Chicago's Mayor Lightfoot Takes Office as Fiscal Woes Loom
Chicago's Lightfoot Takes Office as Fiscal Woes Threaten Agenda
(Bloomberg) -- Chicago made history Monday as Lori Lightfoot was sworn in as its first black, female mayor after sweeping all 50 wards by promising to reform the third-biggest U.S city.
But her broad mandate will run headlong into the city’s harsh, fiscal reality. Next year’s budget deficit is expected to be more than $200 million larger than forecast, and Chicago’s $28-billion pension shortfall is deepening, even after her predecessor, Rahm Emanuel, boosted city payments and raised taxes to help cover the bills. Lightfoot didn’t shy away from addressing the city’s financial problems in her first remarks as mayor.
“We must get our fiscal house in order,’’ Lightfoot told a packed arena during her inaugural speech. “No doubt, some hard choices will have to be made and none of this is going to be easy.’’
Chicago’s “outsized structural deficit,” growing pension debt and other costs threaten the city’s fiscal stability, Lightfoot said, adding that her team is working to measure the size and depth of the financial challenge.
“We are spending a significant percentage of every dollar just to service our pension debt and that alone means that money that should be sent elsewhere is being sent to banks and bondholders, instead of being sent to rebuild our neighborhoods, reduce our property taxes, and revitalize our transportation system,’’ Lightfoot said.
She vowed to put the retirement system on “a path of true solvency’’ and make the government more efficient without balancing the books “on the backs’’ of the city’s working-class and poor.
While Emanuel made progress in addressing the massive pension debt that spurred Moody’s Investors Service to slash the city’s rating to junk four years ago, the shortfall in the retirement system has continued to grow. Emanuel put more money into the retirement funds, but he delayed a surge in the city’s annual payments. Those bills start to come due in Lightfoot’s first budget, helping drive up the bigger-than-expected deficit to more than $700 million.
“Her ability to succeed will be impacted by her ability to manage a very difficult financial situation that cries out for significant reform and restructuring,” said Laurence Msall, president of the Civic Federation, a watchdog group that monitors the city’s finances.
Chicago had projected a budget shortfall of about $252 million in 2020, excluding additional public-safety pension fund contributions. The city had expected to pay an additional $280 million to the police and fire pensions, but those funds may need $100 million more because of investment losses at the end of 2018, according to Kristen Cabanban, a spokeswoman for the finance department.
Click here to read more about Chicago’s pension troubles.
Additionally, the city may need another $130 million to pay debt in the 2020 budget after ending so-called scoop-and-toss, the process of borrowing to pay off maturing debt. Those numbers could change once the city closes its books in June, Cabanban said.
Watching Close
Lightfoot, a former federal prosecutor who is also the city’s first openly gay mayor, has offered few specifics on how she’ll handle the financial problems.
In April, during a trip to the state capital to meet with lawmakers and Governor J.B. Pritzker, a billionaire Democrat who took office in January, she described Chicago’s financial circumstances as "dire,” and noted that her administration is going to have to "make a series of hard choices.” On Friday, she told reporters that the fiscal picture was worse than the city’s estimates without providing specifics.
During her campaign, Lightfoot called for new, progressive revenue sources. She advocated for Chicago to get its "fair share” of funds from the governor’s plan to introduce a graduated income tax and from the anticipated legalization and taxation of recreational marijuana and creation of a city-owned casino. These are all items still pending, and lawmakers are planning to adjourn May 31.
Chicago investors had applauded Emanuel’s moves to stabilize the finances and shore up the pensions. S&P Global Ratings and Fitch Ratings still consider Chicago investment grade. In July, Moody’s changed its outlook on the city from negative to stable. Bondholders want the positive momentum to continue.
“We’re looking for serious proposals to tackle the pension liability and for a sustainable and balanced budget into the future,” said John Ceffalio, municipal-credit analyst for New York-based AllianceBernstein Holding LP, which owns Chicago debt among its $44 billion of municipal bonds. “We don’t underestimate the depth of the challenge that the city faces.’’
Other Concerns
Beyond the city budget, Lightfoot is also facing an expiring teacher’s contract with a labor union that backed her opponent, Cook County Board President Toni Preckwinkle. She’ll also have to contend with the city’s gun-violence, which typically climbs during the summer months.
Lightfoot said she will combat Chicago’s notorious government corruption and plans to pull back so-called aldermanic privilege, the city’s tradition of letting aldermen veto development decisions in their wards. This has put her at odds with some council members whose buy-in she’ll need to pass her budget.
“Her mayorship is very historical in many ways,” Dora Lee, director of research at Belle Haven Investments, which holds the Chicago bonds among its $9 billion of municipal debt. “‘We’re hoping she’s historical in the way that she deals with hopefully resetting Chicago’s financial path."
To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net
To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, Michael B. Marois, Boris Korby
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