Chicago faces $1.2 billion gap as it assembles “pandemic” budget

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Chicago is confronting nearly $1.6 billion in lost revenue over 2020 and 2021 due to the COVID-19 pandemic, threatening to set back city efforts to structurally balance its books by 2022.

The city this week laid out fresh 2020 estimates that illustrate the bruising revenue wounds and the hard road the city faces without federal aid or a quick economic recovery.

Chicago faces the “catastrophic collapse of our local and national economy,” Mayor Lori Lightfoot said Monday.

The city raised to $799 million from $700 million the revenue hit expected this year due to the economic shutdown because of the public health crisis and ensuing recession.

In the 2021 budget, the city expects another beating in the form of a $783.2 million revenue dive. Coupled with $421.3 million in added personnel, pension and debt expenses the city had already expected in 2021 the city must close an estimated deficit of $1.2 billion. Chicago operates on a calendar-year budget.

That puts the combined two-year gap at nearly $2 billion; so far the city has identified $550 million of measures to close its 2020 gap with $200 million in combined upfront savings from a January bond refunding and another that’s in the works as well as federal COVID-19 relief funds already in the bank.

The blows are due to the “catastrophic collapse of our local and national economy,” Mayor Lori Lightfoot said in outlining the grim news Monday. “Our goal this year in this ‘Pandemic Budget’ is to get through this crisis and continuing our initial efforts to spur a robust recovery.”

The forecast must be released by the end of August and launches budget season. The 2021 proposed budget, Lightfoot’s second, will be unveiled in October, voted on in November, and take effect Jan. 1.

Job cuts, furloughs and a property tax hike remain “at the end of my list of tools and options but they have to be on the table,” Lightfoot said. “The reality is stark, our options in this fiscal crisis are limited — all of which require some hard and yes, painful choices.”

The severity will depend on whether a new federal relief package comes to fruition.

“The federal government must step up and support our cities and states with additional stimulus dollars critically needed by our families and businesses,” but in its absence the city must also develop “contingencies,” Lightfoot said.

Lightfoot also called on the state to restore the level of income taxes shared with local governments. The 10% share has been cut in half in recent years.

The 2020 shortfall in the $11.61 billion all-funds budget with a $4.4 billion general fund is due to a $74.4 million hit to transaction-related taxes, $99.7 million of business tax losses, a $174.7 million hit to transportation taxes, $180.2 million in lost sales taxes, $97.6 million in lost recreation-related taxes, $196.9 million of non-tax related revenue losses, and $63.1 million from other sources.

The city received $470 million in direct aid from the federal CARES Act signed in March that reimburses states and local governments for pandemic costs and $47 million in grants.

The city is slowing hiring and looking at management efficiencies to help close the remainder of the 2020 gap.

The city’s unemployment rate is 18.7% and its gross domestic product declined 10% in the second quarter. More than 71,000 Chicago residents have had confirmed COVID-19 cases as of Monday and 2,877 died, according to Illinois Department of Public Health data.

In 2021, the city had been planning for $421.3 million in increased expenses including $207.9 million hike in debt service and property tax collection losses, $91.9 million in personnel spending, $91.4 million in rising pension contributions, and $30.1 million more for contractual services and commodities.

The other piece of the $1.2 billion gap is a $783.2 million revenue beating due to the pandemic’s lingering impact on the city’s economy, with $53.6 million lost in recreation taxes, $289.1 million in non-tax losses, $159.1 million in lower sales tax collections, $105.3 million in transportation tax losses, $61.6 million from a drop in business taxes, and $114.5 million in other softening revenue collections.

Lightfoot said the city is eyeing financial and workforce reforms, new revenue sources and department efficiencies. She cited the personal property lease tax on computer leases as a possible revenue source. Another hefty tax-increment financing surplus declaration is expected. The 2020 budget relied on $300 million of surplus being freed up. Half goes to the schools.

Lightfoot last year faced a more than $800 million deficit and $500 million was erased with structural changes while the remainder was closed with one-time sources like the tax-increment financing surplus declaration and upfront savings from a debt refinancing.

