Chicago's proposed 2023 budget launches a new pension funding policy aimed at holding its net pension liabilities in check beginning with a supplemental $242 million payment next year.
By sending additional funds from higher-than-expected revenues to the frail pension system, Mayor Lori Lightfoot's chief financial officer hopes rating agencies and investors take notice that the city is working to make additional headway on a chronic sore spot that is primarily to blame for having one junk rating and two other triple-B ratings for its general obligation debt.
"I think it's a significantly positive message that we are sending to the
"It's a significant statement of strength in the finances of the city which I would hope the rating agencies would recognize," Bennett said. Chicago is rated BBB-minus by Fitch Ratings, A by Kroll Bond Rating Agency, Ba1 by Moody's Investors Service, and BBB-plus by S&P Global Ratings.
Any upgrades, particularly restoring the Moody's rating to investment grade, would give Lightfoot bragging rights as she seeks a second term in the 2023 mayoral contest.
The city has $33.7 billion of net pension liabilities.
The pension action, if approved as part of the budget package, stands to trim $2 billion off payments through the mid-2050s as the city amortizes its unfunded liabilities and targets a 90% funding ratio.
Lightfoot unveiled the pension proposal in her
Chicago headed into budget season with just a $128 million gap to close — the lowest in recent memory —but that was with the expectation of a roughly $80 million hike in property taxes based on an annual trigger put in place last year that allows for annual increases up to 5% based on inflation.
With citywide elections looming, Lightfoot initially said she would seek half of the 5%, or $42.7 million and last week scrapped the entire hike, saying 2022 revenues were coming in at about $200 million over projections and the upswing was expected to keep up into 2023. Revenues next year are expected to generate $260 million more than previously expected.
Lightfoot did sound alarms with council members against attempts to cancel the CPI trigger in the future.
"We absolutely cannot return to the practices of the past where officials made the politically expedient, but fiscally disastrous decisions to forgo telling our taxpayers the truth about the work it takes to meet our ongoing pension obligations," Lightfoot said.
The Chicago Civic Federation praised the pension move and decision to drop the property tax hike but is reserving a full budget endorsement for a deeper review, said federation President Laurence Msall.
"It's a good thing to be depositing $242 million above the statutory because the pension funds are so underfunded and it could help avoid having to sell assets in a down market so it's a good use" of the city's extra revenues, he said.
"It's also good for taxpayers and in the short-term is attractive for aldermen but we need to more detail on their revenue assumptions and what their plan is if revenues don't continue to grow," Msall said.
The budget relies on $460 million of additional revenue not previously factored into projections including the $260 million in higher tax revenues, $56 million more than last year from a declaration of tax-increment financing surplus, $40 million from a one-time upfront payment from Bally's,
The additional revenue will close the budget gap, fund $62 million in new spending, and the $242 million supplemental pension contribution.
The city
The current gap pales in comparison to the $838 million shortfall Lightfoot faced in her first budget heading into 2020 and then a $1.2 billion heading into 2021 as the COVID-19 threatened the city's fiscal foundations and a $733 million shortfall heading into 2022. Coronavirus Aid, Relief and Economic Security Act and American Relief Plan Act aid
The city will declare a record TIF surplus of $395 million of which it gets to keep $98.3 million while $218.4 million will go to Chicago Public Schools with the remainder going to other taxing bodies. That's up from $272 million last year and the previous peak of $304 million in 2021.
Bennett described the budget proposal as structurally balanced despite the one-time revenues such as the tax-increment financing surplus declaration and casino funds. The city also will use $222 million from expected ending balance, up from $51 million this year.
"We have reached structural balance" with projected growth in revenues sufficient to cover ongoing expenses, Bennett said.
The city expects further recovery from COVID-19 hits in some revenue streams to pick up steam in the next few years, offsetting the one-shots. The city also expects as soon as next year to begin seeing casino-related revenues after a temporary casino site opens with the permanent casino expected to generate at least $200 million annually.
While tapping a higher amount from the ending balance, the city will still maintain about $1.1 billion in overall reserves between its asset lease account and rainy-day funds which were recently boosted by $124 million.
With the potential for economic hits looming should a recession take hold, Bennett said the city has some buffer in its conservative revenue growth estimates in out years.
Pensions
With a roughly $2.3 billion contribution to its
Pension contributions are set to rise to nearly $2.7 billion in 2023 when the $242 million supplemental contribution is included. They are up $1 billion since Lightfoot took office. The police and fire funds hit an actuarial contribution two years ago and the municipal and laborers' funds this year.
The path to 90% funding is slow going based on the formula and for some time net liabilities are projected to rise. The actuarial calculation also still falls short of a standard actuarially determined contribution under standard accounting principles.
Those factors leave the funds susceptible to investment return risk, heightened this year by market losses, and the need to sell off assets to pay benefits. At the end of August, the funds experienced a 12% investment loss and the city estimates that alone would add $100 million to its future contributions.
Lightfoot's supplemental contribution seeks to counter some of the funding schedule's flaws and risk associated with market returns.
"The bottom line is we are putting $242 million more into our pension funds and going forward are going to do the same to get to that place where our net pension liability remains," Bennett said. "We want to give the funds liquidity…so they don't have to sell assets to pay for benefits in this current market at a significant loss."
The city intends to take similar action annually with future advance payments tied to the level needed to stave off growth in the unfunded liabilities.
"It's not a one-time thing. It is a proposed change to our pension funding policy," Bennett said.
Additional savings of $100 million per every $1 billion in borrowing would be seen on interest if the change helps draw a rating upgrade, Bennett said.
Lightfoot's budget would use $152 million in remaining ARPA funds. Most of the federal relief has been funneled toward programs outside of the corporate fund.
Budget hearings kick off Thursday with the finance team laying out the spending plan and subsequent hearings scheduled for alderpersons to question department heads on spending plans.
The city is planning a series of deals later this year and into next year. First up, the city will issue in December up to $900 of new money general obligation debt that will include its
The city also expects to sell up to $1.2 billion of new money and refunding water revenue and wastewater bonds during the first quarter of 2023. A Midway Airport transaction is also expected next year as well as another tranche of GO borrowing late in the year, Bennett said.
