Chicago Investors Want Mayor to Bolster Finances Beyond 2020

(Bloomberg) -- Chicago Mayor Lori Lightfoot on Wednesday will explain how she will close a massive budget gap for 2020, but investors will be looking for clues on how she will avoid deficits and pay growing pension bills in future years.

Lightfoot is considering a graduated real estate transfer tax, higher ridesharing fees, and she hasn’t ruled out increasing property taxes as a last resort to close an $838 million deficit for 2020, the biggest shortfall in recent history. About 60% of the shortfall will be addressed by structural solutions that carry forward into future years and 40% will be one-time items, Jennie Huang Bennett, the city’s chief financial officer, said on Monday.

While refinancing $1.3 billion in debt to save $200 million will help next year, investors want comprehensive plans that set up the city for more revenue and lower costs going forward. Chicago’s fiscal woes don’t end in 2020. The city is struggling with $30 billion of unfunded pension liabilities. And its required payments to the cash-strapped retirement system ramp up this year and keep climbing, topping $2 billion in 2022, city documents show.

“The one concern we have is not just the 2020 jump in pension contributions -- these contributions continue to rise in 2021 and 2022,” said John Ceffalio, a credit analyst for AllianceBernstein LP in New York, which holds the city’s bonds among its $45 billion of municipal debt. “There are going to be large gaps to solve in those years.”

The coming year’s deficit is fueled by the biggest one-year jump in Chicago’s mandated pension payments, according to the city. The annual projected pension contribution climbs to $1.68 billion in 2020, according to city documents. Unlike past years, starting in 2020, the structural budget deficit projections include known long-term liabilities such as pensions and debt service but don’t yet reflect potential new revenue.

The budget deficit is forecast to climb to $1.19 billion in 2021 if structural changes aren’t made or new revenue isn’t found, according to city documents released in August. That shortfall may drop slightly to $1.16 billion the following year, according to the city’s three-year baseline projection.

Fitch Ratings will watch to see how the Lightfoot administration addresses the gap and the pension payment ramp up, Arlene Bohner, the company’s senior director and manager for U.S. state and local government ratings, said in an emailed statement. The rating firm “will not consider the city’s budget to be structurally balanced until recurring revenues match recurring expenses, including actuarially determined pension contributions,” she said.

“The mayor’s plans on how to tackle this year’s budget is important, but equally important is whether she lays out a framework on how to tackle future budget gaps and the increasing pension costs,” said Dora Lee, director of research for Belle Haven Investments, which holds Chicago school bonds among its $10 billion of municipal debt.

Lee said she’s looking for a more comprehensive plan because the “little tidbits” released so far may not be enough.

A graduated real estate transfer tax is expected to be a key component of the budget, and the city longer-term is also looking for revenue from a casino. Chicago officials also recently proposed a new congestion tax levied on ride-hailing companies that will produce an estimated $40 million in new revenue. Lightfoot is also considering boosting tax and fee collection enforcement from city vendors to generate another $25 million a year.

“They’ve been playing at the edges” with these new revenue programs and have yet to explain fully how the city will control spending, Belle Haven’s Lee said. Also, Lightfoot ran on a progressive social platform and those programs cost money, she added.

For example, last month, Lightfoot, a Democrat who was elected in a landslide victory in April, moved to limit financial hardship for those who will owe money for non-moving violations, including reducing the fine for those without vehicle-license stickers to $50 from $200. Such steps will cost about $15 million in 2020, according to estimates from her office.

As Lightfoot prepares to deliver her first budget address, Chicago Public Schools negotiators are also trying to negotiate a contract with the teachers union to end a strike that started Oct. 17. Along with higher salaries, the Chicago Teachers Union is asking the city and district to address social issues such as student homelessness.

Lightfoot on Tuesday said funding to prevent homelessness will increase 36% to $19 million and the city will boost the number of units available for Chicago’s lowest-income renters by 19% to 3,220. That includes more funding to house more than 200 youth dealing with housing instability or homelessness.

Lightfoot said that she won’t be addressing the issues at CPS during her budget address on Wednesday.

“There is a lot good news for taxpayers,” she said during a press conference on Tuesday. “We made a lot of tough choices and hard sacrifices and more to come.”

The city and schools have separate budgets but are tied together because the mayor appoints the board of education and the two bodies share a tax base. Lightfoot’s predecessor Rahm Emanuel increased property taxes to help shore up the pension system, and some have called the city tax-fatigued.

A balanced mix of restructuring and sustainable revenue is needed to avoid further exacerbating the city’s declining population, said Laurence Msall, president of the Civic Federation, which analyzes municipal issues.

“Our greatest concern is that the city have a comprehensive plan and we don’t fall back on bad and expensive practices of the past” such as scoop and toss, which postpones payments, and borrowing for operating expenses, Msall said.

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net

To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, Michael B. Marois

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