The day of financial reckoning for Chicago is not far off, with the city budget shortfall expected to near a record $1 billion in 2015 if major changes are not made to the government worker pension systems, city officials said Wednesday.
That stark assessment, contained in the annual financial analysis prepared by Mayor Rahm Emanuel's top budget officials, overshadowed the fact that the city needs to close an expected $339 million budget gap predicted for next year.
"The greatest concern is the growth in 2015 of a $1 billion budget deficit that's being driven by a growing contribution for the police and fire pension funds," said Laurence Msall, president of the nonpartisan Civic Federation budget watchdog group.
Moody's Investors Service recently hit the city with significant bond downgrades, in large part because of the looming pension shortfall. The same dynamic has been grabbing attention in state government for years, and the city is waiting in line for a solution.
The pension time bomb has left City Hall officials fretting less about the budget gap they now face than the one they will have to grapple with next year. This year's budget hole was expected — multimillion-dollar shortfalls have been declared every year at this time for the past decade. The estimate for the 2014 budget is down about $30 million from last year's figure.
To close the immediate budget gap, the mayor will look at ways to save money before considering new taxes, fines or fees, Budget Director Alexandra Holt said. "As the mayor has said, he always wants to start with reforms and efficiencies, and then we have a conversation of what revenue looks like after that," she said.
To fill last year's financial hole, Emanuel relied on an expected uptick in the economy, a lower-cost garbage pickup system and a smorgasbord of new moneymaking ventures including speed cameras, electronic billboard leases and sale of taxicab medallions.
Although the speed cameras and billboard lease have yet to return a dime, the city has seen significant increases in its share of state income taxes, along with steady or increasing sales, natural gas, hotel and real estate transfer taxes. In his first budget, Emanuel pushed through a series of tax and fee hikes, including doubling of city water bills over several years.
The numbers in the new financial analysis indicate that Emanuel has reduced the city's reliance on one-time revenues that became common during the later years of Mayor Richard M. Daley's tenure.
Both Msall and Moody's gave Emanuel credit for bringing expenses in line with the money that's coming in. But revenue increases aren't keeping up with the increased costs of wages, benefits and supplies, Holt said. The city's day-to-day operating costs are expected to near $3.4 billion next year, an increase of about $139 million.
Moody's noted that the city's "unrelenting public safety demands" contribute to those increasing costs. Through May of this year, the city said it spent $42.6 million on police overtime, when $37.9 million was budgeted for the entire year.
Unanticipated costs make crafting a budget as much of an art as a science. That's illustrated by the dramatic costs this year for settling police misconduct lawsuits, which so far have resulted in payouts of more than $54 million — twice what the city set aside.
Some speculate that if Emanuel is going to raise taxes, he'll have to do it in the 2014 budget year, because in 2015 he is expected to run for re-election. Election-year tax increases are anathema among politicians.
Holt discounted that possibility. "My pressure is to find as many reforms and savings as I possibly can, this year or next year or any year," Holt said.
But without a pension overhaul, Emanuel will face a political nightmare.
"It is very difficult to see how the city could possibly close a billion-dollar budget deficit without severe cuts in services and dramatic increases all just to keep up with the pension requirements due to Springfield's inaction," Msall said.