By Heather Gillers and Shayndi Raice
CHICAGO — Chicago’s mayor on Wednesday outlined a budget that will rely on one-time fixes and cooperation from state lawmakers to address Chicago’s pension burden, the largest of any U.S. city.
As striking teachers marched outside City Hall Wednesday, Mayor Lori Lightfoot, a former federal prosecutor who took office in May, said in an address to the City Council that the budget “reflects the reality that sacrifices are needed in the work that lies ahead.”
She is eschewing some of the nickel-and-dime approaches taken by many cities, ending Chicago’s practices of turning off residents’ water for nonpayment and suspending drivers’ licenses for unpaid parking tickets.
Ms. Lightfoot’s efforts to close an $838 million budget gap in the nation’s third-largest city, where the population is shrinking and teachers have been striking since Thursday, offers a window into the challenge of addressing the burdensome legacy costs weighing on many older American cities.
“Cities that have pension challenges are facing the same sort of question, which is ‘how do you cover future liabilities and current costs without driving people away with higher taxes?'” said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.
Cities’ net pension liabilities grew 76% in nominal dollars in the five years ending in 2017, according to a study by Moody’s Investors Service of cities rated by that firm.
The number of large cities that have on hand less than half of the assets they need to pay promised future benefits doubled between 2009 and 2015, according to a study by the Pew Charitable Trusts. Cities in that situation include Philadelphia, Providence, R.I., and Fort Worth, Texas, as well as Chicago, according to 2018 data from Merritt Research Services.
The reasons: Amounts owed to workers and retirees for pensions have lagged behind the assets on hand to pay them. Losses in 2009, plus years of falling short of investment targets, left pension funds with far less than projected. Meanwhile, governments have contributed to that shortfall by skimping on annual pension contributions to balance budgets. Court protections in many states have made it difficult to cut benefits for already hired workers.
Rising costs for pensions and other expenses “have become a new normal since the recession,” said Mary Murphy, project director at the Pew Charitable Trusts.
In an effort to shore up Chicago’s finances, former Mayor Rahm Emanuel, a former congressman and White House chief of staff who served eight years, raised property taxes and helped attract new investment and construction to the city’s downtown. But decades of paltry contributions to the city’s four pension funds have left Chicago $30 billion short, according to the city’s estimates.
Chicago has the largest pension liability of any major city, according to Moody’s.
The city’s pension cost jumps each year, leaving Ms. Lightfoot to find $1.7 billion for pensions, up from $1.3 billion last year, according to Chicago’s 2020 budget forecast. That increase, along with increasing expenses related to bond debt, lawsuits and labor costs, fueled the budget gap, Ms. Lightfoot has said.
Ms. Lightfoot must also contend with the teachers’ strike, going on since Thursday over pay, class size and other issues. The school district, which is run by a mayor-appointed board, sets its own budget.
The $11.7 billion city budget Ms. Lightfoot presented Wednesday included an increased fee on ride-sharing trips to the downtown area, higher taxes on restaurant meals and increases to parking meter rates. Budget documents showed the city was able to identify nearly $300 million in savings through “improved fiscal management” and other cuts, and plans to save another $200 million on a one-time basis through debt refinancing.
Some of the new bonds will be backed by city sales taxes, which some ratings analysts consider a particularly reliable revenue source.
The budget now requires approval by the City Council. It is implemented on January 1.
Some of Ms. Lightfoot’s proposals rely on help from state lawmakers, who face their own budget issues. The administration is depending on cooperation from the legislature to help land a Chicago casino and to revamp the city’s tax on real estate sales, a move Ms. Lightfoot’s budget relies on for $50 million in revenues.
Without that cooperation, Ms. Lightfoot said, the city will need to make “painful choices,” an apparent reference to the possibility of raising property taxes, which she has made clear she is not ruling out.
A spokeswoman said Ms. Lightfoot isn’t currently considering shoring up the city pension fund with borrowed money, a possibility contemplated by Mr. Emanuel.
S&P Global Inc. analyst Carol Spain said she would like to see Chicago more fully rely on stable, recurring sources of revenue to close future budget gaps, rather than one-time fixes.
Write to Heather Gillers at firstname.lastname@example.org and Shayndi Raice at email@example.com
(END) Dow Jones Newswires
October 23, 2019 20:30 ET (00:30 GMT)
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