CHICAGO - Passage of Chicago Mayor Rahm Emanuel's proposed 2016 budget that socks property owners with a record tax increase to fund escalating public safety pension contributions would positively impact the city's credit profile, Fitch Ratings said.
The assessment of the proposed budget and its tax increases as a "positive credit development" was tempered with Fitch's warning that "long-term risks remain." Fitch rates Chicago's general obligation debt BBB-plus with a negative outlook.
Passage of the budget "would demonstrate willingness to raise recurring revenues for the city's rising pension expenses," Fitch Ratings said in the commentary released Wednesday, one day after Emanuel unveiled the budget proposal. "The plan shows progress toward structural budgetary balance, but vulnerabilities remain."
Fitch analysts said it is good news that Emanuel's budget relies on new revenues to cover rising pension costs without the use of reserves, but Fitch does not look favorably on its ongoing use of nonrecurring measures, albeit at a lower level than in the past. The budget relies on a tax increment financing surplus and pushes off some debt repayments.
While the budget includes a series of new and increased taxes and fees including a first ever garbage collection charge, the centerpiece of the package is the property tax hike. Once fully phased in over four years, it would raise $543 million annually. The hike represents a 58% rise over the city's 2014 property tax levy and 13% increase over the total tax levy when overlapping governments that rely on the same tax base are counted.
Fitch notes the city's gamble that it will win final state approval to lower the hike in its public safety contributions by delaying the schedule for it to reach a 90% funded ratio under a 2010 state mandate. The proposed levy increases assumes the revised amortization schedule will take effect. If the city fails to win final approval for that, it would need to come up with more than $200 million in additional revenue in 2016 and that could mean an even higher property tax increase or potentially the use of non-recurring revenues, Fitch said.
Fitch reiterated its warning "that the rating is likely to be downgraded unless the city implements solutions that move all of the pension plans on a clear path toward adequate, actuarially-based funding while also making progress toward a balanced budget."
While the property tax hike addresses the city's police and fire pension funds which make up half of its $20 billion unfunded liability tab, it also faces a legal challenge to its 2014 reforms to its municipal and laborers' funds.
"The city's reserves, including those in the general fund as well as the long-term reserve funds, are an important aspect of the city's overall credit quality. Drawing on those reserves for pension payments or operations could also trigger a rating downgrade," Fitch wrote.
