Budget Update #3
Increased Revenues, Borrowing
and Property Taxes
Dear Neighbors,

Wedesday's newsletter explained how COVID caused the city's 2021 $1.2 Billion gap. The city proposed $430.9 million in cost-savings measures and $106.3 million in personnel cuts, which eliminated 1800+ positions (5% of the city's workforce), which I support.

Today's newsletter will discuss the options for the remaining budget needs.
Can We Make More Cuts?

Some constituents have contacted me to say that more cuts are needed. As 75% of our budget is personnel, this would mean cutting more city services.

Six hundred million dollars is more than the entire in-house budget of Streets and Sanitation and the Water Department combined. Spreading such cuts throughout the city would require huge cuts to our police and every city service.

Every day my office fields requests from residents, and, unfortunately, there are legitimate complaints that the city has not responded to routine requests within a reasonable amount of time.
Budget in a Snapshot:

$783.2 Million - Declines in Revenue Due to COVID
+ $421.1 Million - Mandated Increases in Spending

= $1.2 Billion - Money Needed to Balance the Budget for 2021

(430.9 Million) - Cost Reductions
($106.3 Million) - Reduced Personnel

= $667.1 Million Needed to Balance the Budget
After deep review of the cuts already proposed in this budget, I've concluded we cannot further cut our way out of the losses caused by COVID. So we must find another way. As you review these difficult decisions, keep in mind that our debts and legal obligations as a city don't change - but our quality of life could change for the worse through a large decline in services and upkeep of our city.

Revenue Increases: One-Time and Long Term

The last time the city faced a similar loss of revenue was in 2008. In response, the city sold the city's parking meters for $1.2 Billion. The city then used all but $100 million for operating cash for the short-term. Had the then-Mayor and City Council leveled with taxpayers and contributed the money to pensions, or raised property tax increase modestly and taken other actions instead of selling the meters, millions of dollars in ballooning liabilities could have been avoided. No wonder taxpayers feel deceived.

In this budget, the one-time revenues are in line with the circumstances.

One-Time Revenues: TIF Surpluses: $33.5 million

The city has many Tax Increment Financing Districts, and they generate substantial revenue that is not available for general use. Since I assumed office, I've co-sponsored the TIF Accountability Ordinance to increase transparency in TIF spending, opposed some TIFs, like Lincoln Yards, and helped cut back the Red Line TIF so that funds can remain in the general budget.

The administration scoured the TIF finances, all of which can now be seen on the City's data portal, and declared the largest surplus ever - $304 million dollars - to help close the budget gap. Chicago will receive $76 million from the surplus, while the public schools receive $176 million, Parks $17 million, City colleges $6 million, Cook County $420 million, MWRD $17 million; and Forest Preserves $2 million.

The city had already included $42.5 of TIF surplus in the budget, so only $33.5 is applied to this calculation

One Time Revenues: Drawing From Reserves: $30 million

Chicago has a reserve fund which is often misleadingly called the "rainy day" fund.

For the last six years, each city budget has added $5 million back to our reserves. To ease the burden of other steps, the city is taking that $30 million to partly fill the gap.

Some aldermen have proposed taking hundreds of millions from our reserves to help our budget this year. But reserves are meant to be -- reserved. If we use our reserves to solve this year's crisis, our credit rating would decline and our costs of borrowing would go way up. Reserves also earn interest. This excellent report from the Civic Federation (pgs. 62-67 and 99-100) explains.

Thirty million dollars taken from reserves can be paid back over a short period of time, but using $100 million or more would be like selling your garage when you run short of money. A government shouldn't use a long term asset to pay in-the-moment needs.

Increase in Gas and Cloud Computing Taxes: $25 million

The city will increase in the cloud computing tax, and will increase the Chicago vehicle gas tax by three cents per gallon. With gas prices currently low, this tax raises revenue and helps discourage (a bit) car travel.

Council had vociferous debate about different proposals: on large businesses, like Amazon (targeting a particular business is unconstitutional), "sin" taxes (they are already very high in Chicago), financial markets transactions conducted over the internet (this should be a federal tax to discourage forum shopping by data heavy businesses), or personal services (which need to be authorized by the State). Chicago has to have the authority to impose any new tax.
Borrowing

Having exhausted other options, only two are left - borrowing money and increasing property taxes.

COVID has created an historically bad situation. The alternative to borrowing is either cutting dramatically more of our government, which would make large portions of our government non-functional, or raising property taxes by a $950 Million dollars.

