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Did Chicago’s finances improve last year?

July 13, 2018

Yes and no, depending on what you mean by “Chicago,” and what you think of the Rule of Law.

The “bottom lines” for Chicago’s income statement and balance sheet both suggested continued deterioration last year, but a closer look presents a mixed picture.

The city’s overall reported financial condition continued to deteriorate, even after especially bad years reported for 2015 and 2016. The city’s reported expenses exceeded fees, grants, and general revenues (taxes), by nearly $1 billion, in line with results in 2012-2014. That loss (in the income statement, called the “Statement of Activities”) was consistent with a continued decline in the net position on the balance sheet (the “Statement of Net Position”).

The nearly $1 billion income statement loss arrived despite reported overall expenses falling almost 20%. The city’s revenues have been catching up to expenses, at least according to these reported numbers, just not enough. Total expenses still run significantly ahead of revenues, despite relatively rapid revenue growth.

Things get interesting when you consider that expectations for sharply higher city contributions to pension plans (and associated tax increases) drove the reported expense decline in 2017, as well as a significant reduction in the net pension liability.

Things get really interesting (and significantly more complicated) when you ask the question why the city’s net position fell further, despite that fact that reported assets rose while reported liabilities declined.

Normally, when assets go up and liabilities go down, the net position improves, right? Not in state and local government land, where the accounting standard setters have recently introduced (a topic for another day, or century) extraordinary new accounts called “Deferred Outflows of Resources” (included near and added to the assets) and “Deferred Inflows of Resources” (included near and added to the liabilities).

Longer story short, significant questions attach to the validity and significance of these ‘deferred’ accounts. Ignoring them, it looks like the city’s finances improved. The city's finances may have improved, but that doesn't necessarily mean that Chicagoans' finances improved, if they are going to be paying significantly higher taxes.

But if recent experience is a guide, the anticipated increases in contributions to employee pension plans driving the reported pension liability reduction may not come to pass. Five years ago, two of the largest plans (Chicago police and firefighter pensions) were expecting significant increases in contributions from 2013 to 2017.  The statutory contribution reported for the police fund in 2017 came about $100 million (20%) below what was projected in 2013 for 2017.

Laws come and go, and the ability and willingness of the government to abide by its own laws can be problematic.

Consider that the City of Chicago’s recently released annual report was not available until July 11, even though state law requires it to be published by June 30.  And the date on the letter of transmittal (addressed in part to the citizens of the City of Chicago) was June 29, the day before the legal deadline.

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