New mayors in Chicago have often entered office at a disadvantage when they are handed a seemingly massive budget deficit left behind by their predecessor.
When Mayor Rahm Emanuel took office in 2011, he pegged the city’s budget shortfall at $636 million, blaming predecessor Richard M. Daley for profligate spending. Mayor Lori Lightfoot similarly blamed Emanuel in 2019 when she said he left her with an $838 million gap.
But the outgoing mayor’s financial team presented a different scenario Tuesday, saying Lightfoot would be leaving Mayor-elect Brandon Johnson with a projected budget gap of just $85 million for his first year — a relative drop in the bucket compared with the city’s $16.7 billion budget.
While the announcement may have seemed like a parting gift to Johnson, it has also presented a challenge for Lightfoot’s recent political rival as the mayor said in order for the fiscal good times to continue, Johnson would have to stick to Lightfoot’s budget practices. That includes continuing to tie the city’s property tax levy to inflation, a policy Johnson campaigned against.
[ Pension debt, property taxes, budget holes: Chicago’s next mayor faces huge financial problems ]
Lightfoot had a blunt message for Johnson: “Don’t screw it up,” she said during a speech at the Executives’ Club of Chicago.
”We’re delivering this up on a silver platter: continue to work, stay the course, and things will continue to shine bright for the city of Chicago,” she said.
The numbers provided by Lightfoot and the city’s finance team were much smaller than the city’s forecast from the summer of 2022, which predicted a $475 million deficit in 2024 and $550 million the following year. They’re even smaller than updated estimates the city laid out in bond disclosures in January: Those showed 2024 and 2025 deficits cut down by about $190 million total, thanks to better than expected revenue collections.
Officials with Johnson’s transition team didn’t return a message Tuesday about Lightfoot’s comments, and it isn’t unusual for a new administration to declare a fiscal situation worse than expected after they’ve had a chance to take a closer look at the books.
Still, the city said the latest forecast does not rely on federal COVID-19 relief money to close gaps, while it does include debt service payments, stock market losses that worsened pension deficits and “conservative” assumptions about how a potential recession might affect the city’s budget. Lightfoot’s administration said if projections hold, the budget gap would remain “relatively low” in 2025 at $124 million and in 2026 at $145 million.
The sunnier forecast is helped along by an “accelerated recovery” in the city’s economy, the city said, “along with the impact of stimulus and inflation on City revenues” such as income, personal property replacement, and lease taxes.
In all, revenues for the 2022 budget year were $555 million higher than expected. Income and personal property replacement taxes made up $441 million of that boost, and the lease tax the city collects on cloud computing services saw “double digit growth during the pandemic” after Lightfoot boosted the tax rate and an increase in cloud computing platform use for those working remotely.
Lightfoot tried to tout her fiscal discipline on the campaign trail. She highlighted her dedication to pay down the city’s pension obligations, secure new revenue streams from the Bally’s casino, a deal to sell water to Joliet and a $750 million reduction in outstanding debt since she took office in 2019. But after losing in the first round of the mayor’s race, the latest announcement offers a chance to burnish her legacy on her way out the door.
“This updated Mid-Year Budget Forecast is proof of the work my administration has done to bring about the City’s financial turnaround,” Lightfoot said in a release.
The forecast landed months earlier than in previous years, and comes less than a month before Johnson is to be sworn in and the day before he is scheduled to address lawmakers in Springfield.
“As a result, we can now project the lowest sustained budget gaps in decades … And this financial turnaround has been acknowledged independently by the rating agencies through 13 upgrades and three positive outlooks over the last eight months,” Lightfoot’s statement continued.
Those ratings agency upgrades will only hold if the city maintains its fiscal discipline, city budget officials said, including a dedication to raising the city’s property tax levy to match inflation and making annual advance pension payments to offset stock market losses. This year’s pension advance was $242 million.
Chicago’s pensions are still among the lowest-funded of any big city, with an average funded ratio of just 23%. Lightfoot’s advance pension policy establishes a “tread water level” aimed at ensuring the funds’ net pension liability remains stable, city officials said.
Lightfoot plans to sign an executive order to keep the pension policy in place to dedicate surplus revenues to bolstering that funding. That policy, Lightfoot’s team argued, helped trigger Moody’s decision to move the city up from junk bond status. If the city maintains that payment plan, it “will create approximately $2.6 billion in reduced pension payments over time,” according to the city’s forecast.
Higher ratings help lower the city’s borrowing costs and free up dollars in the city’s budget.
“Each rating upgrade the City achieves represents approximately $100 million of interest cost savings on each $1 billion in bonds issued,” the forecast noted.
While the city has made progress on addressing the city’s pension costs, such large payments “squeeze out” other investments the city wants to make, city Chief Financial Officer Jennie Huang Bennett said Tuesday. Total pension costs are expected to rise to $2.5 billion in 2026, leaving less money for other city programs.
To help ease that burden, Lightfoot called for “real, common sense pension reform in Springfield” without “pulling the rug out” from retirees. She has been vague about that solution in recent years, but decried any attempt to add to the city’s pension tab.
Johnson can unwind any of Lightfoot’s policies, and has voiced his opposition to raising property taxes, saying the city’s current plan tying property tax increases to the rate of inflation exacerbates the city’s housing affordability crisis.
“Property taxes are already painfully high, and as mayor, Johnson will not raise them further,” Johnson’s campaign platform stated.
Instead, he’s proposed a raft of other taxes — including on financial transactions, on the sale of high-end properties, and on jet fuel at the city’s airports — to help close the city’s deficits. He also has proposed reinstating the city’s per-employee head tax at large corporations. In total, his campaign said his tax proposals would raise $450 million. Many need approval from the Illinois General Assembly, and Gov. J.B. Pritzker has already said he’s opposed to the financial transactions tax.
Lightfoot’s team has defended the inflationary property tax hikes, arguing if the city had raised the levy bit by bit to keep pace with inflation dating back to 1977, the sale of the Chicago Skyway, the Millennium parking garage, and a series of costly bond issuances would not have have been necessary.
The city’s budget has an annual structural imbalance of roughly $100 million to $150 million, according to the forecast, which compounds year after year if unaddressed. If Johnson manages to find $85 million in “structural solutions” in his first budget in 2024, its gap can shrink to $39 million.
“Those solutions carry forward year after year,” Huang Bennett said.
Sarah Wetmore, acting president of the business-backed fiscal watchdog group the Civic Federation, told the Tribune the revenue projections were not a surprise since they track with the state’s rosier revenue projections. Even so, there are notes of concern Johnson will have to address, she said.
Among them: lagging hotel revenues. Johnson has proposed raising the city’s existing hotel tax by $1 per room.
“The report is showing places where the next administration might be needing to focus going forward, such as on the recovery in the downtown area as well as in conventions and that kind of thing,” Wetmore said.
Overall, “the mayor’s team has done quite a lot in terms of improving the city’s financial outlook,” Wetmore said, agreeing with Lightfoot’s team that using budget surpluses to fund the advance pension payments should continue. “This is a one-time source the city is not expected to recur: dedicating it to reducing or offsetting liabilities is a good practice.”
“I think we’re going to be looking forward to seeing what kinds of policy proposals and how the mayor-elect plans to fund those over the coming years,” Wetmore said.
