Chicago mayor pushes massive tax hike over crippling cuts

Chicago Mayor Rahm Emanuel on Tuesday laid out a stark choice for the cash-strapped city as he proposed a 2016 budget aimed at resolving a financial crisis linked to unfunded pensions -- either slash vital public safety and other services, or enact the biggest-ever property tax increase.

In a half-hour speech to Chicago's 50 aldermen, Emanuel said spending cuts would mean reducing 20 percent of the police force, closing 48 fire stations and laying off 40 percent of the city's firefighters.

"In short, if we were to fund our pensions with cuts alone, our city services would become unreliable. Our city would become unlivable. And that would be totally unacceptable," he said, promising his plan would wipe out Chicago's structural budget deficit within the next four years.

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Emanuel, who was elected to a second term in February, proposed a $543 million increase in property taxes - between now and 2018 - to cover police and fire pensions.

Facing a budget shortfall that could hit $745 million, Emanuel is also proposing a per-ride surcharge on taxi and ride-sharing services to raise $48.6 million and a new monthly garbage fee of $9.50 per household to gain $62.7 million. Garbage pickup is currently free for residences.

While Emanuel's proposals usually pass the city council easily, the property tax hike may meet resistance.

"Every time there was a property tax increase of any size ... there has been an aldermanic revolt," said Dick Simpson, political science professor at University of Illinois at Chicago and a former alderman in the 1970s.

Ed Burke, chairman of the city council's finance committee, said aldermen will have opportunities in the coming weeks to see if there are other solutions.

"Public service requires people to display courage and take tough votes and this is a tough vote," Burke told reporters after the mayor's speech.

Alderman Scott Waguespack, a member of the council's small, but vocal Progressive Caucus, said the property tax increase will be hard for taxpayers to swallow.

"We've offered (the mayor) specifically at least two dozen revenue streams and other options, waste and inefficiencies, that can be fixed and we just haven't seen it in this proposal," he told reporters.

If the third-largest U.S. city cannot get its finances under control Chicago faces further downgrades by credit rating agencies, thus making it more expensive to raise funds through bond sales.

Moody's Investors Service, which has already cut the city's credit rating to junk, said on Tuesday it would withhold comment until a budget is passed.

The mayor's overall budget for the fiscal year beginning Jan. 1 totals $9.32 billion, which includes $3.63 billion of spending on operations.

Emanuel said the lion's share of the higher property-tax burden would be on owners of more-costly homes and commercial buildings. But that depends on whether Illinois lawmakers approve an expanded property tax exemption for owners of homes valued at $250,000 or less. A House hearing on the idea is scheduled for Thursday.

Alderman Brendan Reilly, who represents the downtown central business district, said piling more taxes onto businesses risks pushing the city's economy to a tipping point.

In addition to the expanded exemption, Emanuel is counting on the state to enact a law to lower the city's contributions to its police and fire pension funds, which are due to spike starting this year.

However, the city's requests have become entangled in the Illinois budget standoff between the Republican governor and Democrats who control the legislature.

Governor Bruce Rauner wants to temporarily freeze local property taxes, while giving local governments ways to save money, including curbing collective bargaining with their workers -- a move strongly opposed by Democrats.

Meanwhile, the city council could as soon as Thursday approve bond sales for Chicago, including a restructuring and refunding of $500 million of general obligation bonds and $2 billion of new and refunding revenue bonds for O'Hare Airport.

In the wake of credit downgrades, the city has had to pay a stiff penalty to sell its bonds.

"Nothing about this particular budget proposal is going to change our view on the (city)," said Andrew Clinton, president of Clinton Investment Management.

(Additional reporting by Karl Plume and Dave McKinney in Chicago and Jessica DiNapoli in New York; Writing by Fiona Ortiz; Editing by Matthew Lewis and Diane Craft)