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Chicago’s finances among the worst after 2008 recession: study

Updated: December 9, 2013 11:05AM

Chicago weathered the storm of the 2008 recession in worse financial shape than all but two major cities — Boston and bankrupt Detroit — because spending, debt and unfunded pension liabilities rose faster than revenues, according to a new study.

The Civic Federation used nine key indicators to measure Chicago’s financial performance against 12 other U.S. cities over a five-year period ending Dec. 31, 2011, that coincided with the recession and the painstaking recovery.

Chicago ranked No. 11. Only Boston and Detroit fared worse. New York, Los Angeles, Philadelphia, Houston, Kansas City, Seattle, Phoenix, Pittsburgh, Columbus and Baltimore all emerged in better shape.

The reasons are simple. The mountain of debt got higher. Unfunded pension liabilities are $19 billion and rising. And taxes are not growing as fast as city spending, according to the Civic Federation.

Over the five-year period, Chicago’s “real liabilities” — everything from operating expenses to debt and pension liabilities — rose by $824 a person to $3,296 for every man, woman and child living in the city.

Chicago raised taxes and fees by $113.45 a person during that same period, topped only by Houston ($122.01), Boston ($205.58), Baltimore ($354.28) and Detroit ($357.18). But it was not nearly enough to keep pace with expenses.

Although Chicago’s “debt service-to-expenditure ratio” declined over the five-year period, the five-year average of 11.9 percent is still the highest of all 13 cities, which had an average of 9.7 percent.

That’s a red-flag because it means too large a chunk of Chicago’s operating expenses are being gobbled up by long-term obligations. Operating expenses also “consistently and significantly exceeded revenues” over the period in question. In 2008, Chicago had enough working capital to fund just over three months of operations.

When Detroit filed for bankruptcy, Mayor Rahm Emanuel called it a “wake-up call for all of those who try to put their head in the sand and say we don’t have a problem” with pensions. But he flatly denied that Chicago could follow Detroit into bankruptcy.

Civic Federation President Laurence Msall is not so sure.

“If Chicago does not address the structural deterioration of its finances, it is on the road to Detroit. But there are plenty of opportunities to avoid becoming like Detroit, if it addresses debt obligations, pension problems and the structural budget imbalance,” Msall said.

“It is disappointing to see a city like Chicago, which has a stronger economic base and a vibrant downtown, underperform compared to other cities. Debt-per-capita rose at a faster rate. Expenses-per-capita and growth of taxes and fees-per-capita suggest a growing imbalance between what services are costing the city and its ability to fund it with the existing population and tax base.”

The Civic Federation report covers the last four years of former Mayor Richard M. Daley’s 22-year reign and the first seven months of Emanuel’s tenure.

Since then, Emanuel argued this week, he’s taken steps a series of steps to right the ship.

“We don’t issue tax-exempt bonds to do basic operations. We don’t take money out of rainy-day funds to fund operations. Those are dramatic changes,” the mayor said.

“The projected deficit was supposed to be $790 million. We took it down structurally to less than $340 [million] and we’re taking it down an additional $200 [million] in this budget. I’m going to turn this battleship around. [But] I’m not going to reverse 30 years of bad practices in just three years.”

The mayor’s office later noted in a statement: “The report is based on fiscal years 2007 through 2011, which, except for a few months, fell under the previous administration.”

Msall gave Emanuel credit for “beginning to address” financial problems that festered under Daley. But he faulted the mayor for relying too heavily on savings generated by refinancing old debt and for borrowing to cover costly legal settlements that City Hall should have anticipated.

“They have not come up with an actionable solution to the [$19 billion] pension crisis and the growing debt level. Refinancing and using scoop and toss to push principal out 25 or more years is not the answer to the city’s financial challenges. It pushes the burden in an expensive and untenable way onto the next generation for services they’re not going to benefit from,” he said.

In mid-July, Moody’s Investors ordered the triple-downgrade, 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.

Standard & Poor’s has cited those same factors for its negative outlook on Chicago’s A-plus rating.

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 1/2 percent and 25 percent of their respective liabilities.

Emanuel wants the Illinois General Assembly to put off the balloon payment until 2023 to give the city time to wring cost-cutting concessions from organized labor and find enough new revenue to meet union leaders half-way.

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

Chief Financial Officer Lois Scott could not be reached for comment on the Civic Federation study.

Two weeks ago, she acknowledged that the 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.

“The most significant long-term cost of this downgrade is the constraint. Our opportunities to maneuver have become much more restrictive. We really have to address the challenges that we see in front of us with great urgency,” 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 going forward. 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.”

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