Chicago will deliver its 2024 budget forecast in mid-September after a series of public roundtable meetings this month that, along with a newly delivered transition report, will help shape Mayor Brandon Johnson’s first budget.
Recommendations on pension funding fixes from a Johnson-appointed working group also could influence the budget as the panel readies initial proposals for consideration by state lawmakers during its fall veto session.
Several guideposts have already been offered as Johnson must balance his campaign pledges on funding new investments and structurally balancing the budget while holding the line on property taxes as the city deals with crime, rising costs, and end of federal COVID-19 funds.
The Chicago Civic Federation weighed in with guidance for tackling chronic fiscal pressures while Mayor Lori Lightfoot’s finance team laid out a mid-year fiscal forecast and the city’s former chief financial officer urged that structural budgetary balance remain top of mind as decisions are made on revenues and spending.
The city’s annual comprehensive financial report or ACFR for 2022 — published June 30 — is also now in hand and will help make the case for pension fixes as investment losses drove up an already burdensome $33.7 billion net pension liability to $35.4 billion.
“Through strategic planning and addressing structural deficits, we have the opportunity before us to improve the financial health of the city of Chicago,” Johnson said in a letter attached to the audited statements. “While the city still faces several long-term structural challenges, we are charting a better path forward for the city’s finances.”
Johnson recently signed an executive order requiring the release of a budget forecast by the end of September, although the administration intends to release the forecast by Sept. 13. Johnson’s predecessor had signed an executive order when she came into office in 2019 abiding by an Aug. 31 deadline.
The later deadline will give the new administration time to accumulate department and economic data to produce the most accurate forecast “given all that is going on in the economy,” new Budget Director Annette Guzman recently told the City Council budget committee.
Johnson expects to unveil the budget Oct. 11, with hearings and amendments to follow ahead of a vote prior to Thanksgiving.
The city will hold three roundtable discussions on July 18, 20, and 22. The city will give the public an opportunity to pose questions to city officials and the sister agencies and share their concerns on topics including affordable housing, homelessness, public health, public safety, culture, infrastructure, and immigration. Johnson will attend.
The formal budget forecast will set the numbers for the budget updating a mid-year forecast Lightfoot’s administration published in April as she prepared to hand the reins over to Johnson in May.
The 60-page forecast provided a broad view of the city’s fiscal landscape, offered Johnson a roadmap to maintain the city’s upward ratings momentum driven by progress on pension funding and moving toward structural balance, while prodding him to stay on the city’s current path by directing the surplus to cover supplemental pension contributions in coming years.
That forecast raised the final 2022 surplus to $555 million and projected a $143 million surplus this year. It lowers the projected gap in 2024 to $85 million, $124 million in 2025, and $145 million in 2025. The city is currently operating on a $16.4 billion all-funds spending package including a $5.4 billion corporate fund. The forecast anticipates Johnson will keep the automatic annual property tax increase tied to inflation, which he criticized during his campaign, and directs the surplus to cover supplemental pension contributions over the next three years.
Whether Johnson will stick with the Lightfoot policies the forecast is built on and direct the surplus to future supplemental pension payments remains to be seen. ”That will come as the budget unfolds,” Johnson senior advisor Jason Lee said of the surplus. “We want to be thoughtful and think about it through a broader lens of what we are trying to achieve.”
“We want to deal with some the structural deficit challenges, which include the pension obligation, and be responsible there and we want to find resources to continue to invest in critical areas that demand investment, and we want to do it by weaning ourselves off the addiction of property taxes, fines and fees which we think has had a negative impact even on fiscal stability,” Lee said. “We need to figure out a sustainable funding structure that allows us to grow our population.”
During the campaign, Johnson proposed a series of $800 million taxes including reinstating a corporate head tax, taxing financial transactions, raising the tax on real estate transactions, and raising a hotel tax and several others he’s since dropped. He’s also pledged to avoid property tax hikes and to roll back an automatic property tax hike based on inflation.
Johnson’s transition team’s report released Thursday offered sweeping recommendations on quality-of-life issues, economic development, aiming to grow the population to more than three million, hiring goals, housing, public safety, and education, but mostly steered clear of revenue recommendations.
