Mayor Rahm Emanuel has ruled out a pre-election increase in property or sales taxes, but he’ll have to find another way to close a $297.3 million budget gap that assumes the Illinois General Assembly will lift the pension hammer hanging over Chicago.
State law requires the city to make a $550 million contribution to shore up police and fire pension funds that have assets to cover just 30 and 24 percent of their respective liabilities.
If Emanuel chooses to fund the payment with property taxes, the city’s levy must be raised in 2015 so bills issued the following year reflect the increase.
Instead of including that payment in the financial analysis now used as a substitute for Chicago’s preliminary budget, the mayor left it out, assuming he will get both revenue and reform before the payment is due.
Civic Federation President Laurence Msall said Emanuel is actually making two risky assumptions that put off the day of reckoning until after the mayoral election.
One is that he’ll get police and fire pension reform this fall, even though a recent Illinois Supreme Court ruling on retiree health care has some members “questioning whether they will take up pension reform.”
The other assumption is that, even if he doesn’t get it, he’s not required to increase the city’s property tax levy until December 2015.
“To us, the statute appears vague. It doesn’t say `tax year.’ It says `2015.’ Our assumption is, if you’re required in 2015 to make the contribution, you have to include it in your 2015 levy,” Msall said.
“What will become critical when the mayor presents his budget in October is that, if he has not been successful, what’s the back-up plan to either make this contribution — either through taxes or budget cuts — that would not jeopardize the city violating state law.”
Budget Director Alex Holt refused to discuss “Plan B.” She would say only that, historically, pensions have been funded from a “variety of sources”—not just the property tax.
“There might be a statewide revenue solution, as opposed to just a local revenue solution, because it’s actually a statewide problem,” Holt said.
“We don’t need to make the increased payment until 2016, giving us time to work with police and fire, work with the state, work with the other municipalities…Once we know what the reform package looks like, then we can have a conversation about what the revenue package looks like. We’ve got a year and a half to make that decision.”
Earlier this week, the City Council approved a 56 percent increase in the monthly surcharge tacked on to telephone bills to meet the city’s increased obligations to the Municipal Employees and Laborers pension funds. Holt refused to say how the city would meet those rising obligations going forward, when the telephone surcharge will fall short.
As for the more manageable, $297.3 million gap, sales and property taxes are off the table. But Holt refused to rule out other tax and fee hikes after exhausting further cost-cutting that might include layoffs.
Emanuel’s 2014 budget counted on $70 million from speed cameras. Instead, Holt expects the city to fall as much as $30 million short.
“We did a much more phased roll-out so we could give people notices and…it’s worked. People get one warning or one ticket and more than 85 percent of them don’t speed again. The cameras have been very, very effective,” Holt said.
“But we’ve got increases in our property transfer tax, our sales tax, our utility taxes and all kinds of other places, which offset those revenues. So, we’re not worried about meeting our operations for the year.”
Although police and fire overtime payments lag one month behind, the city had already spent $65.2 million through May.
Holt acknowledged that the Fire Department, which accounts for $28.3 million of that amount, would be over-budget by year’s end because of “delays in getting classes in” to the fire academy.
“We have about 350 more firefighters and paramedics coming out of the academy before the end of the year, so we expect to see the overtime drop significantly,” she said.
Since 2004, the city payroll has declined by 17 percent — from 41,550 “full-time equivalent” employees to 32,280. Still, total personnel costs have risen by 21 percent. The average annual cost-per-employee, including health care and pensions, went from $59,714 to $94,551, driven largely by rising health care costs.
Emanuel’s plan to phase out the city’s 55 percent subsidy to retiree health care will save $25 million this year and even more next year if a court allows it to continue. But even that is a risky assumption with a lawsuit pending and the Illinois Supreme Court ruling as a precedent.
Last year’s financial analysis projected a $338.7 million shortfall that would balloon to $994.7 million in 2015 and $1.15 billion in 2016 without a painful mix of employee concessions and new revenues. This year’s version takes the 2017 shortfall down to $587.7 million, but only if the mayor’s risky assumptions are correct.
The Fraternal Order of Police is now the only major union that has yet to reach agreement with the city on a new contract. It was not known whether the hefty expense for retroactive pay raises would compound the $297.3 million shortfall.
FOP President Dean Angelo, who has forged a more cooperative relationship with the mayor, could not be reached for comment, either on contract talks or on the prospect of pension reform that won’t save nearly as much as Municipal Employees and Laborers because cost-of-living increases for police officers and firefighters are not compounded.
The shortfall reportedly assumes that the city will continue to hire only enough police officers to keep pace with attrition. That is likely to become a major issue for aldermen during budget hearings.