City Releases 2013 Annual Financial Analysis: Faces $338.7 Million FY2014 Budget Gap, $1.0 Billion FY2015 Budget Gap

August 08, 2013

Last week the City of Chicago released its Annual Financial Analysis for 2013. According to an executive order issued by Mayor Emanuel on May 20, 2011, the Office of Budget and Management is mandated to produce a financial analysis of the City budget by July 31st of each year. The report includes year-end estimates for the current fiscal year (which ends on December 31) and revenue and expenditure estimates for FY2014. For more information on what is included in the annual reports, see the Civic Federation’s previous blog.

Projected FY2014 Budget Gap of $338.7 Million

The 2013 Annual Financial Analysis projects a $338.7 million budget gap for FY2014. With FY2013 year-end estimates showing a relatively balanced budget – there is a slight surplus of $0.7 million – the FY2014 deficit is largely driven by the assumption that the City will not use fund balance from prior years as a source of revenue to meet growing spending needs. Last year, the City appropriated $177.0 million in fund balance to be used as resources for the FY2013 operating budget.

As the table below shows, the City anticipates an increase of $138.6 million, or 4.3%, in expenditures. According to the report, the projected growth can be attributed to increases in salaries and wages under collective bargaining agreements, higher fuel expenses tied to gas prices, and costs associated with the FY2014 election cycle and the first full year of citywide Blue Cart recycling.

Resources will fall by $200.8 million, or 6.2%, but the majority of that decline is because the projection assumes that the City will not carry over fund balance from FY2013. Recurring revenues, which don’t include fund balance or other transfers in, are projected to decline by $23.8 million. According to the City’s budget staff, part of the decline is due to a bump in FY2013 revenues when the City received an extra month’s payment of income tax distributions from the State, resulting in a $13.0 million decline in FY2014. The City also projects a $13.8 million decline in personal property replacement tax (PPRT) revenues because the FY2013 year-end estimate includes a one-time surge in these revenues generated from businesses selling assets or distributing early dividends and bonuses in anticipation of higher federal tax rates for tax year 2013.[1] 

As noted above, the City’s projections assume that no fund balance will be carried over from FY2013 to help balance the FY2014 budget. The City may not have a significant amount of budgetary reserves from which to draw. According to the City’s audited financial statement, the City had approximately $210.4 million of unrestricted Corporate Fund fund balance at the end of FY2012, the most recent year for which audited data is available. This includes $177.0 million of assigned fund balance to be appropriated in FY2013 per the FY2013 approved budget. That would leave approximately $33.4 million of unrestricted, unassigned fund balance at the end of FY2012, in addition to the $0.7 million of surplus in FY2013.

Even if the City plans to deplete the $34.1 million of budgetary reserves that will likely be available at the end of FY2013, a significant budget gap will remain and the City will likely need to employ a combination of revenue increases and expenditure cuts to close the shortfall. A complete depletion of the City’s budgetary reserves would leave nothing for contingencies such as judgments against the City or severe snowstorms.

Projected FY2015 Budget Gap of $1.0 Billion

For the past few years, the City has anticipated a significant increase in the projected budget deficit for FY2015. The driver of the budget gap is a $590.5 million increase in the City’s required contribution to its pension funds. Legislation passed in 2010 by the Illinois General Assembly requires the City to fund its Police and Fire Pension Funds at an actuarially-determined level that is sufficient to bring their funded ratios to 90% by the end of 2040. This funding change, even without any requirement to fully fund the City’s other two pension funds – the Laborers’ or Municipal Funds – will cause the City’s total required contributions to grow from an anticipated $479.5 million in 2013 to $1.07 billion in 2015 and increase steadily to $1.26 billion in 2020. The current funding levels for the City’s four pension funds are below, along with comparisons to funding levels ten years ago.

The City’s increasing pension liabilities have already had an impact on the City’s budget. Property tax revenues have not flowed into the Corporate Fund, the fund the City uses to pay for general operations, since FY2004. PPRT revenues have also been crowded out of the Corporate Fund since an increasing portion of receipts have been diverted toward pension payments rather than government services.[2]

Finally, although the Police and Fire Funds are on a path toward adequate funding levels, without reform of the Municipal and Laborers’ Funds, those two pension funds will be bankrupt by 2030 and 2031, respectively.

 [1] Communication with City of Chicago budget staff, July 31, 2013.

[2] See pages 10 and 17 of the City of Chicago's Annual Financial Analysis 2013.