CHICAGO – Chicago's proposed $8.2 billion 2017 budget won the Civic Federation of Chicago's endorsement in recognition of the city's progress in tackling pension funding shortfalls and shedding poor financial practices.
But the civic research group's support came with a list of concerns, and warnings that the city has yet to emerge from the fiscal weeds that dragged its ratings down as low as junk.
"This budget is relatively good news for the taxpayers of Chicago, because it continues the progress made by the mayor and his team in recent years, without any additional increases in general taxes," federation president Laurence Msall said of Mayor Rahm Emanuel's proposed budget, which the City Council will vote on later this month.
"The city has shown great progress in reducing the structural deficit, putting all four pension funds on a path back toward solvency and working toward eliminating risky financial practices," he added.
Msall testified at a city budget hearing Tuesday, outlining the federation's position on the budget as detailed in a
"There is much more that still needs to be accomplished," the report said. "The public safety and financial crises the city faces are an immediate concern for all city residents and businesses."
The federation voiced concerns about how the city intends to pay for the hiring of 1,000 new police officers over the next two years and the weight of the city's high debt burden.
Other concerns include uncertainty over the fate of state legislative approval needed for the city's proposed restructuring of two of its pension funds and the need to identify additional revenue when actuarial funding requirements kick in for all four pension funds in the coming years.
"It is crucial that the city demonstrate that it will be able to keep to the funding schedules it has proposed for the four funds while also funding other core city spending priorities," the report reads.
During earlier budget hearings, Chief Financial Officer Carole Brown reassured council members the city is "better positioned to where we can meet those [pension] expenses" because of improved debt practices and the structural deficit reduction.
The new police hires will cost $134 million over the next two years but the city expects to trim overtime to $76 million from the $116 million spent last year as new officers hit the streets, Budget Director Alexandra Holt said at an earlier hearing.
Emanuel has sought to portray the budget as a turning point for the city with its four pension funds now on a track to reach a 90% funded level in 40 years and the city's preliminary deficit trimmed down to $138 million from more than $600 million when he took office in 2011. But he has acknowledged ongoing challenges, saying there is a difference between "stable" and "secure."
The budget relies on a phased in $543 million annual property tax hike approved last year to bolster police and firefighter pensions, a new water-sewer tax to stabilize the municipal fund, and a 9-1-1 surcharge to stabilize the city's laborers' fund. The four pension funds carry net liabilities of $33.8 billion for a collective funded ratio of 23%.
To close the $138 million budget gap, cover $63 million in reduced scoop-and-toss restructuring, and pay for $81 million in additional costs, the budget relies on $252 million in revenue increases from a new tax on plastic bags, special event congestion parking fees, natural revenue growth, and $30 million in savings from various reforms and other initiatives.
The city's reliance on one-time revenues has fallen over the last few years, but remains in the new budget, in the form of $37 million from the prior year's unassigned fund balance, $40.5 million in tax-increment financing surplus revenues, and $37 million being swept from old funds and accounts, the federation said.
Financial Tactics
The federation praised the city's plans to wean itself off scoop- and-toss debt restructuring by 2019 and to reduce the use of borrowing to cover judgments, settlement and equipment costs by devoting more funds for those expenses in the operating budget. But the federation suggested the city should make a more formal commitment.
Emanuel publicly announced the financial practice changes in the spring of 2015. Other pieces of the plan included converting the city's general obligation floating-rate to fixed and terminating swaps to reduce bank risks. Those conversions and terminations – accomplished over the last year -- became more urgent after rating downgrades triggered termination events on credit support and swaps.
The 2017 budget reduces by $63 million the $125 million of debt pushed off in 2016 and $225 million pushed off in 2015. Mayor Richard Daley's administration began the practice a decade ago to keep debt service costs level and Emanuel continued the practice.
The city will incorporate all of the debt restructuring for budget relief planned through 2018 in an upcoming $1.3 billion general obligation sale.
"In order to ensure that the mayor's proposal to end 'scoop-and-toss' comes to fruition and any deviation from the plan is given proper public vetting, the city council should consider codifying the mayor's five-point plan to improve the city's debt profile as part of an updated debt management policy," the Civic Federation report says.
Debt
Between 2006 and 2015, Chicago's total net direct debt rose by 66.8%, or $3.6 billion, to $9 billion. During the same time period, direct debt per capita rose by 79.2% from $1,872 to $3,354.
The weight of the city's debt grows more burdensome when adding in overlapping governments. During the same period, the combined direct debt from other overlapping governments increased by 73.2% at the same time City of Chicago debt rose by 66.8%. Total direct debt from all eight major governments including Chicago rose by 70.6%.
"The sharp upward trend in debt burden over time is a serious cause for concern for the city of Chicago," the report says. "A high debt burden combined with the city's other enormous long-term liabilities, particularly pensions, threaten to further erode the city's credit rating, making borrowing more expensive and possibly limiting available capacity for additional borrowing in the future."
Chicago spreads exceeded 200 basis points over the top-rate Municipal Market Data benchmark on a GO sale earlier this year. They have narrowed but still represent the highest credit spread for a city with the exception of Detroit.
Fitch Ratings and S&P Global Ratings shifted their outlooks on Chicago to stable from negative recently, citing the city's strides in funding pensions. S&P rates Chicago GOs BBB-plus and Fitch rates them BBB-minus.
Moody's Investors Service rates Chicago at the speculative grade level of Ba1 and assigns a negative outlook. Kroll Bond Rating Agency rates the city's GOs BBB-plus with a negative outlook.
