CHICAGO – Not only will a huge property tax hike to fund pensions be a tough sell in Chicago, it will only go part of the way toward solving the city’s fiscal problems.
That’s the grim assessment from members of an expert panel hosted Tuesday by the City Club of Chicago on the city’s fiscal cliff and its future.
Chicago Mayor Rahm Emanuel faces a delicate balancing act.
“How is Mayor Emanuel going to convince the City Council and the citizens of Chicago that with this very painful and, we believe, necessary increase” in taxes “will stabilize” city finances, said Laurence Msall, president of the Chicago Civic Federation. “It’s a very important point in the city’s history.”
Msall was joined on the panel by Chicago’s chief financial officer, Carole Brown, Municipal Market Analytics partner Matt Fabian, and Crain’s Chicago Business political columnist Greg Hinz. It came as the market and public digest news that the Emanuel administration may seek a record half billion property tax increase to deal with the city’s rising pension costs.
The city may also impose a new levy for garbage collection and is eyeing other revenue sources to deal with a $328 million to $550 million scheduled annual spike in police and fire pension contributions under a prior state mandate requiring the city to make such contributions on an actuarial basis. The administration’s plan is far from final and won’t be known until the 2016 budget is released Sept. 22, Brown said.
Msall warned that more than just the tax increase is needed, including changes in both spending habits and debt practices – which Emanuel has vowed to alter – and the release of a long-term plan so the city can show it can weather future storms.
“It’s not the full answer and it’s not going to be enough,” Msall said of a tax hike alone, “because we have dug the hole so deeply…and now the answers are not politically attractive. They are not politically easy.”
Msall said the city has few choices when it comes to the tax hike.
“The alternative is to continue to operate a government which is borrowing,” he said, which is more expensive than raising taxes.
“The mayor has to balance…. what the city can afford and what we need to bring the city out of junk bond status,” Msall said. “This is the day of reckoning for the city of Chicago.”
Since the first published report of a looming wallop in the property tax levy surfaced in the Chicago Sun-Times late last Wednesday, the market has showed its support by trimming between 10 and 15 basis points off city spreads in secondary market trading.
The city has paid a steep penalty to borrow on several recent transactions that came after Moody’s Investors Service downgraded Chicago to speculative-grade Ba1 in May.
“It’s one of the few positive developments that the Chicago market has seen,” Fabian said after the discussion, referring to the market’s failure to recognize other city fiscal strides such as a reduction in its structural budget gap.
“There is a recognition on the market’s part that something is happening,” Fabian said during the discussion, but that endorsement is tepid as the market “is still extremely cautious about the city.”
Investors see an urgent need for action that provides long-term stability and can weather economic downturns, Fabian said.
“I think the market for the [city’s] bonds has been stable but it’s been stable at a very wide spread,” Fabian said, adding that he doesn’t expect a material change of spread tightening by 50 basis points or so until there’s bigger news afoot on a solution and it’s recognized by Moody’s. “Chicago is probably 75 basis points wide to where it would be if it had not lost the investment grade.”
The city’s balancing act is further complicated by the potential economic impact, Msall warned.
“We know there is going to be an economic fallout,” he said, especially when the city’s tax package is added to a recent sales tax hike pushed through by Cook County to deal with its own pension woes and looming tax hikes at the state level to deal with an estimated $4 billion to $5 billion deficit.
A temporary income tax hike expired Jan. 1 and freshman GOP Gov. Bruce Rauner and the General Assembly’s Democratic majority have been locked in political gridlock that has prevented passage of a fiscal 2016 budget.
While panelists said that there’s plenty of blame to go around, Hinz noted that Emanuel may have inherited the pension mess and other poor debt practices from his predecessor, Richard Daley, but has continued some of those practices and made some “miscalculations” that have hampered a solution.
Emanuel began his second term in May.
Politically, Emanuel may have miscalculated his ability to wring solutions out of the state capitol with the new governor, who is a personal friend of the mayor.
Emanuel has now been at odds with Rauner on some of their positions as the state budget impasse continues and Rauner has tied his support for pension help and Chicago Public Schools aid to city support for his policy initiatives.
Emanuel also miscalculated that the weight of the state legal system would land squarely against any pension benefit cuts.
The city’s overhaul of its municipal and laborers’ fund, voided by the Circuit Court in July, will be heard on appeal by the Illinois Supreme Court this fall.
“The bottom line is the day of reckoning has finally arrived,” Hinz said.
Brown defended the administration, saying it’s focused on a solution that will improve investor sentiments while also being fair to taxpayers. Brown defended the level of cuts made during Emanuel’s first term but also signaled in her comments that cuts also pose a challenge as the city seeks to “continue to invest in our neighborhoods.”
Emanuel must come up with roughly $754 million in the next budget. That figure includes a $233 million operating deficit, $93 million in increased city contributions owed to the municipal and laborers' pension funds, and about $100 million in debt repayment the city previously intended push off further in its amortization schedule. It also includes a $328 million hike in contributions for the city's police and firefighters' pension funds. If state legislation does not take effect that re-amortizes payments, the $328 million grows to $550 million.
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.