CHICAGO - For the third year in a row, Chicago has projected a shortfall of more than $100 million in its budget for the upcoming fiscal year.
To help erase the gap, one alderman is suggesting that the city might sell delinquent property liens and fines to provide Chicago with a one-time cash infusion in fiscal 1994, which starts Jan. 1.
Last week, Edward Burke, chairman of the Chicago City Council's Finance Committee, raised the possibility of the city selling old debt in a transaction similar to one undertaken by Jersey City, N.J., in June.
In that deal, Jersey City sold $44 million of outstanding tax liens to First Boston Corp. in return for about $25 million in cash and $19 million in the form of a subordinated note. First Boston then created taxable bonds backed by cash flows to be generated from future tax lien collections and privately placed them with institutional investors. The bonds were rated A by Fitch Investors Service.
Jersey City used the $25 million to help eliminate a budget deficit. The subordinated note will be honored by First Boston after the firm's taxable bonds are paid off.
Burke said Chicago could target $450 million of unpaid traffic tickets it currently has outstanding or an undetermined amount of property liens and unpaid fees for a similar deal.
"We're in the earliest stages of looking at it," Burke said, adding that officials in the administration of Mayor Richard Daley are exploring the plan.
Burke said that selling what he called "municipal junk bonds" could help fill a $102 million fiscal 1994 budget gap because the city "is just about out of creative ways to generate new revenue."
The city eliminated a projected $116 million gap in the fiscal 1993 budget and a $124 million shortfall in the fiscal 1992 budget with measures such as layoffs and higher taxes and fees.
"We can't raise property taxes anymore and fees and other charges are as high as they can get," Burke said.
Paul Vallas, the city's budget director, confirmed on Thursday that the administration is considering doing a deal similar to Jersey City's.
Vallas said preliminary budget estimates for fiscal 1994 show a $102 million gap between corporate fund revenues of $1.7 billion and expenditures of $1.8 billion.
"The gap was created by increasing labor costs and a shortfall in revenue," Vallas said.
Most of the revenue shortfall is due, he said, to a $40.3 million loss of Chicago's share of a temporary state income tax surcharge. The Illinois General Assembly made the surcharge permanent last month, but will now give the majority of the revenues to the state rather than to local governments.
A press release from the city's Office of Budget and Management says that the cost of general government operations is projected to jump $40 million in fiscal 1994 "mainly due to contractually mandated labor cost increases."
"The [budget] hole is big," Vallas said. "The problem is these holes get more difficult to fill as you go on. But hopefully we've reached bottom."
Vallas said he expects to unveil a balanced budget on Oct. 15. He said the administration will avoid raising property taxes "at all costs," while other measures such as layoffs and fee increases will be considered.
Todd Whitestone, a managing director at Standard & Poor's Corp., said Chicago "has a history of closing [budget] gaps" before the beginning of the new fiscal year.
Harvey Zachem, an assistant vice president in the Great Lakes region at Moody's Investors Service, said that some budget unknowns that haunted previous Chicago budgets, such as the fate of the state income tax surcharge, have now been clarified. On the other hand, Zachem said budget reductions that Chicago has been forced to make over the past two years and will probably make in fiscal 1994 can lead to less flexibility in future years.
Whitestone and Zachem said they are not familiar with the plan to securitize and sell delinquent liens and fines.
Chicago's general obligation debt is rated A by Moody's and A-minus by Standard & Poor's.