March 28--Mayor Rahm Emanuel has reduced spending and increased fines, fees and certain taxes to shrink the chronic budget deficits left over from his predecessor, Richard M. Daley.
But four years after taking office, Emanuel still at times resorts to Daley's questionable budget tactics as the mayor struggles to manage the debt he inherited without raising property taxes.
Documents show the mayor has used long-term bonds to put off paying $235 million for short-lived expenditures -- and is making plans to borrow up to $255 million more to postpone payment of new bills coming due.
Many of those new bills, $170 million worth, are principal payments on bonds issued years ago. Finance officials said they expect to use the city's short-term borrowing authority, akin to a city credit card, to make the payments by mid-April -- then issue another long-term bond to pay off the credit.
The remaining $85 million in bills, which stem overwhelmingly from Daley's failed Olympic bid, his privatization of the city's parking meters and other Daley-era deals, has already been paid with credit. Finance officials said they may repay that credit with long-term bonds as well -- though they said it would be a last resort.
Their strategy buys immediate relief, but deferring bills costs more over the long run -- and saddles future taxpayers with the extra expense.
The alternative -- paying the bills with operating revenues -- would require painful tax hikes, officials said in statements and interviews. About 16 percent of the city's $7.3 billion budget already goes to debt payments, squeezing funding for core services like public safety.
Chicago's difficulties "can't be reversed overnight," city spokeswoman Kelley Quinn said in a statement, repeating a common refrain of the mayor's. "It took decades to build the mountain of debt and substantial structural budget deficit that Mayor Emanuel inherited."
As the city heads into a mayoral runoff, Emanuel's continued reliance on borrowing for short-term costs offers a sobering reminder of the long shadow Daley's buy now, pay later budgeting strategy has cast over city finances.
How well the mayor has handled that challenge has become a subject of debate as Emanuel prepares to face challenger Jesus "Chuy" Garcia in the April 7 runoff election.
Through cost cuts, revenue hikes and steps to streamline City Hall, Emanuel has reduced the city's budget deficit and slightly increased reserves.
But he's struggled to pay off debt as it comes due, extricate the city from complex Daley-era financial deals known as derivatives, pay off land purchased in connection with Daley's 2016 Olympics bid and cover legal settlements related to police conduct during Daley's 22-year tenure.
The Emanuel administration laid out details of past and future borrowing this month in filings and in response to Tribune questions after Moody's Investors Service downgraded the city's debt rating in February to two notches above junk status.
Garcia has cited the decision by Moody's and a recent downgrade of Chicago Public Schools as signs of poor financial stewardship. Emanuel points to his success in shrinking the city budget deficit and contends he's better prepared to guide the city through its financial problems.
Emanuel's financial strategy to date has relied in part on the city's short-term borrowing authority, which takes the form of either a line of credit arranged with a bank or short-term loans known as commercial paper. The city pays $5 million a year -- plus interest on any outstanding short-term debt -- to maintain access to that credit.
Though Emanuel has issued far less long-term debt than Daley did in his final term, the mayor has twice increased the limit on how much short-term debt the city can have outstanding, raising the ceiling from $200 million to $1 billion.
Cities typically use this type of short-term borrowing to tide them over for a few months until revenues, such as property taxes, come in. That's how Emanuel will repay $205 million in outstanding credit that he used to cover costs like back pay for police and running the library system, finance officials said.
But unlike New York City, Houston or even cash-strapped Philadelphia, Chicago also uses taxable 30-year bonds to pay off short-term credit.
The fact that Chicago uses expensive, taxable bonds for that purpose is an acknowledgment of sorts that the costs covered by the short-term credit do not benefit the taxpayers who will repay the debt in the future.
Cities are allowed to borrow at much cheaper tax-exempt rates to fund projects that have some long-term use, such as a bridge or a school.
The $235 million in long-term taxable debt that the Emanuel administration has already used to pay back short-term borrowing is 23 percent more than the $191 million used that way during Daley's last term.
Emanuel is "trying to hang on while he's adjusting other parts of the city's spending habit," said Michael Pagano, dean of the University of Illinois at Chicago's College of Urban Planning and Public Affairs. But credit will not solve the problems Emanuel inherited, he said.
"These are -- I wouldn't say Band-Aids because that usually means the wound is going to heal," Pagano said. "These are short-term bridges to get us to some other point, to some other long-term solution. 'What will that solution be?' is the question."
The $235 million that Emanuel converted to taxable bonds includes $86 million that was already on credit when Emanuel took office in 2011, finance officials said. They said Daley had used the credit to cover retroactive pay increases after contract negotiations with firefighters.
The remainder included more than $100 million for legal settlements related to police conduct under Daley and a 2013 payment to the company that now holds the lease on the city's parking meters.
Because Daley underestimated how often disabled drivers would park in metered spaces for free, the city now must compensate the parking meter company annually for lost revenue. A state law change will drastically reduce that cost beginning this year, but the city has paid about $20 million for the past few years.
Chicago's debt management policy says "long-term debt will not be used to fund city operations." City finance officials said they don't consider costs like legal settlements or even the annual payments for disabled parking to be operating expenses, referring to them instead as "legacy costs."
Craig Johnson, an associate professor at Indiana University's School of Public and Environmental Affairs, said a government unable to cover such costs with revenues should make lasting changes, such as raising taxes or cutting services.
Paying those bills with short-term credit and taxable bonds simply delays those changes, racking up interest costs in the process, he said. For example, Chicagoans will pay 30 years worth of interest -- at a rate of 6.3 percent -- on legal settlements paid out in 2013.
"You're turning a short-term problem into a long-term budgetary problem," Johnson said.
Emanuel's mayoral campaign has said he views a property tax increase as "the very last resort."
A "last resort" is also how city finance officials described the idea of using taxable bonds to repay the $85 million in outstanding credit from the Olympic bid and other expenses. But they said they have not ruled out the possibility.
The city's outstanding debt includes more than $20 million in interest on a loan used to buy the site of the former Michael Reese Hospital as the potential location of an Olympic Village, $18.5 million for the 2014 disabled parking payment and more than $40 million in 2013 to terminate burdensome Daley-era derivative deals known as interest rate swaps. Ending the deals brought an end to costly annual payments but required the city to pay out the full value of decadeslong contracts.
The finance department expects to use taxable debt to repay $170 million in credit used to cover upcoming bond payments, a strategy analysts have nicknamed "scoop and toss" because it scoops up today's debt and tosses it -- plus interest -- into the future. Emanuel's finance department is committed to ending the practice of scoop and toss by 2019, officials said.
The appeal of short-term credit will likely continue to grow as the city prepares to face what may be the most burdensome liability the Emanuel administration inherited. After years of underfunding, the city's pension payment, which is $557 million for 2015, is expected to more than double next year.
Neither candidate has laid out a solution that doesn't involve action by the General Assembly, which is not assured. Emanuel's finance department said it will not put the expected $600 million pension increase on short-term credit.
But having hundreds of millions of dollars in credit available to cover other city costs could help free up room in the budget for pension costs, said Richard Ciccarone, president and CEO of the municipal bond analysis firm Merritt Research Services.
"The city is between a rock and a hard place," he said. "They've got to have the flexibility to deal with the many issues in front of them, including the requirement to come up with the money and the pressure to not raise taxes."
(c)2015 the Chicago Tribune
Visit the Chicago Tribune at www.chicagotribune.com
Distributed by Tribune Content Agency, LLC
© Tribune Content Agency, source Regional News