Bond rating dip costs $1 million for every $100 million borrowed
BY FRAN SPIELMAN City Hall Reporter October 28, 2013 3:50PM
Updated: December 1, 2013 7:31AM
An unprecedented, triple-drop in Chicago’s bond rating will cost taxpayers $1 million-a-year for every $100 million borrowed and severely limit the city’s “financial flexibility” going forward, a top mayoral aide warned Monday.
“Fortunately, we’re in a cycle where interest rates are low and the capital markets remain open to us. But we can’t sustain much more of a credit weakening and really provide the city services that our public is demanding,” Chief Financial Officer Lois Scott told aldermen during opening day of City Council budget hearings.
“It is much more expensive for us to keep the city operating financially and it limits our accessibility…. Our opportunities to maneuver have become much more restrictive.”
Moody’s Investors ordered the triple-downgrade in mid-July, 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 Mayor Rahm Emanuel.
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.
Emanuel wants the Illinois General Assembly to put off the balloon payment until 2023. That would give the city time to negotiate a painful mix of employee concessions and increased revenues without raising property taxes so high that it triggers a mass exodus to the suburbs.
But if there is no relief, Scott warned that the state would be authorized to withhold $600 million from the city’s share of state income, sales and gas tax revenues along with an array of state grants.
“We are far from out of the woods. We have made great progress on the operating structural deficit. But we have a lot of wood to chop as it relates to pensions as well as our debt position and we need to address those. Even with substantial reforms, it will require revenue action long-term to bring our financial house into order,” she said.
Under questioning, Scott refused to comment on the possibility of a transaction tax on commodities trades to raise the mountain of revenue needed to meet union leaders half way.
She would only say, “The mayor has been very clear that we need a balanced approach, which pairs reforms with revenues. We don’t have a specific prescription for what the community is going to best be able to absorb in those revenues and reforms, but we need both.”
Opening day of City Council budget hearings provide a road map of the political pressure points.
Northwest Side Ald. Tom Cullerton (38th) complained about Emanuel’s decision to phase out the city’s 55 percent subsidy for retiree health care, a move that will force individual retirees to pay as much as $4,440 more in 2014.
Other aldermen complained about the mayor’s decision to budget another $75 million for police overtime in 2014, instead of hiring more police officers.
But Emanuel’s plan to raise the city’s cigarette tax by 75-cents-a-pack remains the key sticking point.
Critics contend it will encourage people to stand on street corners hawking loose cigarettes, exacerbating a black market that’s already worse than it is for marijuana, cocaine and heroin. “The human costs are devastating. It creates an underground economy,” said Ald. Roderick Sawyer (6th).
Ald. Leslie Hairston (5th) warned that the nation’s highest combined state and local tax would “disproportionately impact communities of color” by “creating a very large black market” for smokes.
“The loose sale of single cigarettes. The sale of cigarettes without tax stamps, which leads to increased loitering. Which means people who might be involved in illegal activity are visible and on the street. If I’m in a rival gang, then I’m going to come by and then we have another shooting,” she said.
Emanuel has a history of tinkering at the margins of his budgets to appease aldermen. But if the $10 million cigarette tax hike was thrown in as a bargaining chip to be dealt away, the mayor didn’t tip his hand on Monday.
“Two years ago, the state increased the cigarette tax by $1. Last year, the county increased it by $1. We’ve increased it 75-cents and we’re putting it towards improving the health care of our children. That’s the right type of investment. And I think it’s the right step, because it also reduces health care costs for those associated with smoking,” the mayor said.