August 6, 2015
The City of Chicago recently released its Annual Financial Analysis for 2015. According to an executive order issued by Mayor Rahm Emanuel on May 20, 2011, the Office of Budget and Management is mandated to produce a financial analysis of the City budget by July 31st of each year. The report includes:
- A financial condition analysis that covers the previous ten years, including a discussion of key factors impacting the performance of the City’s revenue streams;
- A three-year baseline forecast that describes key assumptions as well as alternative forecasts to show positive and negative variances;
- A reserve analysis that includes the corporate fund reserves and asset lease reserves;
- An analysis of the City’s capital improvement program; and
- An analysis of general debt obligations and long-term liabilities, including pensions.
The analysis includes year-end estimates for FY2015 and projections of the FY2016 initial budget gap as well as gaps for FY2017 and FY2018. The City’s fiscal year runs from January 1 to December 31; therefore, year-end estimates are based upon the experience of the first six months of the fiscal year.
Projected FY2016 Corporate Fund Budget Gap of $232.6 Million
The 2015 Annual Financial Analysis projects a $232.6 million preliminary Corporate Fund budget gap for FY2016. This is the gap the FY2016 budget will need to close through some combination of efficiencies, cuts and revenue increases. The FY2015 year-end estimates show a balanced budget with a surplus of approximately $200,000.
However, the $232.6 million number does not include other expected increases in spending attributed to pensions and additional debt service payments to end “scoop and toss” borrowing that would increase the projected deficit to $425.6 million. This is because most or all of the payments are made outside of the Corporate Fund. It should be noted that the total actual budget deficit for FY2016 could be much higher if increased pension payments to the Police and Fire Funds are included. The City of Chicago makes the budgetary assumption that the statutorily required increase to Chicago Police and Fire Pension Funds will be reduced according to changes included in Senate Bill 0777 and pension reform to the Municipal and Laborers’ Pension Funds will be upheld by the Illinois Supreme Court, even though they were struck down by a Cook County Circuit Court. For more information on the pension contribution changes to the Police and Fire Pension Funds read the Civic Federation’s blog here.
The table below compares the FY2015 adopted budget and the FY2015 year-end estimates with the FY2016 projected budget. Corporate Fund total resources are expected to decline by $71.9 million, or 2.0%, between the FY2015 adopted budget and the FY2016 projected budget primarily due to a reduction in non-tax revenues due to one-time revenues in the FY2015 budget that came from sweeping dormant funds. Corporate fund expenditures are expected to increase by $160.8 million or 4.5% between the FY2015 budget and FY2016 projected budget. Based on current estimates, the City anticipates a decrease in total resources of $72.2 million or 2.0% and an increase of $160.7 million, or 4.5%, in expenditures between the FY2015 year-end estimates and the FY2016 projected budget. According to the City’s analysis, the projected growth in expenditures can largely be attributed to personnel costs.
The next table compares the corporate fund deficit projections presented in the 2014 and 2015 annual financial analyses. The Corporate Fund budget gap for FY2016 is projected to be $232.6 million. This is a decrease of $197.6 million, or 45.9%, from the projected FY2016 deficit of $430.2 million, presented in the 2014 Annual Financial Analysis. Similarly, the projection for the Corporate Fund budget gap for FY2017 has also declined from last year’s estimates, from $587.7 million in the 2014 report to $334.9 million in the 2015 report. The projected budget gap for FY2018 is $436.6 million.
Although the Corporate Fund budget deficit projections for FY2016 through FY2017 decrease in the FY2015 Annual Financial Analysis, the deficit is still projected to increase in FY2017 by $102.3 million, or 30.0%, over FY2016 and in FY2018 by $101.4 million, or 23.0%, over FY2017. Further, as noted above, the projected budget gaps in the report do not take into account pension contributions and debt service payments. The pension reform law passed by the Illinois General Assembly last year, Public Act 98-0641, requires the City to contribute $93.0 million more to the Municipal and Laborer’s Pensions Funds; however, as noted above, the law was found unconstitutional by the Circuit Court of Cook County. The City of Chicago plans to appeal the Circuit Court’s ruling, but if the ruling is upheld, the City would see a budget savings because the new funding schedule that required increased payments could be struck down as well. Total projected pension expenditures from the Corporate Fund for FY2016 are $140.2 million. This is because most pension contributions are made outside the Corporate Fund.
Chicago’s Projected Pension Contributions to Increase Significantly
The City of Chicago contributes to four defined benefit pension plans. The four pension plans include the Municipal Fund, Laborers’ Fund, Policemen’s Fund and Firemen’s Fund. The City of Chicago anticipates that it will contribute a total of $885.7 million to its pension funds in tax levy year 2015 payable in calendar year 2016 assuming the Municipal and Laborers’ pension reforms are upheld and SB777 is signed into law by the Governor. In Cook County, the levy for the current tax year is not collected until following year. In the 2016 tax levy year, the City projects that its total pension contribution will increase to $975.8 million or 10.2%. In tax levy years 2017 and 2018, the City projects that its contribution will increase to $1.1 billion and $1.3 billion, respectively. Between 2015 and 2018, the City’s pension contributions will increase by approximately 32.0%.