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City has $137.6M gap — minus cost of saving largest pension fund

Mayor Rahm Emanuel's Budget Director Alex Holt | Michael Schmidt/Sun-Times

Chicago faces a $137.6 million budget shortfall in 2017 that does not factor in the steep cost of — and the tax increases required — to save the largest of four city employee pension funds.

Mayor Rahm Emanuel’s administration released a financial analysis Friday that projects the smallest gap in the city’s operating budget since 2007. For the first time, the shortfall was calculated without “separate consideration of pension funds” because “permanent, recurring sources” of revenue have been identified for three of the four funds.

That’s progress, considering the $635 million deficit Emanuel inherited when he took office in 2011 in a budget balanced, in part, with one-time revenues and taxes depressed by the recession.

“It’s been an enormous amount of work on cutting expenses. We’ve got some great revenue growth. We have some new revenue. We really have made tremendous progress towards eliminating the structural deficit,” said Budget Director Alex Holt.

“Once we’ve closed and balanced the 2017 budget, what we’re looking to on a going-forward basis is about normal expense growth. It’s no longer about the structural deficit.”

Still, another painful round of tax increases is guaranteed for taxpayers still reeling from the largest property tax increase in Chicago history.

That’s because Emanuel is closing in on a deal to save the Municipal Employees Pension Fund, under the “same framework” he used to save the Laborers pension fund, that will require its own “dedicated revenue source,” the report states.

Possibilities include a “stormwater stress tax” on big-box stores and large businesses; an increase in utility, real estate transaction, sales or gasoline taxes; a fee specifically for pensions tacked on to water bills like the new garbage collection fee or yet another property tax increase.

A property tax increase is the least likely option because it would be the third in a year. Last fall, Emanuel persuaded a reluctant City Council to raise property taxes by $588 million for police and fire pensions, and school construction. He has agreed to raise property taxes by $250 million more for teacher pensions.

“Some of it requires state law change. We’re not at the stage right now where we’re ready to talk about what [the] options are. The most important thing for us is to get agreement with [union leaders] to get the benefit reforms that we need to try and make sure that the full cost of going to actuarial funding isn’t on the taxpayers . . . ” Holt said.

Asked whether a third property tax increase was out of the question, Holt said, “We’re not gonna rule anything in or anything out.”

The deal that Emanuel struck to replace an agreement struck down by the Illinois Supreme Court calls for employees hired after Jan. 1 to become eligible for retirement at age 65 in exchange for an 11.5 percent pension contribution. That’s three percentage points higher than employees pay now.

Veteran employees hired after Jan. 1, 2011, get to choose between contributing 11.5 percent for the right to retire at 65 or continuing to pay 8.5 percent and waiting until age 67 to retire.

In exchange, Emanuel agreed to devote to a Laborers fund with just 8,000 members all of the revenue from a 56 percent telephone tax hike initially earmarked to save both pension funds.

That means he needs to raise other taxes to save the Municipal Employees Pension Fund, which has 71,000 members.

Two years ago, Emanuel put off Chicago’s day of reckoning until after the mayoral election.

Although state law required Chicago to make a $550 million contribution to shore up police and fire pension funds, Emanuel left it out of the financial analysis and made the erroneous assumption that he would get both revenue and reform before the payment was due.

Last year’s financial analysis projected a $426 million budget shortfall, but only if three risky assumptions turned out to be correct, which didn’t happen.

This year’s report forecasts a “worst case” shortfall of $780.1 million in 2019 if the economy turns stagnant and revenues fall flat and a best-case scenario of $144.1 million that same year assuming continued growth. A $32 million increase in the city’s contribution to the police and fire pension funds in 2019 — not covered by the record property tax increase — is included in both scenarios.

But several factors could impact the hit Chicago taxpayers will have to take.

Contracts with the building trades and Chicago Police officers expire in midyear, but the projected shortfall includes no money for pay raises after June 30 at a time when the city will be under pressure to satisfy the salary demands of Chicago police officers to offset the city’s need to change how cops are disciplined.

The U.S. Justice Department is likely to make costly demands for police hiring, training, supervision and equipment after completing a sweeping civil rights investigation of the Chicago Police Department triggered by the police shooting of Laquan McDonald. Holt acknowledged that “new revenue” may be required.

If the General Assembly once again rejects the mayor’s plan to double the homeowners exemption, Emanuel will be under pressure to find $20 million to continue a token property tax rebate.