Chicago's Looming Financial Crisis

 /  Oct. 4, 2020, 6:44 p.m.

Chicago downtown
Managing Chicago's budget has been a precarious balancing act for years.

At the start of the pandemic, Chicago Mayor Lori Lightfoot remained remarkably optimistic about its effect on the city’s budget. She emphasized that no one revenue stream accounts for more than 13 percent of the city’s budget, and that less than a quarter of funds are “economically sensitive” -- that is, sourced from sales and entertainment taxes that are dependent on the health of the economy. Citing prior preparation for an economic downturn and an unexpected $100 million windfall from debt refinancing, she stated, “We have more than sufficient cash on hand.”

Fast forward to September, and the tone from city government is starkly different, though the initial optimism took time to fade. In April, the mayor first indicated trouble with the 2020 budget; in June, she acknowledged a $700 million estimated shortfall. On August 31st, Mayor Lightfoot announced the latest “pandemic budget” projections: shortfalls of $800 million in 2020 and $1.2 billion in 2021. When asked about specific taxes and cuts, the mayor admitted that “all options are on the table.”

How did we get here?

Rosy predictions aside, Chicago’s financial situation had been precarious long before the COVID-19 pandemic. At the start of Mayor Lightfoot’s term, Chicago’s pension deficit was the largest of any U.S. city. Such a deficit accrues when an employer—in this case, the city—does not have the funds needed to make the current and future payments it owes to its retired workers. In 2019, Chicago’s pension debt rose by $1.7 billion, to a total of nearly $32 billion. Laborers’ pensions are faring the best, with their funding at 43 percent; firefighters’s pensions currently fare the worst, at just 17 percent.

2020 would have seen the pension crisis worsen with or without a recession. This year, a new law took effect that forces all city employee pension accounts to be funded at 90 percent, according to actuarial estimates, by 2045. This provision automatically directs $1.68 billion of the 2020 budget toward pension contributions, making these funds unavailable for other city services.

On the revenue side of the equation, Chicago is already tied for the highest combined sales tax rate in the nation, at 10.25 percent (though some items, like groceries and medicine, are discounted). Early in her term, Mayor Lightfoot indicated that she wanted to avoid the property tax hikes, pension cuts, and borrowing that mayors of the past have pursued. In her initial 2020 budget, released in October 2019, she managed to accomplish this goal by eliminating spending inefficiencies and raising revenue through new taxes on downtown congestion and parking, restaurants, and legal cannabis sales. Though some critics argued that these were short-term fixes to a long-term problem, the dreaded property tax increase was averted.

The impact of COVID-19

The risk with consumer tax-based solutions like Lightfoot’s to a budget deficit is that they are highly sensitive to the health of the economy. When a recession hits, consumer spending falls, and revenues can drop sharply. This is the case in Chicago, and the main reason for the budget shortfalls projected in 2020 and 2021, despite the fact that only a quarter of city funds are “economically sensitive.” Nationwide, consumer spending dropped by 12.9 percent in April, the most precipitous one-month drop ever recorded. Though it has risen each of the following months, including a surge of 8.6 percent in May, the pace appears to be slowing: July saw only a 1.9 percent increase. If a second wave of the virus causes further shutdowns, the upward trend in consumer spending may reverse entirely. 

Though some financial relief came from the CARES Act passed by Congress in May, these funds were earmarked for strictly COVID-19 related expenses like expanding healthcare capacity and providing social services to residents affected by the economic downturn. Of the $2 trillion allocated to state and local governments, Chicago received $1.13 billion directly. Over $400 million went to direct response efforts, with the remaining funds addressing issues like airport assistance, public health infrastructure, small business support, and food and housing assistance. No funds were permitted to replace lost revenues. While this money has undoubtedly helped the city to combat the virus and Chicagoans to stay afloat, it is not the long-term solution Chicago needs to balance its budget. 

Plans for a “pandemic budget”

Mayor Lightfoot initially floated several options for closing the shortfalls with a “pandemic budget,” including an increase in the personal property lease tax on computers, debt refinancing, further borrowing via pension obligation bonds, and unspecified spending cuts. The main worry for residents remains where these cuts will be felt. 

Activists have called for defunding the Chicago Police Department, whose $1.8 billion budget accounts for about 40 percent of the city’s general operating budget, but Mayor Lightfoot has so far refused this request. Lightfoot led a task force within the United States Conference of Mayors that released a blueprint for police reform in August, and although it supported increased funding for social services, the mayor rejected using the police budget to pursue these investments in Chicago. The plan instead recommends limiting police use of force, requiring bystander officers to intervene in instances of misconduct, and empowering police chiefs to discipline officers without union arbitration. “A well-resourced police department remains critical,” Mayor Lightfoot asserted. To defund, “we’d have to get rid of the youngest, most diverse, most well-trained officers.” 

