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Chicago, short of money, turns to private sector

By Andrew Stern

CHICAGO (Reuters) - Chicago Mayor Rahm Emanuel, facing budget cuts from the debt-ridden state of Illinois and the federal government, turned to the private sector on Thursday to finance $7.2 billion in rebuilding of the city's aging subways, sewers and schools.

Emanuel, who laid off hundreds of workers in his first year in office to close a $636 million gap in the city's $6.3 billion budget, said no taxes would be raised to pay for infrastructure he said would create 30,000 jobs over the next three years.

He said the infrastructure would be paid for with further cuts in the city bureaucracy, building retrofits to shave 25 percent off the city's energy bill, and user fees and bond sales to pay back, and provide a profit, to private investors.

Watchdog groups expressed caution about tapping private groups for financing to pay for sorely needed infrastructure improvements.

"It's reasonable for him to look for private sources of funding, because he can't look forward to state funding," with Illinois' dire finances, said Laurence Msall of the watchdog Civic Federation. The federal government is similarly hard-pressed.

In a speech with former President Bill Clinton, a champion of infrastructure trust funds, Emanuel said five investment firms involved in such financing already expressed interest in participating. He did not name the finance firms.

"The age of our infrastructure is no longer a leg-up, it is holding us back," Emanuel said.

He said he planned to build new schools and renovate older ones, repave half the city's streets, add another new runway at O'Hare International Airport, expand park space, and rebuild sewers and rail lines.

The city has a mixed record on private investment.

In 2008, a 75-year lease of its parking meter system for a one-time $1.15 billion payment was sharply criticized as fees went up. Emanuel's predecessor Richard Daley spent much of the proceeds to close a budget deficit, a factor in a downgrade of the city's credit rating in 2010.

Chicago's credit rating remains solid, analysts said though watchdogs and credit rating agencies have cautioned against taking on too much new debt or dipping into reserves.

The nation's third-largest city also has a reputation for public corruption and for handing out no-bid contracts to friends of the powerful, though Emanuel has taken steps to make the process more transparent, said University of Illinois-Chicago political analyst Dick Simpson.

"There certainly has been corruption in the past. The issue is will there be in the future?" Simpson said.

The Civic Federation said the city's debt service was taking a larger share of its budget than in other U.S. cities.

Chicago paid out nearly 12 percent of its 2010 budget to service its debt, down from 15 percent two years earlier but higher than Los Angeles' 8 percent and New York's 6.5 percent. The city has $14 billion in unfunded pension liabilities, and its school system's budget deficit is forecast to expand to $1.2 billion in 2014.

(Reporting By Andrew Stern; Editing by Greg McCune)

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