Faced with a $550 million deficit for its 2010 budget, the City of Chicago is looking to cushion the blow by tapping into some of the nearly $1 billion it saved from auctioning infrastructure assets over the years, a proposal fueling heated debate in the city about how and when – if ever – such reserves should be spent.
“It would be very beneficial if we had a formal policy on when we drew down those reserves,” Laurence Msall, president of Chicago’s Civic Federation, told the city council’s finance committee at a hearing today. “The use of the reserves should be viewed as an extreme event,” he added, urging the 50 members of the city council to reject the budget proposal.
“If 26 of us vote ‘no’, we have no budget for next year,” alderman Ed Burke, chairman of the city council’s finance committee, responded.
Daley: under pressure to
The debate, streamed live on the finance committee website, illustrates the difficult choices facing many US cities. Unlike the federal government, which can run deficits from one fiscal year to the next, local governments are legally required to balance their annual budgets. This leaves many of them with two difficult choices: either raise taxes or cut essential services like police and fire protection.
In Chicago, Mayor Richard Daley is trying hard to avoid either option. His solution involves balancing the 2010 budget in part by taking $270 million from permanent reserves the city built up by leasing-out its infrastructure assets to the highest bidder.
We always viewed this as a rainy day fund . . . and it's raining like hell out there
The reserves are made up of $400 million the city set aside earlier this year after it received $1.16 billion from Morgan Stanley Infrastructure Partners for a 75-year lease of its parking meter system. The reserves also contain $500 million from the city’s 99-year lease of the Chicago Skyway, which has been appreciating in interest since the $1.83 billion deal closed in 2005.
Specifically, Daley wants to take the $270 million from the parking meter reserve portion of the fund. The Skyway funds would be left intact, Daley said. An additional $100 million would come from another reserve fund set aside from the parking meters deal, which the city can draw down on over several years to stabilise its budgets.
Sources and uses of funds for the Chicago Skyway deal – all amounts in USD millions.
Daley said in a statement that the plan is a “responsible budget for tough times”. But many city council members disagree.
“A lot of aldermen are struggling with considering, with even thinking of using any dollars from the long term reserve fund to balance the budget. Many of us believe that money should not be used,” said Manuel Flores, alderman for Chicago’s First Ward. The money, Flores added, belongs “not just to the current generation” but “future Chicagoans as well”.
So long as the reserves stay on deposit with the city’s bankers, Chicago derives ongoing annual interest income approximately equal to the excess revenue the city was earning from the assets prior to leasing them, explains Joseph Seliga of Mayer Brown, Chicago’s legal advisor on the Skyway deal.
For example, prior to leasing the Skyway, the city derived about $25 million a year in net income from operating the 7.8-mile toll bridge. Keeping $500 million on deposit with the city’s bankers at a 5 percent interest rate, the city gains approximately $25 million a year in interest, which it can have available in perpetuity. The city followed the same strategy with the $400 million in reserves from the parking meters.
So if the principal is drawn down, that leaves less interest income each year – income which the city has been using to fund general operating expenses.
Sources and uses of funds for parking meters deal – all amounts in USD millions.
Not everyone is opposed to drawing down the reserves. Among the Chicago business community, some have resigned themselves to the necessity of doing so amid such a difficult economic environment.
“We always viewed this as a rainy day fund,” Gerald Roper, president of the Chicagoland Chamber of Commerce, said in an interview. “And it’s raining like hell out there.” So the chamber didn't applaud the mayor's proposal, Roper said. “But we didn't oppose it, either,” he added.
Flores is still uncertain whether the city council will ultimately back Daley’s plan. “I don’t know whether the administration has the votes for their proposal,” he said. A balanced budget must be passed before 1 January 2010.
Sources and uses of funds for parking garages deal – all amounts in USD millions.
But even if the mayor does eventually get approval from the city to use the funds, other thorny issues remain. “Are we actually going to take that money directly from the actual long-term reserve or are we going to borrow other money and use that long-term reserve fund as a surety? These are questions that have not been answered,” Flores said.
Either way, Daley has said he would replenish the reserves “when city revenues have rebounded”. But with economically sensitive city tax revenues down 17 percent this year while the cost of government salaries, pensions and health care – which accounts for 80 percent of city expenditures – continues to increase, some doubt the money will easily come back once it is spent.
“One of the things you realize as a legal matter is it is very challenging to create a truly locked lockbox,” Seliga said.