Chicago Boss Vows No New Taxes After Teacher Strike: Muni Credit

Chicago Mayor Rahm Emanuel
Chicago Mayor Rahm Emanuel plans to unveil his 2013 spending plan next week after pledging to fix the city’s finances without boosting taxes, fines or fees. Photographer: David Paul Morris/Bloomberg

Chicago Mayor Rahm Emanuel is coming to Wall Street to convince skeptical investors he can close a $300 million budget deficit without raising taxes and also narrow a $15 billion pension gap.

Emanuel, 52, a former investment banker and President Barack Obama’s ex-chief of staff, is scheduled to address municipal bond analysts in New York today, more than two weeks after cutting a deal to end the third most-populous U.S. city’s first teacher strike in 25 years.

He plans to unveil his 2013 spending plan next week after pledging to fix the city’s finances without boosting taxes, fines or fees. Some investors doubt that Emanuel, who took office in May 2011, can stick to that promise down the road. The yield penalty on some Chicago general-obligation debt has grown by more than 50 percent since Sept. 19, when students returned to class after the seven-day strike concluded.

“Absent some reform of the benefits that are paid out, a tax increase is just simple math -- it has to occur,” said Shawn O’Leary, senior research analyst in Chicago at Nuveen Asset Management, which oversees about $90 billion in munis. “You can’t cut your way to that kind of balance.”

‘Outsized’ Pressure

Chicago is contending with the same retirement-system challenge as its home-state, which has the nation’s weakest pension-funding ratio. Illinois was downgraded in January by Moody’s Investors Service, which cited “severe pension under-funding.” Its A2 rating, sixth-highest, is the lowest for a U.S. state. Moody’s also cited “outsized pension pressures” in giving Chicago a negative outlook in April.

Nationwide, growing pension liabilities have helped push smaller municipalities such as Stockton, California, and Central Falls, Rhode Island, into bankruptcy. U.S. states and localities face more than $2 trillion in unfunded public-employee retirement costs, Moody’s said in a July report.

Chicago’s four retirement funds face a combined unfunded liability of $14.7 billion, or $5,473 per resident. Without changes to benefits, taxpayer payments toward pensions may almost triple, to $1.2 billion in 2015 from $476 million this year, according to budget documents and the mayor.

Narrower Deficit

Emanuel said last month that the city’s projected 2013 budget deficit had dropped to $298 million from about $370 million. The revision included savings of $23 million in health care and $1 million on unused telephone lines.

The Chicago Public Schools system, which Emanuel runs, has a separate deficit of about $1 billion in 2013.

Chicago’s inspector general, Joseph Ferguson, on Sept. 27 proposed ideas, including spending cuts and tax increases, to raise as much as $1.2 billion. The savings included expanding the sales tax to certain city services, an idea that Emanuel proposed and later dropped during his mayoral campaign.

Part of Emanuel’s dilemma is that the city can’t change the structure of its pensions without state approval. Illinois lawmakers have yet to deal with the state’s own pensions. They failed to advance any measures in a special session Aug. 17 aimed at addressing the funds.

For Emanuel, “the real challenge is the pensions and what they do about them in Springfield,” the state capital, said Laurence Msall, president of the Civic Federation, a Chicago-based research group that follows government finance.

Funding Danger

“He desperately needs the state of Illinois to address pension reform,” Msall said. “The danger of city pensions running out of funds is real.”

Emanuel, who formerly worked as a mergers and acquisitions adviser in the Chicago office of Wasserstein Perella & Co., inherited a city that lost 6.9 percent of its residents from 2000 to 2010 and faced a $600 million budget deficit when he took office.

The mayor plans to address the pension challenge during a presentation he’s scheduled to deliver today to the Municipal Analysts Group of New York, said Kathleen Strand, a spokeswoman for Emanuel.

“Like many cities and states across the country, we have balanced our budgets, invested in what works and reformed what doesn’t, but if we do not address our pension challenges, this work will have been for naught,” he said in an e-mailed comment forwarded by Strand.

‘Reasonable’ Decision

His decision to rule out tax increases is “reasonable,” said Richard Ciccarone, chief research officer at McDonnell Investment Management LLC in Oak Brook, Illinois.

“Knowing that you have to make cutbacks, you start with those first and then you see what you need to fill up with the burden on the taxpayers,” said Ciccarone, whose company oversees about $8 billion in munis. “The slow growth in the nation’s recovery hasn’t blessed them with an easy fix.”

Muni investors are demanding a larger yield penalty on Chicago’s general obligations.

Securities maturing in 2034 traded yesterday at an average yield of 3.34 percent, or 0.70 percentage point more than benchmark AAAs, data compiled by Bloomberg show. That difference was about 0.45 percentage point on Sept. 19. The penalty also widened on bonds maturing in 2017 and 2040.

In muni trading yesterday, 10-year AAAs rallied for a 13th straight day, pushing yields down about 0.01 percentage point to 1.67 percent, a two-month low. It touched 1.63 percent July 27, the lowest since at least January 2009, data compiled by Bloomberg show.

Following are pending sales:

MINNESOTA OFFICE OF HIGHER EDUCATION is set to issue $375 million of revenue debt as soon as next week, according to the preliminary official statement. (Updated Oct. 5)

CITY AND COUNTY OF HONOLULU plans to offer $925 million of tax-exempt debt as soon as this month, data compiled by Bloomberg show. (Added Oct. 4)

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