The rating agencies called the one-shots reasonable given the size of the gap and the city vowed to get to structural balance in 2022 but the pandemic is now raising questions over whether that can be accomplished.

“We are still on a path to structural balance and very committed to making the changes we need to achieve that structural balance,” chief financial officer Jennie Huang Bennett said. “The pandemic has had an impact” and the city will need time to recover and so “we don’t have an exact date at this point.”

The city’s GO bonds are rated at BBB-minus by Fitch Ratings, A by Kroll Bond Rating Agency, junk-level Ba1 by Moody’s Investors Service, and BBB-plus by S&P. S&P assigns a negative outlook; the others assign a stable outlook.

Pension obligation bonds are still on the table.

“What’s really important is that those pension obligation bonds be paired with reform measures that we would take…without that it would be very difficult for us to make the case that ultimately it’s a long-term sustainable solution for the city. We are taking a hard look at it though,” Bennett said.

Chicago is taking a “hard look” at pension bonds if they can be paired with reforms, said chief financial officer Jennie Huang Bennett.

Yvette Shields

The city is not currently considering tapping the Federal Reserve’s short-term lending program because it can borrow at a more affordable rate on its own, Bennett said.

Bennett sought to quiet any talk of bankruptcy as a potential fix. The specter was raised when Detroit filed for Chapter 9 with Michigan’s approval in 2013 and was again raised with a recent Wall Street Journal by a hedge fund manager positioned to profit from such an event.

Democrats who control the Illinois legislature are unlikely to approve a Chapter 9 statute.

“Bankruptcy is not on the table for the city. It doesn’t solve any of our problems and it’s not something that we are even remotely discussing,” Bennett said.

The city has some cushion in an ending balance of $185 million 2019 unassigned balance and $550 million of reserves from the 2005 Chicago Skyway lease deal. Bennett said while reserves are for a rainy day and the pandemic arguably is that day, “it’s one the key strengths” for the city’s credit profile consistently noted by analysts and is among the “very last resorts” for the city under a worst case scenario and would not be used “in a meaningful way.”

The city’s pension contribution rises to $1.81 billion in 2021 from $1.68 billion to cover rising contributions for all four of the city’s pension funds. The city is ramping up to an actuarial based contribution in 2022 for its municipal and laborers’ funds when total contributions are estimated at $2.24 billion. The city hit an ARC payment for police and firefighters in the current budget and modest increases loom. The schedule is designed to reach 90% funded ratios between 2055 and 2058.

The city is carrying $31.8 billion of net pension liabilities and funded ratios for the funds are 18% for firefighters, police at 21%, municipal at 24%, and laborers at 43%.

The forecast lays out warnings of future deficits, which is typical in the projections given they don’t reflect any new structural changes on expenses or revenues that would be adopted in 2021. The baseline forecast is for $1.5 billion deficits in 2022 and 2023 with gaps of $1.1 billion projected in a positive scenario and $1.9 billion in a negative one.

The administration expects casino revenue to eventually bolster the budget by $200 million annually. The city won during the state’s spring session tweaks to the 2019 casino legislation allowing for the city’s first casino and last month it issued a request for information from the industry on potential development strategies.

The city had also previously hoped to raise another $100 million annually from changes to the tax on real estate sales. State legislation stalled and is now on hold. City budget director Susie Park said given the pandemic now is “not the right time to pursue it.”

In her address, Lightfoot also warned that the fiscal pressures bearing down on the city extend beyond the pandemic’s fiscal toll on taxes and tourism to a spike in shootings and murder, civil unrest, and looting and rioting that’s accompanied peaceful protests since the May 25 killing of George Floyd by a Minneapolis police officer.

“We cannot talk about our fiscal health divorced from this moment in history. All of these cross-currents affect our financial future. This is a critical inflection point. It is momentous and a moment that all agree requires us to reject the status quo, and step into our truths,” Lightfoot said.

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