Smoke and Mirrors

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Chicago’s Budget

Previously I had written about the importance of mobility as bankrupt municipalities attempt to grab more and more of your hard-earned income to fill exploding budget deficits. A perfect example of this is the City of Chicago, which just unveiled its budget to address an $838 million shortfall for fiscal year 2020. To help close the city’s deficit, mayor Lori Lightfoot proposes to save $337 million through various efficiencies, including but not limited to the implementation of zero-based budgeting and department mergers.

Unsurprisingly, $350 million of the deficit is to be paid through new taxes. Her plan calls for higher taxes on ridesharing and restaurant food and drink. She’s also called for other revenues, including a progressive real estate transfer tax and a Chicago casino that need the authorization of the state legislature. If the mayor doesn’t get these items, she has threatened a property tax increase even though the city is still absorbing a record $543MM increase from 2015.

Where things get murky is the remaining $200 million which is expected to come from what I call accounting gimmickry, or “smoke and mirrors”. This amount will come from refinancing $1.3B in bonds and taking 20 years of interest savings in 2020. Yes, you read that right, the city is front-loading interest savings as a one-time event to show that it has a balanced budget. A few comments about these shenanigans. One, given that it is a one-time event, you will have a $200 million hole in 2021 and beyond. Second, this is an accounting entry and not on a cash flow basis, which means the city is not really saving $200MM in cash next year. Lastly, the method of refinancing will be through the use of “securitized” bonds. What is a securitized bond, you might ask? It mandates a sale of assets (i.e. transfer of ownership) in the event of default, in this case, future tax revenue!

In a nutshell, the budget is comprised of legitimate cost-cutting ideas, tax increases, and shady accounting while risking future services that could be obtained from tax revenue. There is nothing about structural pension reform needed to tackle Chicago’s growing underfunded retirement liabilities. Meanwhile, public teachers are striking after rejecting what Mayor Lightfoot called the most lucrative offer ever for the Teacher’s Union.

My decision to live outside of Chicago and Illinois altogether is looking prescient by the day. I suspect things will get much worse before they get better.

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