Annual Financial Analysis
Reserves and Liquidity Funds

Reserves and Liquidity Funds

Reserve Funds, also known as ‘rainy day funds’, are funds that the City sets aside as an economic safety net to mitigate current and future risks such as contingencies, emergencies, or revenue shortfalls. These funds are not included in the City’s annual operating budget. This section details the reserve funds for the City’s water and sewer systems (water rate stabilization, sewer rate stabilization) and a series of reserve funds established in connection with the long-term lease or concession of City assets. This section describes the manner in which funds generated by the City’s long-term Skyway concession lease and long-term parking meter system concession agreement have been spent and historic and present levels of reserve funds.

Water and Sewer Rate Stabilization Funds

The City’s water fund and sewer fund both maintain rate stabilization accounts. These accounts are reserved to ensure that the City’s water and sewer systems will remain financially solvent in the case of a catastrophic event, in which case the accounts would be used to finance operations and make necessary repairs for a short period. A decision is made each year regarding the amount that will be deposited into the rate stabilization accounts based on the available system resources and the appropriate level of reserves for the water and sewer funds. The current balance in the water rate stabilization account is $91.2 million, and the current balance in the sewer rate stabilization account is $32.6 million.

Asset Lease / Concession Reserves

Following is a brief history of the City’s use of the asset lease/concession reserve funds.

Alt text

Midway Airport Security Funds

In 2008, the City entered into an agreement with a private company for the long-term lease of Midway International Airport. The private company failed to carry out the transaction and surrendered its $126.1 million security deposit to the City in 2009; $13.1 million of this amount was used to pay various fees associated with the proposed lease transaction, $33 million was used to pay off existing debt, and $40 million was transferred to the corporate fund for use in that year. The remaining $40 million was transferred to the corporate fund in two $20 million transfers, one in 2010 and the second in 2011.

Skyway and Parking Meter Lease/Concession Reserve Funds

In 2005, the City entered into a 99-year lease of the Chicago Skyway, under which a private company was granted the right to operate and collect tolls from the Skyway. In return, the City received an upfront payment of $1.83 billion. Approximately $850 million of this amount was used to pay off existing debt, including $446.3 million to refund the outstanding Skyway bonds at the time of the transaction.

In 2009, the City entered into a 75-year concession agreement for its metered parking system, under which a private company was granted the right to operate and collect revenue from the parking meter system and the City received an upfront payment of $1.15 billion.

Both of these transactions resulted in the establishment of a long-term reserve fund, a mid-term reserve fund, and a human infrastructure fund. An additional “budget stabilization” fund was established in connection with the parking meter concession.

This chart provides the annual transfers to the corporate fund from the multiple reserve funds established with revenue from lease or concession agreements of City assets. Additionally, the transfers presented in this chart include amounts utilized to cover transaction costs for the respective lease/concession. The sections below details the initial reserve fund balance and reasons for the transfers to the corporate fund.

Long-Term Reserves

The City established a $500 million long-term reserve with a portion of the proceeds of the Chicago Skyway lease. The principal of this fund was intended to supplement corporate fund reserves, with interest earnings to be used for City operating expenses. These funds have been utilized as planned - the principal balance remains $500 million and the earned interest has been transferred to the corporate fund each year, with the dollar amount of the transfer reflecting variations in interest rates.

The City established a $400 million long-term reserve with a portion of the proceeds of the parking meter concession. This fund was created to replace revenues that would have been generated from parking meters by transferring interest earnings on the fund to the corporate fund, with the principal remaining intact at $400 million. However, starting in 2009, the City began utilizing these long-term reserve funds to subsidize the City’s operating budget. Utilizing these funds reduced the principal balance substantially below the initial deposit and accordingly reduced the interest earnings generated by the fund. The original ordinance establishing the fund directed that an annual transfer of $20 million be made from the fund into the corporate fund to replace lost meter revenue. However, in order to maintain these important reserves, the City amended the ordinance in 2012 to state that only interest generated from the fund, and not principal, must be transferred for this purpose. In addition, the City began to rebuild these reserves in 2012, with $40 million deposited through 2015.

Mid-Term Reserves and Budget Stabilization Fund

The City also established mid-term reserve funds of $375 million and $325 million, respectively, with proceeds from the Skyway lease and parking meter concession. Both of these funds were created to supplement corporate fund revenues. The Skyway mid-term reserve fund has been drawn upon as scheduled, with the principal depleted in 2010 and the approximately $50 million in accumulated interest transferred from this fund to the corporate fund in 2011. The parking meter mid-term reserve fund was drawn on an accelerated schedule and was also fully spent in 2011.

The parking meter budget stabilization fund was established to assist the City in weathering the national economic downturn occurring at the time of the closing of the parking meter concession. Initially $326.4 million was deposited into the fund and the principal was fully utilized by the end of 2010. A small amount (approximately $600,000) of interest remained in the fund and was transferred to the parking meter long term reserve fund in 2012.

Human Infrastructure Reserve Funds

The City set aside $100 million of the proceeds from each of the Skyway lease and the parking meter concession to be used to fund programs to improve the quality of life in Chicago neighborhoods. The principal of the Skyway human infrastructure fund was fully utilized by the end of 2009 and the remaining interest in the fund was utilized in 2011. The remaining balance of the parking meter human infrastructure fund was used in 2014; thus, there was a $0 balance as of year-end 2014.

Asset Lease/Concession Funds Going Forward

As noted earlier, the City historically used the asset lease/concession reserve funds to subsidize its operating budget. Beginning with the 2012 budget, the City started to rebuild its reserves in order to enhance its long-term stability, adding to the reserves annually. Currently, the asset lease/concession reserve funds, along with the Operating Liquidity Fund – which is discussed below – represent the unrestricted budgetary fund balance of the City. Since 2012, the City has added $40 million to its unrestricted budgetary fund balance, and is committed to maintaining this balance – currently approximately $620 million – at a level that ensures the City’s ability to withstand any future significant economic downturns. Only the interest earned on the long-term reserve funds will be transferred to the corporate fund on a going forward basis.

Operating Liquidity Fund

The City regularly issues commercial paper notes and/or enters into lines of credit with commercial banks to meet operating or liquidity needs throughout the fiscal year. For example, the City routinely issues short-term commercial paper notes to fund operations for libraries until property tax revenues are collected. As noted above, the City maintains a healthy unrestricted budgetary fund balance, a portion of which could be used to support short-term liquidity needs throughout the fiscal year. This operating liquidity fund is not intended to provide one-time revenue to the City’s corporate budget or to provide an indefinite line of credit. This fund will function as a reoccurring short-term funding solution for City operations that are funded from a dedicated revenue source (e.g. Chicago Public Library property tax revenue), allowing the City to manage liquidity issues associated with timing of revenue collection. The operating liquidity fund allows the City to decrease the size of its commercial paper/lines of credit (and the associated borrowing costs), while continuing to fund these annual, basic operational needs in the future.

The City has set aside $5 million in the 2015 assigned fund balance. Revenue for the operating liquidity fund in 2016 will be identified as part of the fund balance in the audited financial statements for 2016.