Emanuel’s 2018 budget surrounded by red flags

Mayor Rahm Emanuel is certain to take a bow this week when the City Council signs off on his 2018 budget, balanced with higher taxes on telephone bills, ride-hailing and large-venue amusements along with previously approved tax increases on property, water and sewer bills.

Emanuel is rightfully proud that the $8.6 billion budget will complete his two-year police hiring surge while spending more on everything from police reform, crime-fighting nerve centers, summer jobs and after school-programs to rodent control and broken garbage carts.

And the mayor’s claim that Chicago is better off financially than it has been in years rings true, if only because the city he inherited was so close to the financial brink.

“The heavy lifting is not over. There is much more that needs to be accomplished,” the Civic Federation wrote when it endorsed the budget in an analysis that also raised a series of red flags mirroring those identified by Standard & Poor’s, a Wall Street rating agency.

Chief among them are the city’s crushing debt and spiraling pension liabilities, even though dedicated funding sources have been identified for all four city employee pension funds.

Rahm Emanuel’s 2018 budget by the numbers

Following five-year “ramp-up” periods, additional tax increases will be needed to honor the city’s statutory promise to keep those pension funds on the road to 90 percent funding by 2048.

By the city’s own estimate, police and fire pension costs will rise by $297.3 million — or 36 percent — in 2020. The Municipal and Laborers plan costs will grow by $330.4 million, or 50 percent, in fiscal 2022.

Chicago taxpayers already have been hit with nearly $1.1 billion in property tax increases, primarily for police, fire and teacher pensions and school construction; a 29.5 percent tax on water and sewer bills to save the Municipal Employees pension fund; and a 56 percent telephone tax hike in 2014 and another 28.2 percent next year for the Laborers pension fund.

“Chicago has yet to identify funding sources to address significant statutory pension contribution increases,” Standard & Poor’s has said.

The Civic Federation agreed that “additional cuts or tax increases” will be required and it should start with an annual review of the $9.50-a-month fee for garbage collection imposed in 2016. That fee covers just 25 percent of the city’s waste-removal costs.

Emanuel deserves credit for “significantly reducing” the city’s operating deficit and weaning the city off its reliance on “one-time revenue sources,” but not enough to satisfy the Civic Federation.

“The continued practice of using significant one-time revenue sources, especially fund balance, only exacerbates the ongoing structural deficit and leaves the city vulnerable when hit with unexpected costs or economic downturn,” the report states.

Another great unknown is the outcome of negotiations with 90 percent of the city’s 34,492 employees, whose union contracts expired June 30.

Emanuel has promised to follow Inspector General Joe Ferguson’s advice to use those union talks to tilt the playing field in favor of taxpayers by cutting costs and improving city services, particularly in the area of health care.

The Civic Federation can only hope he follows through in a way that makes those 44 contracts “reasonable and sustainable over the life of the contracts.”

That would be a marked contrast from the 10-year agreement signed by former Mayor Richard M. Daley. It locked the city into paying the prevailing wage to members of the building trades; Daley wanted to guarantee labor peace through the 2016 Summer Olympic Games which, in the end, Chicago did not get.

Yet another looming concern is the $3 billion borrowing plan — called “securitization” — that isolates sales tax revenue in a special fund to dramatically reduce city borrowing costs. That plan is expected to generate $94 million next year, another one-time revenue source.

Even with the savings, debt service is costing taxpayers $821.3 million — that’s 12.4 percent of all budgeted expenses. Between 2007 and 2016, total net direct debt rose by 54 percent — from $5.8 billion to $8.9 billion.

The “securitization” structure has already achieved a AAA rating, primarily because bondholders get paid first, even if the city goes bankrupt. Only after debt service is paid would sales tax revenue start to flow back to the city. But that’s not without risk.

Noting that sales taxes account for 17 percent of the city’s corporate fund revenues, Standard & Poor’s has warned: “To the extent that a growing share of these sales taxes go to fund debt service, if not offset by other measures, Chicago could face further operating budget pressures.”

To bolster police supervision and finish Emanuel’s two-year police hiring surge, the budget calls for 250 additional police officers, 192 field training officers, 100 detectives, 37 sergeants and 50 lieutenants next year.

But the Civic Federation remains concerned about the “future cost and sustainability” of the mayor’s plan.

While rookie cop salaries are substantially less, costs “will increase substantially in future years at the same time the city will need to grow pension contributions for existing employees and retirees.”

Yet another concern is the financial quicksand Emanuel is stepping into by raising ride-hailing fees and funneling the $16 million in annual revenue to the CTA to bankroll capital improvements. He’s also giving Chicago Public Schools $80 million for security, Safe Passage and after-school programs, with $66 million of that coming from another one-time revenue: a surplus of tax increment financing money.

No wonder Standard & Poor’s views Chicago as “being at a crossroads.”

“While we don’t expect the city to change course from finding structural solutions to address growing liabilities, the practical reality remains that Chicago needs to maintain the political will and resources to address the challenges or credit quality will also reverse its trajectory,” the rating agency said.

Emanuel’s communications director Adam Collins noted that all four pension funds are “on the path to solvency,” rating agencies have “improved the outlook on the city’s bonds” and Chicago’s structural deficit has been reduced by 82 percent.

“It’s unquestionable that the city is on stronger financial footing than it was six years ago,” he said.

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