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Chicago budget gap to shrink, but pension payment spike looms

CHICAGO (Reuters) - Chicago said its budget deficit was on track to shrink to just below $300 million in 2015, but a state-mandated increase in pension payments would expand gaps in the future.

The projected $297 million operating fund deficit, the lowest for the city in seven years, is based on $3.22 billion in revenue and $3.52 billion in expenses, according to an annual financial analysis that Chicago released late on Thursday.

The projection assumes continued economic growth and a return to normal revenue trends, which were affected by this year's severe weather, a statement from Mayor Rahm Emanuel said. Meanwhile, higher expenses were mainly due to increased salaries and wages under collective bargaining agreements.

“While a $297 million budget shortfall is substantial, we are making progress in righting the city’s financial ship,” the mayor said in the statement.

A looming $500 million increase in pension payments to Chicago's police and fire retirement systems would inflate the deficit to as much as $1.2 billion in 2016 and $1.5 billion in 2017, according to the financial analysis.

Pension contributions, which are funded out of property taxes and total $478 million in 2014, would rise to more than $1 billion a year for the third-largest U.S. city.

The report said an Illinois law requiring the payment increase did not include cost-saving reforms or a gradual funding increase. Without reforms, it said, the law "puts retirees, taxpayers, and critical city services at risk."

Earlier this year, the Illinois Legislature did pass changes requiring both Chicago and workers to increase pension contributions to the city's municipal and laborers' retirement systems. The law also ties cost-of-living adjustments for pensions to inflation while skipping the adjustments in certain years. The constitutionality of cuts to public worker pensions in Illinois is currently being litigated in a state court.

On Wednesday, the Chicago City Council approved a plan to increase an emergency services surcharge on phones to free up money in the operating fund to make the higher pension payment to the two funds.

Chicago's four pension funds were only 37 percent funded at the end of 2013, and the unfunded liability totaled $19.2 billion, according to the analysis.

Severe pension funding problems have led Moody's Investors Service to cut Chicago's credit rating four notches to Baa1 since July 2013.

The budget analysis showed Chicago's payments on its outstanding bonds for airports, water and sewer, and capital improvements growing to $1.7 billion in 2017 from $1.56 billion in 2014. Debt service on general obligation bonds paid out of the operating fund "will increase significantly from current levels in future years due to growth from anticipated issuances and the way in which the city’s debt is structured," the report said.

Emanuel is scheduled to present his fiscal 2015 budget to the city council in October. Chicago's fiscal year begins on Jan. 1.

(Reporting by Karen Pierog; Editing by Lisa Von Ahn)

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