CHICAGO - Chicago faces a $420 million gap in its next budget - reflecting a combination of sagging revenues and rising costs - and "everything's on the table" except a property tax increase to close the hole including layoffs, cuts, and dipping into the city's $500 million cash reserve, said chief financial officer Paul Volpe.
City finance officials put off their traditional July release of preliminary budget numbers for the next year in anticipation of the latest revenue numbers. Volpe presented a grim picture of both revenues and costs yesterday.
"The preliminary estimates reflect the impact of the recession on two annual budgets - we've had slow revenues and greater than expected expenses in 2008, and we expect weaker revenues in 2009, even as we shoulder increases in wage, benefit and pension costs," Volpe said.
A dip in the expected level of revenues and higher expenses this year for snow removal, fuel, and energy are contributing to what's now expected to be a $141 million shortfall in the current $3 billion corporate budget that is part of the city's $5.9 billion all-funds 2008 budget. No improvement is expected in the near term, Volpe said, resulting in a roughly $280 million hole to plug in 2009. Combined, the city needs to erase a $420 million deficit as the new budget is crafted and presented to the city council this fall.
Revenues collected so far this year are down from previous estimates by 3.4% or about $40 million. Some are doing better than expected, including taxes on utilities, hotels, and amusements. But others are struggling, including taxes on cigarettes, real estate transactions, vehicle fuel, and bottled water, in addition to other revenue streams such as the sale of city-owned land and building permits. Overall, revenues are expected to fall about $107 million below those collected in 2007.
The city exceeded a snow collection budget of $18.5 million by $6.5 million and has exceeded its fuel budget of $29.4 million by $7.6 million.
Between January and July, real estate tax collections were $35 million below projections. The city estimates a total $55 million reduction in budgeted revenues from the tax for the year. The once flush revenue stream generated $242 million at its peak in 2006 when the Chicago real estate market was still booming. Sales taxes too are a trouble spot with collections falling flat this year and now on pace to fall about $18.1 million short for the year from previous estimates.
In further evidence of the city's fiscal struggles, Volpe said the most recent analysis shows the city's unreserved ending cash balance for 2007 will be just $4.6 million once its audit is completed, down from an earlier projection of $15.5 million and the lowest in recent memory. Volpe said the city was not considering any borrowing for cash-flow purposes.
"We haven't faced a more challenging budget since I've been mayor," Mayor Richard Daley, who took office in 1989, said in a statement. The mayor ruled out a property tax increase to help shore up the budget. The city last year raised property taxes by 10% to generate $83.4 million - the most controversial piece of $275 million in tax and fee increases.
Daley has already undertaken several management steps to help rein in spending, including ordering a hiring freeze, a 3% across-the-board cut on non-personnel costs, a suspension of most overtime, and a suspension on non-critical out of town travel.
Amid reports from labor leaders and City Council members that as many as 1,800 positions could be cut to help erase the red ink, Volpe said all measures absent property taxes are on the table. "We are going to have to make some tough decisions," he said.
Volpe said maintaining the city's double-A level general obligation ratings was a priority and that the city would like to avoid a raid on the $500 million permanent reserve but he did not rule out such a step. The account was established with a portion of the $1.8 billion received in early 2005 when the city entered into a 99-lease of the Skyway toll bridge with a private consortium and was cited as a primary reason for a round of rating upgrades that followed.
The reserve was established as the city had previously teetered on the brink of a downgrade due to its then narrow ending balance of $19 million in 2004. The balance hit a low of $13 million in 2002, from a high of $180 million in 1998. The 2006 unreserved balance was $26.8 million.
Standard & Poor's analyst John Kenward said he was not overly concerned with the narrow balance given the existence of the reserve. "Our upgrade of the general obligation credit to AA-minus was founded on the existence of the reserve and as long as that stays intact in substantial form" the credit remains sturdy, although he cautioned that dipping into the reserve "could pose a problem."
The city also has several proposals to privatize other assets such as its parking meters and Midway Airport that could help in managing the budget.
Chicago's $6 billion of GOs are rated Aa3 by Moody's Investors Service and AA by Fitch Ratings.