October 3, 2013
Over the next few weeks, many Chicago-area local governments will be releasing their proposed budgets for fiscal year 2014. In preparation for the upcoming budget releases, this blog will recap the Civic Federation’s significant observations from our analyses of local governments’ proposed FY2013 budgets. The governments studied by the Civic Federation include: the City Colleges of Chicago and Chicago Public Schools (CPS) which have already released their FY2014 budgets, City of Chicago, Cook County, Chicago Transit Authority (CTA), Forest Preserve District of Cook County, Metropolitan Water Reclamation District of Greater Chicago (MWRD) and Chicago Park District.
Last year, funded ratios for government employee pension funds declined for each of the seven governments with their own pension funds: CPS, City of Chicago, Cook County, CTA, Forest Preserve District of Cook County, MWRD and the Park District. These governments face enormous unfunded pension liabilities. In FY2015 the City faces a $700 million increase in contributions to its four pension funds. The increase would require nearly doubling the property tax levy, which was approximately $801.3 million in FY2013, in order to maintain services at the same level. Only MWRD has proposed a change to employee and employer funding of its pensions and gotten it passed by the Illinois General Assembly so far.
Last year, five of seven governments held their property tax levies flat or relatively flat. CPS increased its levy to the maximum amount allowable by law, which it repeated for FY2014. MWRD raised its non-capped property tax levy, but kept its capped property tax levy flat. City Colleges of Chicago kept its FY2014 levy flat.
Three of seven governments met the Government Finance Officers’ Association (GFOA) recommendation of maintaining a General Fund fund balance of at least 17% of operating expenses at the end of FY2011. These governments were the Chicago Park District, Forest Preserve District and MWRD. The other governments maintained fund balances of over 10.0%. However, CPS proposed draining all of its reserves in FY2013 and FY2014 in order to balance its budgets. For the past few years, the City has also developed a pattern of using Corporate Fund fund balance as appropriable resources. The FY2013 budget included an appropriation of $133.0 million of fund balance to help close the budget gap, leaving approximately $33.4 million in unrestricted, unassigned fund balance. Having a healthy level of budgetary reserves is imperative to managing a government’s risk effectively. Reserves are useful when a government faces unexpected events, such as a costly snowstorm.
What to Watch for in FY2014
The City of Chicago and Cook County have estimated preliminary budget gaps of $338.7 million and $132.9 million, respectively. This year, CPS was forced to close a $977.0 million budget deficit with layoffs, cutting central office spending and the draining of reserves. These deficits indicate that despite recent spending cuts and layoffs, local governments continue to struggle with ongoing structural deficits. In addition, these governments face growing bonded indebtedness and enormous unfunded pension liabilities, as evident from their pension funds’ declining funded ratios.
According to media reports, the City will not increase property or sales taxes to close the FY2014 deficit. Similarly, the County is reportedly not planning any tax or fee hikes. The City’s 2013 Annual Financial Analysis indicated that the City will end FY2013 with a $0.7 million surplus. The slight bump will add to the City’s $33.4 million of budgetary reserves, but will not bring the Corporate Fund fund balance to the GFOA’s recommended 17%.
The City and County, as well as other local governments and agencies in the area, face enormous challenges to balance their FY2014 budgets as expenditure pressures grow faster than revenues in the aftermath of the Great Recession. In addition to its current fiscal challenges, the City faces a $700 million spike in its statutory pension contributions in FY2015, increasing its estimated budget gap for FY2015 to $1.0 billion.
It is clear that Chicago-area governments need to develop comprehensive plans to stabilize their finances and set them on a more financially sustainable path moving forward. The Civic Federation believes that an effective long-term financial planning process must include the identification of possible actions and scenarios to address identified future fiscal challenges. Possible scenarios, strategies, actions and priorities need to address financial imbalances and other long-term issues, including personnel costs, indebtedness and capital and infrastructure needs. Sufficient stakeholder participation is needed to provide meaningful input on a long-term financial strategy to address the City’s financial challenges.
Finally, the pension funding crisis demands immediate attention by all elected officials in the Chicago area and the Illinois General Assembly. Without comprehensive pension reform, some local governments will be forced to make drastic cuts to essential government services, raise taxes to unsustainable levels or some combination while others will see their pension funds continue to decline, depriving public employees of viable retirement systems.