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Budget-making this year is all kinds of ugly
As long as COVID-19 continues to ice key parts of the economy and tax revenues, and as long as Washington continues to brawl, the budget makers will have to choose between hard and harder.

Friday, October 23, 2020
Crain's Chicago Business
by Greg Hinz

When it comes to budget-making, there's the "borrow now and pay it back later" approach, fondly known in the financial biz as scoop and toss.

Others instead prefer to raid that rainy day cookie jar, hoping that the bond ratings agencies don't notice or, if they do, that they don't much care.

 

And, of course, there's my favorite in the panoply of fiscal juggling. That's to cross your fingers, hide under the bed and wait for Congress to have an epiphany and come to your rescue.

Local governments are doing lots of stuff to try to balance their books amid the pandemic as they roll out their fiscal 2021 budgets, and though a few other approaches are surfacing (like reducing the payroll a little here and there), the core of what they're up to is the three techniques listed above. Is one any better than another?

Now, let me say upfront that being a government CFO nowadays is not unlike someone serving as a pump operator on the Titanic. As long as COVID-19 continues to ice key parts of the economy and tax revenues, and as long as Washington continues to brawl over whether to help out local governments that have only limited control of their own fate, the budget makers will have to choose between hard and harder.

Still, making choices is their job. So let's look at what they're doing.

Leading the scoop-and-toss parade by a large margin is Mayor Lori Lightfoot. She's proposing to close nearly half of her $1.2 billion budget gap by refinancing and restructuring city debt, booking all the proceeds from cheaper interest rates now but deferring repayment years into the future. As a result, Lightfoot will get a wad of money to close her budget gap, at least on paper, but at the cost of more finance costs later.

The mayor's team contends that a dollar gained now is worth more than a dollar you have to pay later, after inflation. That's true, but it still has to be repaid. They also say the pandemic has created an unusual situation that justifies an unorthodox response. That argument would have more merit if the mayor hadn't essentially done the same thing a year ago, booking upfront decades of interest rate savings on restructured debt.

Could the mayor have cut more? Maybe, though slashing her biggest line item, police salaries, is dangerous in multiple ways. How about drawing down more than $30 million of the city's $600 million-plus in long-term reserves? The mayor says Wall Street would frown on that.

At least Lightfoot offered a plan. That's more than you can say about the rising number of local governments—including Chicago Public Schools, Metra and the Chicago Transit Authority—that have passed or proposed budgets with holes that in each case run to tens or hundreds of millions of dollars.

 

They have more faith in Washington getting its act together than I do. If nothing else, the agencies should detail exactly what's ahead without Washington.

The big drawdown of reserves, a proposed $76.8 million, comes from Cook County Board President Toni Preckwinkle.

Preckwinkle argues—correctly—that she has more than $400 million in reserves to tap because she's carefully built up the county's bank balance in a decade in office. She also was early to make at least a modest number of layoffs, and actually has been paying off her pension debt at a fair clip. So let's stipulate that, despite her staunch pro-union reputation, Preckwinkle is a better fiscal manager than the political world recognizes.

On the other hand, one reason Preckwinkle has all of that money is because of the penny-on-the-dollar sales tax she pushed through a few years ago for pensions. Think of that every time you shop. She's also the woman who later roundly insisted she had to have a soda pop tax, even though now in the middle of a pandemic county reserves are so big they can be seriously tapped.

Welcome to local budget-making, circa 2020. Some are better than others. None are pretty.

 

 



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