Next Mayor Will Face Tough Decisions to Solve Financial Mess

Friday, September 10, 2010

Everybody who is anybody in Chicago politics has been mentioned as a possible replacement for Mayor Richard M. Daley after his shocking retirement announcement this week. But rather than pondering their chances, potential candidates might take a good look at City Hall’s balance sheet and ask themselves another question: Who would want to deal with this mess?

His privatization deal for the city’s parking meters, though criticized, brought in more than $1 billion for the city.

City Hall’s budget of about $6 billion is hundreds of millions of dollars short every year. Allies and critics of the outgoing mayor agree that there is no simple and politically palatable solution to the budget deficit, which is estimated to hit a record $655 million for 2011.

The new mayor will have to raise taxes and cut services, said Alderman Edward Burke (14th Ward), the chairman of the City Council’s Finance Committee and one of the many local politicians who have not ruled out a mayoral run.

“Not only have we run out of rabbits, we have run out of hats,” Mr. Burke said.

Mr. Daley was largely able to avoid those tough choices in recent years because he balanced his budgets with proceeds from the long-term privatization deals for the Chicago Skyway and the city’s parking-meter system, which together generated more than $3 billion.

Mr. Burke said he expected that Mr. Daley’s final budget, which administration officials will propose in early October for 2011, would drain what remained of the revenues from those deals.

“I think it is pretty obvious that there is no other choice,” he said.

William Beavers, a Cook County Board commissioner who was chairman of the council’s Budget Committee from 2001 to 2006, said, “They just about sold everything they could sell, so the next mayor is going to catch hell.”

Some observers said that making the necessary cuts or tax increases would doom Mr. Daley’s successor to a much shorter tenure than the mayor’s 21-year run.

The city’s financial state will be “the overarching issue of the mayoral race,” said Jerry Morrison, the Illinois political director for the Service Employees International Union, the top political campaign donor in the state.

“If you want to talk about crime in many communities, we are short 2,000 officers, and hiring more means money,” Mr. Morrison said. “If you want to talk about education, there is a deficit at the Chicago Public Schools, and that means money.”

Mr. Daley carefully crafted an image as the chief executive of a city government that operated like a corporation. As the city’s finances soured, he and his aides blamed the general economic downturn for the budget woes. In recent weeks, the mayor repeatedly asserted that Chicago was doing better financially than the state or federal government and other major American cities.

The city’s credit rating was downgraded last month by Fitch agency analysts, who noted that Chicago’s government has been living beyond its means for years. The Wall Street analysts pointed out that the city began drawing on its reserves in 2006 and 2007, before the economy went into recession.

Gene Saffold, Mr. Daley’s chief financial officer, explained the credit downgrade by saying Chicago’s bond rating was still no lower than that of New York or Los Angeles.

But the analysts gave Chicago a “negative” financial outlook while rating New York and Los Angeles as “stable.” New York has saved enough money to offset its 2011 budget shortfall, along with spending cuts, a rollback of property tax cuts and conservative revenue projections, according to the Fitch analysts.

They also noted that New York’s pensions were “well funded.” Chicago’s are badly underfunded, and no major reforms have been enacted, although Mr. Daley formed a commission to address the issue.

Moreover, while New York generated and saved budget surpluses in the economic boom, the Daley administration did not build nearly as large a cushion into its budgets as government finance experts recommend.

Chicago’s budget hole in 2012 is likely to be at least as large as the projected record deficit for 2011, said Dana Levenson, who was Mr. Daley’s chief financial officer from 2004 to 2007.

“I don’t think many of the people who want the job now are thinking about it,” Mr. Levenson said of the mushrooming ranks of mayoral hopefuls.

In recent years, Mr. Daley refrained from raising property taxes and relied heavily on revenues that rise and fall with the general economy, including the tax on real- estate sales.

Even though the problems are worsened by the poor economy, experts speak of a structural deficit facing Chicago. The city’s costs are rising faster than inflation, at a time when revenues are dropping.

Costs are high in part because the mayor entered into a 10-year deal in 2007 with major unions representing city employees. The agreement promised attractive wage increases and benefits for blue-collar city workers like garbage collectors, snow plow drivers and hoisting engineers.

Unions representing city employees have agreed to forgo wage increases this year and to take as many as 24 unpaid furlough days, which amount to a 9 percent pay cut. But there is no guarantee that labor leaders will agree to those concessions as part of the city’s 2011 fiscal plans or to help balance the next mayor’s budgets.

Personnel costs make up 80 percent of the city’s budget, and most of that money goes toward paying police and firefighters. That severely limits the city’s ability to address the budget deficit without sharp cuts in public-safety services.

For instance, firefighters are paid $65,000 to $82,000 a year, while garbage-truck drivers receive an hourly wage of $32.95, which works out to almost $70,000 a year before the furlough days.

Worker wages rose because officials wanted to offer pay that is competitive with the private sector’s, said Alderman Helen Shiller (46th Ward), who is not seeking re-election after more than 20 years in office.

“The problem is really the employee costs,” Ms. Shiller said. “There was a real attempt in the 1980s and 1990s to meet the market rate for the different jobs that we had, and we were a little schizophrenic about it. On the one hand, we said we had to be competitive. On the other, why are we paying so much for these people?”

One option is to tap the huge reserves in the mayor’s tax increment financing accounts, a development tool relying on tax dollars that would otherwise go to schools, parks and other units of local government. Derided by some critics as a mayoral “slush fund” for real- estate developers, the accounts have accumulated about $500 million a year. Mr. Daley has long defended the program as crucial to encouraging economic development, but he recently said he would consider draining the accounts to help bring down the deficit.

“That’s not really a silver bullet,” said Mr. Burke, the finance committee chairman.

By state law, only about 20 percent of the money taken from the accounts could directly aid city finances, with the rest going to schools and parks after all.

Despite carrying an already heavy debt load, aldermen this week approved Mr. Daley’s plan to borrow $1 billion to continue expanding O’Hare International Airport.

Bill Abolt, the budget director for Mr. Daley from 2002 to 2004, said that avoiding deficits would require a new mayor willing to do what has been unthinkable at City Hall for years: privatizing garbage collection, gradually raising property taxes and focusing a smaller police force more intensely on high-crime neighborhoods.

“You simply cannot maintain Mayor Daley’s vision with the current sources of revenue,” Mr. Abolt said. “The money is not there for the services and the capital projects that the mayor was delivering. It just doesn’t add up.”