November 01, 2012
On October 31, 2012, the Civic Federation released its analysis of the City of Chicago’s FY2013 proposed budget and President Laurence Msall presented the Federation’s position to City Council at its public hearing.
The Civic Federation supports Mayor Emanuel’s proposed FY2013 budget of nearly $6.5 billion because it is a reasonable continuation of the City’s efforts to reduce its structural deficit through management reforms that focus on expenditure reduction and operational efficiency. With over 80% of the City’s $3.2 billion operating budget reserved for personnel services, the proposed budget puts the City in a better financial position by taking aim at rising personnel-related costs. These initiatives include increased action in healthcare claims management and joint purchasing, work rule adjustments and expanded opportunities for managed competition. The budget also does not include new taxes or fees – though Chicago residents will experience water and sewer rate increases in 2013 as the FY2012 budget’s fee increases are implemented – and eliminates the Employer’s Expense Tax early.
Corporate Fund
In the last ten years, the Corporate Fund (the City’s operating fund for general government services) has increased by $551.8 million to $3.2 billion in FY2013. As noted above, over 80% of the Corporate Fund appropriations are for personnel services, which include salaries and wages and benefits such as healthcare, overtime pay, workers’ compensation and unemployment compensation. Since FY2004, the City’s Corporate Fund workforce has decreased by 4,752 positions to 24,634 positions in FY2012.[1] Meanwhile, appropriations for personnel services in the Corporate Fund have increased by $441.7 million to $2.6 billion in FY2013.
Since FY2004, Corporate Fund revenues, which include local tax, non-tax and intergovernmental revenues such as the State income tax, have increased by $520.1 million, or 21.7%, to $2.9 billion in FY2013. During this ten-year period, local tax revenues have increased by $173.9 million, or 14.5%, and non-tax revenues – which include revenues from licenses, permits, fines, leases and rentals – have increased by $279.5 million, or 40.0%.
Property Taxes
The budget also holds the property tax levy for City government nearly flat at $801.3 million.[2] The last significant increase in the property tax levy was in FY2008, when it was increased by 11.7%, or $83.4 million, to $796.9 million. Since then, the City has incrementally increased the levy in order to capture revenue from expiring tax increment financing (TIF) districts; by $1.1 million to $798.0 million in FY2012 and by $3.3 million to $801.3 million proposed in FY2013. Revenues from the property tax levy pay for the City’s public library system, pension contributions and debt service.
Continuing Financial Challenges for the City
The City will continue to face significant challenges with an ongoing structural deficit as a result of the City’s earlier failures to structurally attack previous budget shortfalls. Repeated use of non-recurring revenue sources in the past, especially the use of principal from the proceeds from long-term asset leases, exacerbated a persistent structural deficit in the annual operating budget and has deferred attention from a looming pension crisis and from sound financial practices including adequate budgetary reserves. The most significant financial challenge the City faces is its enormous unfunded pension liabilities.
Pensions
The City faces a severe pension funding crisis as all four funds’ funding levels dropped significantly for the fourth consecutive year. The Police and Fire pension funds were only 35.6% and 28.3% funded in FY2011 on an actuarial value basis; the funded ratio for the Municipal Fund was 44.6% and the Laborers Fund was 64.9%.[3] The City’s pension crisis has been caused largely by investment losses and consecutive years of contributions that fulfilled statutory requirements, but were insufficient for the level of benefits promised.
Over the past ten years, the unfunded liabilities of the four pension funds combined have grown by $12.6 billion, or 303.9%, to $16.7 billion in FY2011. Pursuant to Public Act 96-1495 enacted in December 2010, which aims to bring the funded ratio of the Police and Fire pension funds to 90% by 2040, the City’s total required pension contribution for all four pension funds will increase from $466.6 million in FY2014 to $1.2 billion in FY2015. However, the 2010 legislation did not change the funding for the Municipal and Laborers’ pension funds, which are scheduled to run out of funds by 2025 and 2028, respectively.
In May 2012, Mayor Emanuel offered a plan to reform pensions for employees of the City of Chicago, Chicago Public Schools and Chicago Park District during a hearing of the Illinois House of Representatives Personnel and Pensions Committee. The Civic Federation is pleased Mayor Emanuel presented a framework for reform, but there is much more work to be done and our State legislature needs more specific encouragement by members of the City Council and the administration to take the necessary actions for the State of Illinois as well as the City’s fiscal stability.
Corporate Fund Reserves
The Civic Federation is deeply concerned that the City has not demonstrated the will or ability to build a Corporate Fund reserve through disciplined execution of a reserve policy that would require it to hold back spending on an annual basis until the target reserve level is reached. The City’s budgetary practices include budgeting all operating surplus from the City’s prior years as an available revenue, instead of building a true fund balance available for contingencies.[4]
Had the City been adequately building budgetary reserves, it may not have had to sell expensive taxable bonds to pay for a tort settlement that is essentially an operating cost. The Federation estimates the total cost of financing the $78.4 million Lewis settlement to be approximately $201.4 million, which includes nearly $123.0 million in interest payments.[5] Rather than adequately budgeting for known tort claims, previous administrations had for many years spent all of its revenues and additionally drained its parking meter asset lease reserves. By borrowing money to pay for the settlement rather than making a one-time payment, the City has compounded the cost of its actions for the taxpayers.
The Civic Federation recommends that the City develop a long-term plan and policy to build up its Corporate Fund reserves as revenues slowly begin to recover. These reserves must be built using discipline and not spending all anticipated revenues. More specifically, the City should establish a Corporate Fund unrestricted fund balance equal to at least 10% of the prior year’s Corporate Fund expenditures. For a complete analysis of the City’s FY2013 proposed budget, including the Civic Federation’s full position and recommendations, see the Federation’s City of Chicago FY2013 Proposed Budget: Analysis and Recommendations.
[1] In FY2013, the City began reporting full-time equivalent (FTE) positions, which include full- and part-time employees, for a more accurate measure of its workforce than position count. With the reporting change, a ten-year trend analysis would not accurately reflect the change in workforce from FY2004 to FY2013. The FY2013 Corporate Fund workforce is projected to be 25,419 FTEs, a decrease of approximately 275 positions from FY2012 approved budget.
[2] The property tax levy is $837.9 million when amounts levied for the City Colleges of Chicago ($36.6 million) are included.
[3] These are funded ratios based on the actuarial value of assets.
[4] The City has included $177 million of prior year Corporate Fund resources as part of its FY2013 available resources to be appropriated. This is a continuation from last year’s practice of appropriating $143 million of prior year Corporate Fund resources.
[5] In May 2012, the City sold nearly $308.0 million in taxable bonds, a part of which will be used to pay for a $78.4 million settlement for the class action lawsuit Lewis v. the City of Chicago. Communication with the City of Chicago, Office of Budget and Management, October 30, 2012.