(Bloomberg) — Chicagoans are bracing for the biggest property tax increase in the city’s history as Mayor Rahm Emanuel contends with a budget shortfall and soaring retirement bills that have sent its credit rating tumbling.
Emanuel, a Democrat, on Tuesday will propose raising property taxes by $588 million over the next four years. That would inject cash into the city as it faces a $426 million deficit and a pension plan debt that’s grown to $20 billion, more than $7,000 for each resident.
The tax increase marks the biggest step yet by Emanuel to shore up the finances of the third-largest U.S. city, which is under pressure from Wall Street as investors demand higher yields to buy its securities. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have all downgraded Chicago this year, giving it the lowest rating of any big U.S. city except for once-bankrupt Detroit.
“This is not kicking the can down the road,” said Paul Mansour, head of municipal research in Hartford, Connecticut, at Conning, which holds Chicago debt among its $11 billion of municipal securities. “We’re actually going to do something here that is going to sting. We’re moving from gamesmanship to action steps.”
The prospect of higher taxes has been welcomed by investors. Federally tax-exempt Chicago bonds maturing in 2040 traded Monday for an average 92.6 cents on the dollar, up from 87.7 cents on Aug. 31. That lowered the yield to 5.6 percent, about 2.4 percentage points more than top-rated debt, according to data compiled by Bloomberg.
The financial squeeze on Chicago emerged after officials shortchanged the pension funds by more than $7 billion over the past decade, freeing up cash for other uses. That’s caused the projected retirement bill to swell to about $1 billion next year, more than doubling since 2014, as it makes up for years of failing to set aside enough to cover pension checks for police officers, firefighters and other city employees.
The financial stains come as Chicago deals with rising violent crime, a school district that may lay off thousands of teachers and a court challenge that threatens to scuttle its plan to cut employee retirement benefits.
The move to raise taxes is a shift for Emanuel, who won re- election in April after touting his record of not lifting property, gas or sales taxes. In May, Moody’s cut Chicago’s bonds to junk, saddling the city with higher interest bills as it refinanced debt.
The property tax hike, which will be used for pensions, will start with a $318 million increase in 2015 followed by an additional $109 million in 2016, $53 million in 2017 and $63 million in 2018, Emanuel’s office said in a statement Monday. A $45 million special real estate levy that state lawmakers approved in 2003 would also be enacted to ease overcrowding at schools.
“It’s a good faith example of what Chicago needs to kind of right their ship and improve their finances,” said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia. “It’s not going to solve all the problems of the world, but they’re taking the right steps and that’s important.”