With the mayoral election safely behind him, Mayor Rahm Emanuel on Wednesday shifted his focus to digging the city out of a deep hole “dug over many, many years” and shoring up a Chicago bond rating that has dropped to just two levels above junk status.
Even though it will intensify pressure for spending cuts and tax hikes, Emanuel unveiled plans to end or move away from four risky financial practices that his predecessor and political mentor, former Mayor Richard M. Daley, used to “mask” the true cost of city government.
He’ll do that by:
- Terminating a combined, $915 million in so-called “swaps” in the city’s portfolio of general obligation and sales tax debt and converting all general obligation debt from variable to fixed interest rates. The $230 million penalty will be folded into the refinancing to avoid putting added pressure on the city budget.
- Implementing a four-year phase-out of “scoop-and-toss,” the practice of paying short-term obligations by saddling Chicago taxpayers with long-term debt. That will add $75 million to an operating shortfall in the city’s 2016 budget that’s already pegged at $300 million.
- Gradually ending the practice of using borrowing to bankroll costly legal settlements and judgments against the city by covering those in the city’s operating budget. That could add $30 million or more to the 2016 shortfall.
- Continuing to build back a rainy day fund that Daley raided to the tune of $1.2 billion to balance his last four budgets after selling off valuable city assets, including the Chicago Skyway, city parking meters and downtown parking garages. Daley tried to sell Midway Airport for $2.5 billion, but the deal fell through for lack of financing.
“Every one of these practices were developed in years past to hide, mask or not confront the real cost of operating the government,” Emanuel told the Civic Federation.
“Now that the economy is improving . . . this is the time to take further action . . . to bring financial sanity to the budget.”
He added that each of the steps “will require fundamental changes in how we spend money in our budget and where we spend it. But they are essential to building on the progress we’ve already made.”
Civic Federation President Laurence Msall applauded the bitter medicine Emanuel outlined to the group, even though there will be “hundreds of millions of dollars” in penalties associated with it.
“In the short term, there will be costs associated with implementing these changes that will put pressure on the operating budget. . . . It’s going to put significant financial pressure on [the operating budget]. But in the long term, it’ll have great savings for the taxpayers,” Msall said.
“The city budget is already under enormous pressure. But yes, this is going to require either additional new revenue or further cuts in the city’s operating budget. . . . There will be immediate costs to the city to get out from underneath those swaps.”
Pressed to estimate those costs, Msall said, “It’s in the magnitude of the hundreds of millions. . . . But by doing that, you reduce the cost overall to taxpayers.”
Budget Director Alex Holt refused to discuss the possibility of a post-election property tax hike, or any other new sources of revenue for that matter. She repeated the City Hall line that spending cuts must come first.
During a question-and-answer session that followed his speech to the Civic Federation, Emanuel was asked whether the actions he outlined would restore a Chicago bond rating that has some people using the b-word, as in “bankruptcy.”
“I don’t play a financial analyst on TV,” the mayor joked.
Turning serious, he said, “I can’t imagine, given their reports, etc., how they would not see these [as] positive. I’m not gonna set up the bogey that it’s gonna change our status because, the truth is, I wouldn’t change our status until we also see further improvements in what we’re doing on our pensions, just like what we’ve doing on Laborers and Municipal.”
That assumes, of course, that the Chicago pension-reform bill survives an ongoing legal challenge, even if the state pension-reform bill is overturned by the Illinois Supreme Court.
Emanuel argued again Wednesday that the city is standing on more solid legal ground.
“Unlike the state, we negotiated with our labor partners. That’s a big deal. We negotiated with our unions. Big difference. Second, we’re not making cuts. By preserving and protecting the pension, it will continue to be a pension,” the mayor said.
“We believe that ‘preserve and protect’ of the actions we’re taking is consistent with the direction and words of the Constitution, which we think we’re fundamentally different than what the state did.”
In December, the city must raise property taxes or find some other way to meet a state-mandated, $550 million payment to shore up police and fire pension funds.
Emanuel wants the Illinois General Assembly to lift the hammer hanging over Chicago taxpayers to avoid raising property taxes so high that in one fell swoop, it will trigger an exodus of homeowners.
The so-called ramp-up would also give the mayor time to negotiate reforms with police and fire unions.
But the mayor acknowledged Wednesday that those reforms he’s in the process of negotiating with police and fire unions will not produce nearly as much savings as there were in the other two city pension fund deals.
“As it relates to public safety, they do not have the same type of COLA [cost-of-living adjustment] that the Laborers and Municipal have. So, the type of savings that you would see there don’t exist,” the mayor said.
As for the $9.5 billion teacher pension crisis that threatens the Chicago Public School System with bankruptcy, Emanuel put the onus on Daley without ever saying his name.
He noted that, from 1995 through 2004, CPS made no payments at all to the teachers pension fund and made reduced payments from 2009 until he took office.
Emanuel made yet another pitch to end the dual taxation that forces Chicago taxpayers to pay twice — once for the pensions of their own teachers and again for teachers outside the city.
“I’m not laying this at Springfield’s doorstep, but you could read it that way,” the mayor said.