's woes, said Richard Ciccarone, chief research officer at Oak Brook, Ill.-based McDonnell Investment Management LLC.

"He has to come across that he really understands the intricacies of the city's problems and spell out some specific actions," Ciccarone said. "He likes to say that crisis brings opportunity. He has his crisis, now we have to see how he makes the opportunity work."

Emanuel, in addition to serving President Obama, also served in Bill Clinton's administration and was a senior adviser and fundraiser to Daley earlier in his career.

The city's direct tax-supported debt burden rose 122% between 2000 and 2009 to $6.9 billion., the Civic Federation reported. Chicago's $6.8 billion of general obligation debt is rated AA-minus by Fitch Ratings, A-plus by Standard & Poor's and Aa3 by Moody's Investors Service, all with stable outlooks. The city carried $12.4 billion in unfunded liabilities in its four pension funds in fiscal 2009.

The Civic Federation report recommends the city adopt a multi-budgeting plan, restrict future reserve use, establish a formal fund balance policy, and reform pensions to increase both city and employee contributions.

Emanuel, who raised more than $12 million for the campaign and survived a residency challenge, said he would cut $75 million from the current budget and freeze spending. "We know we face serious new challenges and overcoming them will not be easy. It requires new ideas, cooperation and sacrifice from everyone involved," he said in his victory speech.

During the campaign, he outlined proposals to begin whittling down the deficit. He has pledged to enact reforms in the 2012 budget that could achieve $500 million in savings. Emanuel wants to extend the city's sales tax to include services while also slicing the tax to 1% from 1.25%, a move his campaign has estimated could raise $15 million to $20 million annually.

On pensions, he has said he wants to preserve them but will seek changes. While recent state legislation has already cut benefits for new employees in some of the city's unions, Emanuel has angered unions by suggesting benefit cuts may be needed for current employees.

"The obligation to pay for pension contributions must be shared by the city and its employees," the mayor-elect said.

Daley had planned to use proceeds of a $2.5 billion privatization of Midway Airport to help shore up the pensions, but that deal fell through in 2009 when the winning bidder could not raise the funds due to the international fiscal crisis. Emanuel has said he does not plan to resurrect that lease.

Daley's administration launched the movement to privatize assets with the $1.8 billion lease of the Chicago Skyway toll bridge in 2005, but interest in more privatizations has waned due to public anger over the city's $1.2 billion parking-meter lease deal that was poorly implemented in 2008.

Emanuel has called the use of reserves to finance operations "irresponsible" and said any future asset leases would be structured so that proceeds are preserved or spent on infrastructure or used in some other way with long-lasting taxpayer benefit. He is open to building a casino in Chicago if state lawmakers approve one.

The end of the Daley era stands to shake up the local public finance field and the political landscape as Emanuel will face a more independent City Council.

Over the last two decades, former city finance officials and lawyers have flocked to the offices of local, regional, and Wall Street firms and top law firms, capitalizing on their ties to the mayoral administration, including Daley himself.

Minority and women-owned firms have benefitted from a city goal of doling out at least 25% and 5% of its respective bond business to such firms. Most broker-dealers receive some share of city bond business — which totaled $3.4 billion last year according to Thomson Reuters — as long as they maintained a Chicago office.

"It's a new day in Chicago. It's probably not going to be business as usual, but no one knows yet," said one Chicago-based public finance banker.

Emanuel has said he would sign an order banning employees from lobbying departments they formerly worked in for two years.

While Daley benefitted from a tight grip on the City Council, at least 10 of the 50 aldermanic seats on the council will be held by new members who are not beholden to Emanuel for their election. Nine incumbents face a runoff on April 5.

The fate of powerful Alderman Edward Burke, who has long held sway over the city's Finance Committee, remains uncertain. During the campaign, Emanuel opened the door to reorganizing the council, saying no chairmanships were assured.

In addition to visiting city chief financial officer Gene Saffold and his finance staff, bankers also court Burke as he holds sway over bond approvals. Burke, who never misses an opportunity during committee meetings to tease bankers in their expensive suits in the council chambers, backed Emanuel challenger Gery Chico in the race. Some believe Burke will keep his post, given his influence in city political and business circles.

Due to his appointment powers, Emanuel will also hold sway over city agencies including the Chicago Board of Education, the Chicago Park District, the Chicago Transit Authority and other city-state agencies.

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