With budget done, Chicago's Emanuel turns back to pensions
CHICAGO – The Chicago City Council gave near-unanimous approval to Mayor Rahm Emanuel’s final budget Wednesday, clearing the path for the administration to focus on a plan to further address the city’s pension liabilities.
The council voted 48-to-1 for the budget as aldermen mostly put aside their concerns over looming pension funding pressures and praised Emanuel and his financial team for strides attained over the last seven years.
The lack of any new taxes or fees in the $10.7 billion 2019 spending plan and the inclusion of popular measures on affordable housing and policing helped.
The pension clouds loom large, with $28 billion in unfunded liabilities and looming spikes in the city's contribution schedule, and Emanuel intends to lay out on Dec. 12 ahead of the next council meeting what’s being described as a comprehensive long-term plan to tackle the problem.
“I’m going to lay out where we were, where we are…what are the steps” and “the honesty about those steps because I think it’s going to take a series of steps and a multifaceted approach to meet the challenge and our commitment to our retirees and our taxpayers,” Emanuel said during a post-council news conference. He is not seeking a third term as mayor in the Feb. 26 election.
A pension obligation bond issue is expected to be among the proposed fixes. Emanuel’s close advisor, businessman Michael Sacks, pitched the idea of an up to $10 billion POB in August at the city’s investors’ conference. After reviewing the idea with bankers, chief financial officer Carole Brown has said it makes fiscal sense if interest rates remain in check.
The financing appeared to be on a fast track for introduction at a September council meeting but Emanuel’s early September announcement that he would not run pushed out the timing as investors and aldermen were rattled. Rising interest rates then dampened such a deal’s prospects with bankers saying it had lost its value.
The administration then shifted focus to the budget.
Emanuel could win over some market skeptics on a POB if it’s part of a larger, long-term package, instead of a standalone POB that many believe would prove a hard sell.
The details of the package and how much headway would be made by May when a new mayor takes office all remain up in the air.
The four funds are collectively funded at about 26% and while Emanuel’s previous overhaul of the funding scheme puts them on the path to a 90% funded ratio beginning in 2045, it will take years before funded ratios begin to improve, leaving them vulnerable to market fluctuations.
A $10 billion POB would raise the funded ratios to more than 50%, Brown has previously said.
For the council, it’s the $300 million spike coming in 2020 on public safety contributions followed by another $310 million hike two years later for the municipal and laborers funds that’s at the forefront of their concern. Aldermen has already approved Emanuel’s record property tax increase, new water-sewer surcharge, and 9-1-1 fee to cover current increases.
The city must tread cautiously on any borrowing as the structure could threaten its ratings.
“Depending on the structure of the POBs and whether or not the city would make changes to its pension funding discipline, issuance could have rating implications for Chicago,” S&P said in a budget review.
Chicago is rated BBB-plus by S&P. Fitch Ratings has it at BBB-minus, Kroll Bond Rating Agency has it at A, and Moody’s Investors Service rates at the speculative grade of Ba1.
The budget sailed through the review and approval process with few red flags for aldermen, boosted with new funding for some educational efforts, affordable housing and policing, and no hard-to-swallow cuts. The market labeled it a status quo budget that lacked any new taxes although some previously approved tax hikes are still being phased in.
After the vote, Emanuel thanked aldermen for their votes on issues such as higher taxes to raise pension funding. After nearing a “fiscal cliff” when he took office in 2011, “Chicago is back on solid ground,” he said.
Aldermen Derrick Curtis was absent. Alderman Scott Waguespack, who chairs the Progressive Caucus, was the sole "no" vote.
Alderman Edward Burke praised Emanuel for “making hard decisions, some them painful and unpopular.” He is the longtime chairman of the council's Finance Committee.
“You have done the heavy lifting and built a secure foundation,” Burke said.
The $10.67 billion all-funds package for 2019 is divided into $8.86 billion of local funds, including a $3.82 billion corporate fund. and $1.81 billion of grant funds. The city faced a $98 million deficit heading into the budget cycle, down from $635 million inherited by Emanuel seven years ago.
The city will contribute $1.31 billion to its pension funds next year, up $121 million from this year. Contributions rise to $1.67 billion in 2021 as actuarial funding requirements hit for two funds and then $2.1 billion in 2023 when the two other funds are required to receive actuarially based payments.
The budget absorbs the initial $25.7 million price tag for police reforms under a consent decree, $15 million more needed for settlements, and the cost of some new labor contracts, but deals for police and firefighters have not yet been reached.
The budget moves the city closer to structural balance although S&P said $73.5 million in debt service savings, account sweeps, changes in revenue projections, and tax-increment financing surplus funds can’t be counted annually.
The budget relies on about $43 million from natural growth of existing taxes and $21.6 million from the ground transportation tax due to the growth of the ride-share industry. The budget further relies on sweeping some old accounts and debt service savings as it continues to refund debt under its sales tax securitization structure established last year to refund $3 billion of GO and sales tax bonds. The next installment, $624.6 million of tax-exempt bonds, are expected to price Thursday, Nov. 15.
The city anticipates an unassigned fund balance on par with recent years at around $150 million and an additional $10 million will go into reserves.
The Civic Federation of Federation endorsed the budget as a reasonable one-year plan that lacks new taxes or fees, makes new investment in public safety and covers rising pension contributions but pensions loom large.
“This budget continues to incorporate many of prudent financial practices prioritized by Mayor Emanuel and the City Council in recent years,” said federation president Laurence Msall. “However, there remains an enormous elephant in the room—a projected doubling in required pension contributions over the next five years—that the next administration and City Council must tackle.”
Emanuel has not commented on any specific candidates among the more than dozen that have announced bids to replace him.
“I think you have to look and see if the person has a vision and determination to do the entire spectrum of the city” covering all bases from education to finances, Emanuel said Wednesday.
Illinois Comptroller Susana Mendoza, who was expected to jump into the contest after winning re-election to her state post last week, made it official Wednesday. She joins a short list of candidates who are familiar to the municipal market or have fiscal backgrounds.
Others include Cook County Board President Toni Preckwinkle and former JPMorgan Midwest chair William Daley, the brother of former Mayor Richard M. Daley. William Daley served in the cabinets of President Clinton and President Obama.
Former Chicago Public Schools chief executive officer and Chicago budget director Paul Vallas and Gery Chico, a lawyer whose firms have done bond business and who was head of the Chicago Board of Education during Vallas’ tenure, are also in the race.