Protecting Proceeds From Long-Term Asset Leases

November 19, 2009

In two previous blog posts [here and here] the Civic Federation discussed the City of Chicago’s use of asset lease proceeds from its 99 year leases of the Chicago Skyway and the City’s parking meters. In sum, the City has set aside $900.0 million in long-term reserve accounts using proceeds from both the Skyway and parking meter leases. The City set aside an additional $1,226.4 million of asset lease proceeds from the Skyway and parking meter leases to fund operating expenses between FY2005 and FY2012.

The Civic Federation believes that asset lease funds should not be used for operating expenses. Instead, they should be primarily dedicated to retiring debt, making long-term capital investments and creating substantial long-term reserve accounts. Operating expenses should be paid out of the interest earned on the long-term reserves as a replacement for the revenues that were originally generated by the assets before they were taken off of the City’s books.

However, understanding that emergencies arise, the Civic Federation recommends that the City create a policy to dictate when it may decrease the principal of asset lease reserve funds. The policy should articulate both the situations under which the reserves should be drawn down and how much can be withdrawn from the reserve fund.

The Civic Federation recommends that the City adhere to the following policy when looking to decrease the principal of asset lease reserve funds:

1) The City shall be authorized to use principal from long-term reserve funds for operating expenses if the following three elements exist:

a. A combined decrease in corporate fund sales, income, personal property replacement, real estate transfer, hotel and amusement tax revenues that exceeds 5.0% between the prior year-end estimates and the City’s annual preliminary budget revenue forecasts;1

b. A budget deficit that exceeds 10.0% of the projected Corporate Fund appropriations in the City’s annual preliminary budget estimates; and

c. A declaration of a nationwide economic recession by the National Bureau of Economic Research within the previous nine months from July 31.

2) If City Council approves by a simple majority vote a submission by the Mayor of Chicago that all three elements exist, then:

a. The City may use long-term asset lease proceeds to reduce only the amount of corporate fund revenue projected to decline between year-end estimates and proposed budget forecasts for the upcoming fiscal year.

In its FY2010 Preliminary Budget Estimates, the City projected that FY2010 projected sales, use, income and personal property replacement tax revenues would fall by 9.4% over FY2009 year-end estimates.2 In the FY2010 Preliminary Budget Estimates, the City predicted that its budget deficit would total 15.7% of its projected FY2010 corporate fund expenditures. Finally, according to the National Bureau of Economic Research, which announced its finding in December of 2008, the current recession began in December of 2007.3

Given the above policy statement, the Federation supports the City’s use of a portion of the long-term reserves to help bridge its FY2010 budget deficit, but we do not support the degree to which the City is drawing down on the revenues.

The City is proposing to use $370 million of the proceeds from the parking meter lease in FY2010, including $20 million required to offset 2009-2010 interest earning shortfalls, to close its $520 million deficit. The Civic Federation recommends that the City use only $93.1 million in long-term lease assets, which is the corporate fund revenue decrease the City forecasts in its FY2010 budget.4 Using the full $370 million is not sound fiscal policy as the City is taking a large portion of reserve funds that are supposed to last the entire life of parking meter lease, or 99 years.

To read the Federation’s full analysis of the proposed FY2010 City of Chicago budget, click here.

To read the Civic Federation’s issue brief on Alternative Service Delivery (another name for asset leases and privatization generally), click here.

1. The City of Chicago defines economically sensitive revenues as sales, income, personal property replacement, real estate transfer, hotel and amusement taxes. $93.1 million is the combined projected decline of these revenue sources.

2. See City of Chicago FY2010 Overview and Revenue Estimates, pp. 111-112.

3. National Bureau of Economic Research website at http://www.nber.org/ (last visited on November 12, 2009).

4. City of Chicago FY2010 Overview and Revenue Estimates, p. 2.