CHICAGO — Chicago’s reliance on non-recurring revenues over deep spending cuts to balance the proposed $6.2 billion 2011 budget is costly and only delays a financial reckoning that could lead to steep tax increases and-or harsh budget cuts, a fiscal watchdog group warned.

“In the past three months, the city’s debt rating has been downgraded in part because of its use of asset-lease proceeds to prop up the budget,” said Laurence Msall, president of the Civic Federation of Chicago. “The city’s short-sighted budgeting has costly consequences.”

The federation announced its opposition to Mayor Richard Daley’s proposed budget during a City Council hearing on the budget Wednesday.

The council is expected to approve the retiring mayor’s final budget later this month.

To eliminate a $655 million deficit, the budget dips deeply into reserves set up with the city’s asset leases, including $244 million from the $1.15 billion parking meter lease last year. Only $76 million from the deal will remain.

It also calls for restructuring $142 million of debt by extending maturities by 4.5 years to capture immediate budgetary relief.

The federation warned in its analysis that the maneuvers will add to the disparity between recurring revenues and ongoing expenses worsening the city’s structural deficit.

It called on the city to establish a formal policy for reserve use.

Chicago’s chief financial officer, Gene Saffold, has defended the budget’s use of reserves, noting that the $500 million account set up with Skyway toll bridge lease proceeds in 2005 remains untouched. Asset lease reserves are the city’s only fiscal cushion as its ending balance fell to just $2.7 million last year. The federation called on the city to build up the ending balance through greater spending discipline.

Msall praised the city’s development of performance measurements that will help it enact future cuts and plans to trim spending by $96.9 million through layoffs, furlough days, and other measures.

But the plans fall far short of what is needed, given growing personnel costs, an escalating debt burden, and mammoth unfunded pension liabilities.

“Clearly, Chicago’s budget trend is not sustainable. If the city does not stop deferring necessary but difficult changes to its spending, hefty tax hikes and-or enormous budget cuts will be needed to balance the budget when one-time revenues have run out,” the report reads.

The federation voiced its concern over the city’s failure to propose any meaningful pension reforms, especially given the April report of a special mayoral commission warning that the city’s police and fire funds could run out of funds to cover retiree payments in a decade if no action is taken.

Chicago’s four pension funds carry unfunded liabilities of $14.6 billion, for a funded ratio of just 43%.

Daley has proposed that pension benefit changes recently enacted for new laborer and municipal employees be extended through state legislation to police and firefighters, but that move would make just a small dent in Chicago’s liabilities.

The federation praised that proposal, but called for further action to address the pension crisis such as increasing employee and employer contributions and consolidating the funds.

The city’s debt burden rose to $6.8 billion from $3.1 billion between 2000 and 2009 and debt service will cost the city $1.3 billion next year, accounting for 21% of spending.

“The rate of increase and the level of the city’s debt burden are of great concern to the civic federation,” the report reads.

Ahead of a planned $804 million taxable Build America Bond and restructuring general obligation sale, Fitch Ratings downgraded Chicago to AA-minus. Moody’s Investors Service yesterday affirmed the city’s Aa3 rating after downgrading it in August. Standard & Poor’s rates the city AA-minus.

Chicago put off the sale — originally scheduled for next week — in the hopes of entering the market when supply eases and headlines over the city’s fiscal struggles and state budget crisis have diminished.

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