CHICAGO - The budget proposal Chicago Mayor Rahm Emanuel released this week leaves many concerns, Standard & Poor's said in a special bulletin Thursday, in which it said the city's BBB-plus general obligation rating and negative outlook remain unchanged.
"We consider Chicago's budgetary problems to be substantial, particularly regarding how it will accommodate growing pension contributions in its budget--and this is one of the primary drivers of our rating," analysts write. "In our view, the extent of the city's structural imbalance, when factoring in pension contributions, will take multiple years to rectify."
Emanuel proposed a phased-in property tax hike that will generate an additional $543 million annually by 2018 to fund skyrocketing police and fire contributions under a 2010 state mandate. The city will draw from the general fund and enterprise funds to cover rising municipal and laborers fund contributions due under a city-backed 2014 reform plan. The city is saddled with $20 billion of unfunded pension liabilities.
Analysts say the proposed budget does lay out a path to address rising contributions and that property taxes are a sound, predicable and reliable funding stream, but caution that the City Council still has to vote for it and that several pieces of the plan hinge on state action. A multi-notch downgrade could possibly follow adoption of a plan should it fall short of using reliable revenue streams to cover pensions, Standard & Poor's said.
Analysts remain concerned that the city is gambling on several unknowns related to its pension costs.
The fate of 2014 reforms to two of its four pension funds remains uncertain. The city will argue the legality of the reforms to the municipal and laborers' fund before the Illinois Supreme Court this fall.
"In the short-term, this would benefit the city's budget, but it would have negative ramifications because it would set the stage for greater budgetary pressure in the medium to long term as pension plan assets are depleted," Standard & Poor's said.
The first-year property tax hike of $318 million is tied to the expectation that the city will win state approval to re-amortize its payment schedule on police and fire contributions, reducing what no scheduled to be a $550 million payment increase to a $328 million increase.
Beyond the four year phase in of the proposed property increase, the city has not said how it would cover future pension cost growth.
Standard & Poor's also points out that while the higher contributions are positive, the phased-in approach the city wants still requires a deferment from funding its obligations at an actuarially based level. In the past, city contributions to its four funds have been set by a formula tied to employee contributions as required under state statutes. They've long fallen short of an actuarially required contribution level.
"Given the uncertainty regarding the reform of its police, fire, municipal and laborers pension plans, we expect city management to consider contingency plans for addressing its pension liabilities," Standard & Poor's said.
Under Emanuel's budget proposal, the city's 2014 property tax levy of $840 million which went to cover pensions, debt service, and library operations would increase to about $1.26 billion.
The rating agency notes that the budget offers only "modest" spending cuts that rely on reforms and other efficiencies but no service cuts and an additional $125 million in various new and higher non property taxes and fees to close a corporate fund budget gap.
The budget continues to rely on some non-recurring revenues.
"We expect the city to continue to address the structural cracks in its corporate fund budget, as exemplified by budget gaps, which the city forecasts will continue for the next two years, and to find additional solutions to manage its pension and debt obligations in a structural and sound way," analysts wrote.
