Remaking a City’s Fiscal Future


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eBlog, 7/13/16

In this morning’s eBlog, we consider the complex fiscal challenges confronting the Windy City, where we noted a few years ago in our report: Chicago, after a significant effort to remake itself into a global city, today confronts unprecedented challenges. The city took a serious turn for the worse during the first decade of the new century. The gleaming towers, swank restaurants, and smart shops remain, but Chicago is experiencing a decline different from other large cities. It is a troubled place, one falling behind its large urban brethren and presenting a host of challenges for Mayor Rahm Emanuel. Challenges confronting the city’s fiscal future are: schools, which one commentator cited as ‘almost insoluble;’ police—crime—gangs (also ‘almost insoluble’); infrastructure (on which the mayor has earned very high marks); pensions, where Chicagoans’ long-term debt and pension obligations per capita rose 185% since 2002—which are inextricably linked to the state; and bringing jobs back to Chicago. These challenges come as state and federal aid are reduced.” This morning we consider some of the ongoing fiscal challenges as the city OBM prepares a preliminary budget based on the requests submitted by the departments and the resources OBM expects will be available to fund those needs. This preliminary budget is used to inform the Annual Financial Analysis, which by Executive Order is issued on or before July 31st of each year. The Annual Financial Analysis presents an overview of the City’s financial condition, and it serves as the starting point for preparing next year’s budget. The document includes a historical analysis of the City’s revenue and expenditures; financial forecasts for the City’s major funds; and detailed analyses of the City’s reserves, capital program, debt, and pensions.

The Fiscally Windy City. Chicago’s long-term principal and interest payment schedule for the city’s general obligation debt swelled last year by about $1.7 billion, forcing Mayor Rahm Emanuel and his finance team to confront a severe liquidity problem even as it also was challenged by the state’s constitution as it sought to address longer term pension obligations and a liquidity crunch. Chicago published its 2015 comprehensive annual financial report or CAFR last Friday; it will soon release its annual financial analysis—which will include the fiscal gap the city must close ahead of the fall release of a 2017 budget as well as multi-year projections based on various revenue scenarios. It appears the city has made progress in reducing its structural budget deficit and reducing some of its pension liabilities—mostly via tax increases in a state where the Illinois Supreme Court has ruled the state constitution bars the city’s ability the alter benefits—meaning its net position for reporting purposes has deteriorated. Nevertheless, Chicago’s ending balance strengthened, allowing the administration to make good on its commitment to rely less on debt for operations. No doubt some of the urgency to act were spurred by Moody’s characteristically moody downgrades of the city’s General Obligation bonds, as well as water and wastewater credit ratings last year; the bad news is—as in most states—the city’s hands are tied absent state authority to address its pension challenges and the adoption of a state budget—or, as the ever prescient Richard Ciccarone, president of Merritt Research Services, put it: “We are a long way from the finish line…Investors will be watching closely to see whether the city is able to stay the course on the promises they’ve made to investors” about debt practices and aligning revenues with expenses.

Nevertheless, from a different perspective, key goals set by Mayor Emanuel to reverse the outflow of young professions appear to be succeeding: Despite the city of Chicago’s population loss over the past few decades, its economic trends have been generally more encouraging. Household income is an important indicator of Chicago’s fortunes relative to those of its suburbs. In 1990, median household income in the city was just 67% of the median household income in suburban Chicago. By 2010, this income ratio had climbed to 73%. Decomposing household income statistics by (self-reported) racial/ethnic group reveals that this trend was pervasive for the three largest groups: non-Hispanic white, black, and Hispanic. The ratio of city median income to suburban median income among white households experienced the greatest change; it rose from 77% in 1990 to 98% (near parity) in 2010. Moreover, these robust trends are enhanced by rising share of adults aged 25 and older who have attained at least a bachelor’s degree—those millennials the Mayor had sought to relocate from the city’s suburbs into the city: twenty-six years ago, among adults aged 25 and older, 19% of those residing in the city had attained a four-year college degree versus 28% of those residing in the suburbs; by 2010, Chicagoans in this age demographic had almost reached the same share in this regard as their suburban counterparts (33% for city residents versus 35% for suburban residents). The non-Hispanic whites again experienced the greatest change among the three largest racial/ethnic groups. In 1990, 29% of the white city population aged 25 and older had a four-year college degree—the same percentage as the white suburban population in this age demographic; however, by 2010, 55% of such white city dwellers had a bachelor’s degree, while 39% of their white suburbanite counterparts did. Between 1990 and 2010, the city’s black population also made substantial gains in education, as evidenced by the share of black adults aged 25 and older with a bachelor’s degree having risen from 11% to 17%. Moreover, it appears from new data examinations of specific neighborhoods that we can actually perceive how geographically concentrated the city’s gains in college-educated adults aged 25 and older have been: the gains have been highly concentrated in Chicago’s central business district and the surrounding areas, as well as the neighborhoods west of Chicago’s northern lakeshore: the Near South Side realized an increase in the share of adults with a four-year college degree climb from 9% in 1980 to 68% in 2010. In Chicago’s neighborhoods west of its northern lakeshore, the shares of the college-educated population there typically doubled or tripled between 1980 and 2010. One can see the importance of a long-term strategy—and appreciate how vital in not so far away Detroit the efforts of retired U.S. Bankruptcy Judge and now Detroit Public Schools Emergency Manager Steven Rhodes is to Detroit’s fiscal future.

Schooling on Debt. Mayor Emanuel, upon his election, had determined that a key to the city’s fiscal recovery was to lure young families with children back into the city—the very acute challenge today in Detroit. That meant signal investments in public safety and Chicago’s Public Schools, and its Park District—for which there has been a price: a total overlapping burden of $19.4 billion for a debt per capita figure of $7,211—or nearly a 33% debt per capita increase between FY2014 versus FY2006. Nevertheless, Mr. Ciccarone warns that the Chicago Public Schools, notwithstanding some assistance provided by the increasingly fiscally dysfunctional state to help CPS address a $1 billion deficit, could well force CPS to impose the legislature’s authorized $250 million in additional property taxes. But it is on the public pension front where the most challenge is: according to the city’s 2015 CAFR, Chicago’s net pension liability totaled $33.9 billion—including $18.6 billion of municipal employees’ fund liabilities, $2.5 billion of laborers’ fund liabilities, $9 billion of police fund liabilities, and $3.8 billion of firefighter fund obligations—the city’s first fiscal reporting on the figure based on actuarial reports from its four funds applying GASB’s new calculations for reporting purposes. The GASB changes do not impact funding or the size of the actuarially accrued unfunded liabilities—which were approximately $20 billion at the end of 2014, but as the ever insightful Mr. Ciccarone advises: “It provides a more vivid picture of the unfunded scale and scope of the liabilities and how they weigh down the balance sheet.” And that’s before next year, when the net police and fire figures are projected to worsen as the funds factor in changes recently approved by the Illinois General Assembly delaying a shift to an actuarial required contribution and extending deadline for reaching a 90% funded ratio. Nevertheless, CFO Brown reports Chicago will unveil a municipal employees’ fund fix this summer. Chicago closed out FY2015 with a total fund balance of $215 million, up $65 million from last fiscal year’s $150 million, dedicating a portion to cover operating expenses, such as judgments and union settlements, leaving an unassigned balance of $93 million. In addition, the city was successful in reducing other OPEB unfunded liabilities, primarily through phasing out most retiree healthcare subsidies. Of course, that phase out awaits a pending state constitutional challenge.


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