The report recommends the city “work with public/private sectors to increase the size of the city’s tax base and make our tax system more equitable, including by reducing the dependency on property taxes.”
“We discussed specifics of the mayor’s tax policy and tax incentives for corporations but did not reach consensus. Ultimately, we reached agreement that the mayor should work to grow the tax base and reduce the reliance on property taxes,” the report reads.
The mid-year forecast was offered as “a marker for where the finances of the city are currently and most importantly to provide a lot of transparency over the projections,” Jennie Huang Bennett, the city’s former chief financial officer, said in an interview before handing the CFO reins over to Jill Jaworski. “We feel like we’ve left the city in a pretty good place” with more than a dozen upgrades in hand including one from Moody’s Investors Service that shed the city’s junk status.
Recent water and wastewater upgrades translated in a 25- to 30-basis-point cut on the city’s spring bond issues. “Fiscal stability pays for city investments. It’s not just about fiscal discipline for the sake of fiscal discipline,” Bennett said.
Bennett urged that structural balance stay top of mind. The city has recently more closely aligned its recurring revenues with ongoing expenses, shedding the use of scoop-and-toss debt restructuring, borrowing for judgments and settlements, asset sales, and reserve use, following through on efforts begun by Lightfoot’s predecessor Rahm Emanuel.
But the city must confront roughly $100 million to $150 million of funding pressures annually that, if not solved structurally, double in the next year and would lead the city back to a burdensome imbalance that would likely draw rating downgrades. Pension costs also will rise as legislation is expected that raises benefits for the city’s lower tier of workers to comply with federal Social Security rules.
“Every administration has the right and privilege to determine their own tax policy and financial plan so it doesn’t have to be property taxes but it has to be a structural solution and that vigilance on structural balance is what I’d like to see the next administration carry forward,” said Bennett, a former public finance banker who led the financial team at Chicago Public Schools before being tapped by Lightfoot in 2019.
If the Johnson administration opts to end an automatic property tax increase based on the consumer price index, then an alternative structural funding fix that will grow along with costs is needed. “It’s about holding to fiscal discipline, finding structural solutions and being able to explain the overall financial plan to the markets in a way that provides a credible story for them to be able to make long term. Fiscal stability and adherence to fiscal discipline will pay off in the end.”
Another pressure is the city’s “fragile” post COVID-19 economic recovery with about $190 million of business-related taxes still lagging. “I think it’s critically important that the city focus on how the city can accelerate that recovery to generate more revenue for city services and grow the pie” as those revenues might not recover, Bennett said.
The Civic Federation warned of the pressing strains that lay ahead and offered suggestions to aid in keeping the city on its positive fiscal trajectory in a report on the city’s fiscal condition.
“The Civic Federation is concerned about how the city of Chicago will continue to fund the same level of operations while supporting its enormous long-term obligations, especially during high inflationary times and with a potential national economic downturn looming, all while several economic sectors have not fully recovered from the pandemic,” Civic Federation Acting President Sarah Wetmore said.
“Over the last decade, the city has made progress in addressing some of its persistent financial challenges. This report is intended to help the new administration and City Council continue that progress in the coming years.”
Public safety rises to the top, the federation said. The police department has a budget of nearly $2 billion and some of the highest per-capita staffing levels in the country, yet violent crime levels remain well above pre-pandemic levels. The city must do a better job of communicating to the public changes underway to comply with a federal consent decree on policing tactics and should include reform information in budget documents, it said.
Pension and bonded debt pose obstacles to further progress. “The city is in need of additional stable sources of funding to address ongoing annual increases in pension costs,” the federation suggested.
The report assesses a list of potential revenue streams, some named by Johnson, and whether they require state approval or are possible through the city’s home-rule status alone. The federation did not endorse or reject any. The federation does the same on pension options, including fund consolidation, which requires state approval and pension obligation bonds, which do not.
The report recommends that the city address its financial entanglements with the Chicago Public Schools which will move to an elected school board in the coming years, develop long-term fiscal plans, cut the City Council in half, consider raising a special garbage collection surcharge, re-evaluate tax increment financing districts, and expand the authority of the council’s office of financial analysis.