Chicago Projects Smallest Budget Gap Since 2008 at $297 Million

Chicago is projecting the smallest budget gap since 2008 even as it forecasts that the deficit will almost double by 2017 amid growing pension obligations.

The outlook for the third-largest U.S. city, released with an annual report, forecasts a 2015 deficit of $297.3 million, $100 million less than projected a year earlier after the city reformed two of its four pension funds. That shortfall will rise to $587.7 million by 2017, and that gap doesn’t include obligations to Chicago’s two underfunded retirement funds.

“By making the tough but necessary choices over the past three years, we are able to continue chipping away,” Mayor Rahm Emanuel said in an e-mailed statement today. “While a $297 million budget shortfall is substantial, we are making progress in righting the city’s financial ship.”

Chicago found a partial solution in June to address the $19.2 billion shortfall across its four retirement funds when the Illinois legislature restructured two of the systems, which had a combined $9.4 billion in unfunded liabilities for about 60,000 municipal workers and retirees.

The liabilities were the main reason behind Moody’s Investors Service’s downgrade of Chicago’s debt in March to Baa1, three steps above junk, citing the threat to the city’s fiscal solvency.

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The risks intensified July 3 when the Illinois Supreme Court ruled the state constitution prevents the reduction of contributions to retiree health care. A week later, Moody’s said the decision was “credit negative” for the state and the city as the plan that lawmakers approved to stabilize pensions relies on benefit cuts.

Chicago’s revenue is projected to drop about 1 percent to $3.22 billion in 2015, partly due to a decline in utility payments, today’s report said, citing a return to more normal weather after severe conditions in 2014. Expenses are seen rising by about $260 million to $3.52 billion because of higher salaries and wages from collective-bargaining agreements.

Still, the 2015 budget gap is less than half what was projected three years ago thanks to the recovering economy, the renegotiation of major contractual costs and cuts in health-care expenses, the report said. Plus the city’s transition to a grid-based garbage-collection system completed in April 2013 saves about $18 million a year, according to the report.

Emanuel plans to present next year’s budget to the city council in October.

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Stacie Sherman

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