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City deficit to hit nearly $1 billion soon without pension reform

City Budget Director Alex Holt Mayor Rahm Emanuel. | Sun-Times file photo

City Budget Director Alex Holt and Mayor Rahm Emanuel. | Sun-Times file photo

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Updated: September 3, 2013 6:59AM

Mayor Rahm Emanuel will not raise sales or property taxes to close a $338.7 million gap in next year’s budget but all bets are off in 2015, when the shortfall balloons to $1 billion without pension reform, a top mayoral aide said Wednesday.

In 2015, the city is required by state law to make a $600 million contribution to stabilize police and fire pension funds that now have assets to cover just 30.5 and 25 percent of their respective liabilities.

The mayor’s City Council floor leader has suggested that the Illinois General Assembly “relieve us of these artificial dates they’ve put on us and allow us to solve the pension problem over time.”

A seven-year “ramp up” was built into a tentative contract with police sergeants but roundly rejected by the rank-and-file.

But if Springfield refuses to lift the hammer hanging over the heads of Chicago taxpayers, next year’s $338.7 million shortfall will seem like the good old days.

The deficit will rise to $994.7 million in 2015 and $1.15 billion in 2016 without a painful mix of employee concessions and new revenues, according to the city’s annual financial analysis released Wednesday.

Civic Federation President Laurence Msall said the 2014 gap is “manageable” with “very difficult reductions in personnel” and cuts that include the $66 million-a-year aldermanic menu program and a refuse collection rebate for condominium owners that Emanuel agreed to phase out, instead of eliminate.

Msall said the mayor also will have to “tap into additional service fees,” in part, because Chicago is “operating precariously with very little in reserve for weather-related and other emergencies.”

But he said, “The following year, the city faces a financial cliff. Police and fire pensions are so close to running out of money, there’s not enough time to both save those funds and relieve Chicago taxpayers without dramatic reductions” in employee benefits.

Two weeks ago, Moody’s Investors ordered an unprecedented triple-drop in the city’s bond rating, citing Chicago’s “very large and growing” pension liabilities, “significant” debt service payments, “unrelenting public safety demands” and historic reluctance to raise local taxes that has continued under Emanuel.

On Wednesday, Budget Director Alex Holt took sales and property taxes off the table to close the 2014 gap. But she refused to rule out other tax and fee hikes after yet another round of cost-cutting that might include layoffs.

Although the city payroll has declined by 20 percent since 2003 — to 32,420 employees — personnel costs have increased by 15 percent. The average annual cost-per-employee, including benefits, went from $58,299 to $95,406 driven largely by rising health care costs.

Moody’s has suggested that Chicago has “nearly unlimited” ability to raise property and sales taxes and should use it to reverse a chronic under-funding of its pension funds.

Emanuel strongly disagrees.

“He’s not going to increase revenues and increase taxes on people to put into a system that hasn’t been reformed,” Holt said.

“More taxes don’t solve the problem. You’ve got to have reform and then, we need to talk about how we pay for it. But if you do them in the reverse, you’ll never get the reform.”

Fraternal Order of Police President Mike Shields reacted angrily to the suggestion that reform must precede revenue to shore up under-funded pensions.

“Be careful of this mayor when you hear him use the word `reform.’ It usually means that the working man is going to get screwed,” Shields said.

“He only wants to diminish the benefits of people who have dedicated their lives to the city and not reduce expenditures to create his legacy, such as bike lanes, a park for Maggie Daley and a DePaul arena. It’s not a benefits problem. He has to find another source of revenue, such as casinos, to fund pensions.”

Shields said the FOP would steadfastly resist any effort to relax the $600 million mandate in 2015.

“That may work for other pension funds. But if the S&P 500 catches a cold, the Chicago Police pension fund will catch pneumonia. We are way too low in our funding to have a pension funding holiday for seven years,” he said.

After getting the rundown from a top aide who attended Wednesday’s briefing on the city’s shaky finances, Ald. Ameya Pawar (47th) had no immediate answers.

“The jig is up. That’s why you have 17 or 18 new aldermen and a new mayor. The [old] mayor retired because he couldn’t do what he’s been doing for 22 years,” Pawar said.

“Police and fire pensions might end up forcing the city to cut police and fire [service]. We’ve got to get beyond this idea that pension reform is synonymous with busting pensions. Everybody has to take a haircut.”

Normally, City Hall exaggerates the size of the budget shortfall whenever it’s negotiating new contracts with police officers, firefighters and other unionized city employees to strengthen its hand at the bargaining table.

For the second straight year, Emanuel has flipped the political script.

His preliminary 2014 budget forecasts a $338.7 million hole — 27 percent less than the $460 million gap predicted by the mayor’s own budget team a year ago.

Rebounding sales, income and real estate transaction tax revenues and savings generated by managed competition, a wellness program, aggressive debt collection and the switch from a ward-by-ward to a grid system for collecting garbage all contributed to the improving financial picture.

The shortfall assumes that the city will continue to hire only enough police officers to keep pace with a wave of retirements that, Holt contends, has eased somewhat.

It also assumes that police overtime spending that was $10.5 million in the hole before the traditional summer crime wave will continue to keep the lid on homicides and shootings.

Contracts with Chicago’s rank-and-file police officers, firefighters and paramedics expired on June 30, 2012.

New contracts — whether negotiated at the bargaining table or handed down by an arbitrator — will almost certainly include a hefty expense for retroactive pay raises that may compound the $338.7 million shortfall.

Holt refused to say how much money the city has salted away for retroactive pay raises amid concern that could set a floor for negotiations. The last time police and fire contracts were settled, the city was forced to borrow the money to bankroll back pay.

The idea of privatizing Midway Airport — by reviving a $2.5 billion deal that collapsed for lack of financing — is still very much alive. In fact, the competition is down to only two remaining bidders with final proposals due this fall.

But Holt stressed that even if Emanuel seals the deal and a reluctant City Council approves it, there would be no influx of new revenues to the city’s corporate fund. The Midway windfall would only be used to shore up city pension funds and build infrastructure projects.

Chicago’s 165 tax-increment-financing (TIF) districts now have a collective balance of $1.7 billion. But Holt stressed that $1.5 billion of that money has already been allocated to future projects, $600 million of them to build or renovate Chicago Public Schools.

That leaves only $200 million for the discussion about a potential surplus, but even that is mitigated by the fact that some TIF’s have “declining” revenues and need to maintain a balance, the budget director said.

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