The city needs almost a billion dollars, not $500 million, because COVID has resulted in a drop of $800 million in 2020 revenues since March. The city still needs $450 million dollars to pay for the 2020 budget.
Budget in a Snapshot:

$783.2 Million - Declines in Revenue Due to COVID
+ $421.1 Million - Mandated Increases in Spending

= $1.2 Billion - Money Needed to Balance the Budget for 2021
(430.9 Million) - Cost Reductions
($106.3 Million) - Reduced Personnel
(88.5 Million) - One-time revenue and new taxes

= $578.6 Million Needed to Balance the Budget
As interest rates are quite low, the city can refinance or restructure about $1.7 Billion in existing debt for savings or to stretch out the payments. Refunding for savings is simply swapping one loan for another at a lower interest rate, like refinancing your mortgage.

Restructuring is dicier. This practice has become known as "scoop" and "toss" -- scooping up a bunch of loans and tossing their due dates farther out into the future to lower the annual cost, but paying out much more cash over the long haul. "Scoop and toss" apparently was a routine undisclosed practice during the Daley years. After a Chicago Tribune expose in 2013, Mayor Emanuel promised to end the practice, which he did, in his last budget.

When the city issues these new bonds, the cash it receives will be used to help close the budget gaps: $450 million for 2020, and about $500 million for 2021.

My skepticism was somewhat relieved by witnessing how frank the administration has been in proposing these proposed transactions. Here is a chart explaining how they work and showing the stream of payments into the future.

There is risk in the restructurings - interest rates may be less favorable. But even the conservative Civic Federation concluded that "the city does not have a lot of good options," so long as the transactions are conducted transparently.

Should we borrow $100 million more to avoid a direct property tax increase? I believe the answer should be no. Frankly, I wish we could borrow less. The administration has said that should federal relief arrive with few restrictions, they will cut back the restructurings as much as possible. I support this borrowing based on that representation.

Property Tax Increase - $77.9 million

Which leads us to the proposed property tax increase, the last resort of any budget. I have voted against property tax increases when I've not been convinced they were absolutely necessary and pledged not to support them.

But these are extraordinary times. No one could have predicted that COVID would upend our lives, decimate our economy, and threaten to seriously damage the viability of this city.

As we analyzed the budget, and aldermen questioned department heads, we learned that the cost of cutting our budget another $100 million was very high. To save $100 million would involve laying off 1400 people: perhaps 840 employees from public safety and the rest from every other department. Do we want that to reduce our police presence and city services that much more?

As we consider our choices, let's examine exactly what is on the table:

Property taxpayers (homeowners and commercial properties) would be paying a total of $77.9 million comprised of 1) an increase of $35.4 million based on the 2019 Consumer Price Index rate of 2.3%; and 2) $42.5 million in “loss in collections."

The "loss in collections" is required because the Chicago must make the entire actuarial contribution for pensions, even if the city does not collect 100% of the levy. In general, the city collects 96% of its levy, and then it has to pursue people who don't or can't pay. The prior administration did not make the full payments, which led to the state withholding the funds from state grants.

Sixteen million dollars of the increase is attributable to the expansion of our tax base from new development and expiring TIF districts, and would not apply to existing property owners. These three elements comprise a total $93.9 million increase in the tax levy.

According to the city, this property tax increase, which would be billed for the first time in 2022, would equal 1.3% of our current tax bills. Please review the City's calculations and an explanation of how property taxes are imposed in the documents found at these links.

If we simply borrowed more money, that cost would also fall on property taxpayers and in fact, the increase would, in the long run cost us more. By not borrowing money and simply paying directly for our bills, we also avoid interest costs.

As I have said, until we can conquer pension reform, "we face an important quality of life issue: do we simply cut back our government so that we can't have basic constituent service or police? Or do we find ways to fund the government we want and plan for a recovery from this pandemic?" This is why, after much deliberation, in the face of an extraordinary time, I will support this budget.

Finally, many of you have heard in the news that the city has agreed to borrow more, $25 million to avoid 350 layoffs. This would not have been my first choice. However, we also learned that when the pandemic hit, hundreds of city workers changed their assignments to work at scheduling tests, setting up facilities, getting food to the homeless and seniors, and setting up the myriad of things needed to combat the pandemic, while others continued to pick up the trash, repair streets and sewers, all while the pandemic was uncertain and scary. During the unrest in our city, many Water Department and Streets and Sanitation workers were pressed into service to man trucks blocking intersections during protests, and later looting.

As stewards of this community, and with love and care towards this city and its residents, I believe it is our duty to come together and weigh the impact of this tax increase against the degradation of our quality of life in this city if we don't.
Stay safe,






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