The latest report from Chicago’s top financial officials, however, emphasized that no city employees will be exempt from scrutiny as the city explores layoffs, pay cuts, and furloughs. This is a difficult process in the best of times; over 90 percent of city employees are covered under collective bargaining agreements with organized labor. 

This summer has already seen the city renegotiate several contracts that had lapsed since 2016. The new firefighters’ contract nearly doubles employee healthcare contributions, a move that is estimated to save taxpayers about $7 million annually, but that drew sharp criticism from rank-and-file members. More alarmingly for Chicago’s budgetary prospects, the agreement also compels the city to provide $95 million in back pay to cover a 10 percent pay raise from 2017 to June 2021, when the contract is set expire. A new agreement with police supervisors similarly increases employee healthcare contributions while providing $33 million in back pay, to cover a 10.5 percent raise from 2016 to June 2022. Now, the Fraternal Order of Police Lodge #7, which represents Chicago’s rank-and-file police officers, is the only union yet to reach an agreement.

With major spending cuts unlikely at the bargaining table, Chicago is pursuing other options. Residents will soon see their water bills increase to cover the cost of replacing lead service lines that still reach almost 400,000 Chicagoans. The city is considering establishing a temporary casino, potentially at the currently unused McCormick Place East, in order to gather some quick revenues ahead of building a more permanent entertainment complex. A property tax hike, which is perennially unpopular but can help stabilize a city’s budget through economic downturn, remains a last resort. A sales tax increase is another unpopular but possible fix, though it would require action from the state legislature. 

In the hands of Congress

Back in June, Mayor Lightfoot put it bluntly: “The magnitude of the problems and the challenges that we all face is such that only the federal government has the resources and the wherewithal to act a scale that’ll make a meaningful difference.” Without federal aid, she said, “we’re looking at a lot of really, really difficult or impossible choices.” 

Though Chicago’s Budget Director later clarified that next year’s budget proposal will not assume any federal aid money, it is clearly the city’s hope that Congress will save them from these impossible choices. In a September 25 letter to Illinois’s congressional delegation, Lightfoot joined labor leaders in calling for Congress to allocate direct aid to struggling city governments. “We urgently need federal support to shore up our budget and keep people working amid this crisis,” the letter reads.

Whether or not this wish will be granted remains highly uncertain. There is a large gap in the size of the federal aid bills proposed by the two parties, driven largely by the amount of state and local aid. House Democrats passed the HEROES Act in May, which would allocate over $1 trillion to states and cities, $915 billion of which could be spent for any purpose, including backfilling revenue losses from the economic downturn. Senate Majority Leader Mitch McConnell called this provision “a slush fund for states.” In contrast, the Senate Republicans’ HEALS Act would provide no new aid to states and localities, though it would loosen somewhat the restrictions on CARES Act funding usage.

Public opinion appears to align with the Democrats, and not just in deep blue cities like Chicago. A July CNBC/Change Research poll of likely voters in six swing states found that 68 percent supported providing relief to state and local governments experiencing budget shortfalls. Another poll showed that even a majority of Republicans in these states support further aid. 

Perhaps emboldened by these figures, Democrats on Monday unveiled a new HEROES Act that attempts to find a compromise. It includes $436 billion in emergency aid for state and local governments—half of the original bill—but also earmarks funds for schools, childcare, stimulus checks, and expanded unemployment payments. The $25 billion allocated for airlines is a nod to Republican interests, but Republicans will still have to be willing to add more than $1 trillion from their proposal in order to meet in the middle. With only a month to go before the November election, the clock is ticking for either party to be able to claim a win.

House Speaker Nancy Pelosi, who this week has been in discussion with Treasury Secretary Steve Mnuchin, said she was “hopeful” that Congressional leaders and the White House could find common ground to address “the health and economic catastrophe” brought on by the coronavirus pandemic. McConnell echoed this tone: “I think we’re closer to getting an outcome.” If Chicago’s budget is to survive this pandemic, we have to hope they are right.

The image used in this article is licensed under the Creative Commons Attribution 2.0 Generic license. No changes were made to the original image, which was uploaded by George Miquilena and can be found here.

Kaitlyn Van Baalen


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