CHICAGO -- Chicago's city council Wednesday easily approved a record property tax hike as part of Mayor Rahm Emanuel's $7.8 billion 2016 budget.
When the property tax is fully phased in it will bring in $588 million in new annual revenue, including $543 million to fund the city's public safety pension contributions and $45 million for school capital projects.
The budget also includes an additional $125 million package of higher taxes and fees unrelated to the property tax levy hike, including a first ever monthly charge for garbage pickup.
When he took office in 2011, Emanuel said before the vote, "our finances in the public sector hung over this city like a dark cloud. Those finances were beginning to erode people's confidence in this city."
Emanuel pointed to cuts and management efficiencies made over the last four years to trim the structural budget deficit, his halt to the city's use of reserves, and his pledge to phase out practices like using debt for operating expenses and pushing off debt repayments for budget relief.
The city's pension debt tops its remaining strains with its $20 billion tab of unfunded obligations. That led Moody's Investors Service to downgrade Chicago to junk this year.
"At the end of the day, as it relates to our pensions, there is a choice," Emanuel said. "Finally do what we had not done for years" and raise property taxes or make deep cuts to police and firefighter ranks and city services.
"This budget lays the foundation for a more secure, more stable and stronger city," he said.
The budget passed easily in a 36-14 vote that marked the largest number to vote against an Emanuel spending plan. The vote on the revenue package that supports the budget including the tax levy was 35-15.
GOING FORWARD
With the vote behind it, the city, after updating its financial disclosure, is expected to come to market as soon as next month with up to $500 million of general obligation refunding debt for traditional savings and a restructuring for scoop-and-toss budget relief.
The administration's focus now shifts to convincing state leaders to double a homestead exemption that would soften the property tax blow on lower-valued properties and to finalize a proposed re-amortization of public safety pension payments. Without approval for the pension shift, Chicago
will need to come up with $220 million more next year to cover its police and firefighter pension contributions.
"The mayor has demonstrated leadership and political will by raising the property tax. The mayor is taking action to solve the city's problems but the city is still beholden to the state and so his hands are tied," said Brian Battle, director of trading at Performance Trust Capital Partners. "Now we are waiting to see the same leadership in Springfield where there is a real vacuum."
Spreads on the city's 10-year general obligation paper have narrowed by about 50 basis points since the package was announced last month.
Several market participants said there may be some slight further tightening of spreads but the buyside anticipated council approval and has largely already rewarded the city for the budget proposal in current trading levels, Battle said.
The homestead exemption hike passed a House committee recently but has yet to receive a floor vote. Emanuel has said the city could implement a tax rebate program as an alternative but it would require upfront funding.
The fate of the pension fund re-amortization is clouded. The General Assembly's Democratic majorities have approved it but it's not yet been sent to Gov. Bruce Rauner who has offered mixed messages on his position. It's unclear what will be accomplished given the ongoing budget feud between the rookie GOP governor and Democratic majority.
THE VOTE
The vote came after about two hours of debate during which opponents and supporters alike stood to defend their positions. Emanuel helped build support for the budget in recent weeks by making some minor concessions. He temporarily capped the garbage fee, negotiated on a ride share fee, dropped a proposal to privatize the city's 3-1-1 call center, and agreed to require the school district to report on how it will spend its new capital funds.
The chords struck by critics stemmed from the impact of the property tax hike on renters and concern over the garbage fee with some urging the city look harder at spending cuts.
"If it's an all or nothing vote [on the tax package] then I have to stick with my residents ….and it will be no," Alderman David Moore said because of his opposition to the garbage fee. He voted no on the tax package.
"The way we structure this revenue package is going to affect my residents too hard," said Alderman Jason Ervin.
The resounding theme from Emanuel's allies and skeptics was the need to tackle the city's pension ills despite the difficulty of doing so.
"The members of the body have a choice. They can look to the next generation, or they can look to the next election," said Alderman Ed Burke, chairman of the Finance Committee.
Alderman John Arena, a critic of Emanuel's whose vote was not assured, recounted past council votes on pension benefits and borrowing that have added to the city's fiscal strains, urging his colleagues to speak up more before they cast their decisions.
"I will support this budget because I see no better option," he said.
"We could sit on our hands and let the city go to pot or we can stand up and take control of our destiny," said council member Pat Dowell.
The city's GO ratings range from a speculative-grade Ba1 from Moody's Investors Service to A-minus from Kroll Bond Rating Agency. Fitch Ratings and Standard & Poor's assign BBB-plus ratings and all but Kroll take a negative view on the credit. Kroll has a stable outlook.
Rating agencies and the Civic Federation of Chicago have said the plan allows the city to make progress toward stabilizing its fiscal condition but is no panacea given the scope of its pension burden. Improvement in its funded condition won't be realized for years.
The budget revises the 2015 property tax levy, raising it by $318 million. It will rise again in 2016, 2017, and 2018 to fund the city's increasing public safety pension payments under a 2010 state mandate to stabilize the police and firefighter retirement funds by funding them on an actuarial basis. The two funds are responsible for about half of the city's pension burden.
The budget lowers by $100 million to $125 million the amount of debt the city will push off for budget relief as part of a debt management overhaul announced earlier this year that would phase the practice out by 2019. The $125 million package of other tax and fee hikes along with $170 million in savings from reforms, efficiencies, and other measures tackle a $233 million operating deficit and fund other spending proposals.
After the vote, Moody's issued a special commentary calling the adopted budget a positive step tempered by its gamble on favorable state political and legal actions.
"The Chicago City Council's approval of a fiscal year 2016 budget and a $543 million property tax hike dedicated to the city's public safety pension plans is a positive step in addressing the city's elevated unfunded pension liabilities," wrote analyst Matthew Butler. "However, the budget assumes certain actions from the state of Illinois and Illinois Supreme Court that directly impact the city's statutory pension funding requirements. Should these decisions not match the city's assumptions, new operating pressures could materialize in the immediate- and longer-term."
Moody's also warned that the 2016 budget assumptions will likely remain insufficient to "fully arrest growth in unfunded pension liabilities for many years."
