The script for the Chicago budget season is well known. The budget office announces the umpteenth annual new and unexpected budget crises. Without questioning or understanding, the media reports this as news. Over a few weeks in October and November the mayor’s budget wizards wave their wand and the deficit disappears, just in time for the City Council to rubber stamp a “balanced budget.”
The underlying reality is that Chicago is continually digging a financial hole despite balanced budget claims. The city lacks the will to close its financial gap of more than $36 billion in any fiscally healthy way.
Spending more money than expected revenue is a chronic condition that recurs every year. It is not cyclical, where a deficit arises in a bad year and is offset by a surplus in a good year. It is not extraordinary due to some immediate unexpected exogenous event, like a pandemic, civil unrest, or a financial crisis. These crises just exacerbate the issues.
It is well documented that in Chicago’s case there is too much spending for basic city services, such as the police and fire departments. This wouldn’t be as big of a problem if taxpayers were willing to pay for such spending, but elected officials don’t ask for fear of being politically unpopular.
To close this gap would require raising taxes or cutting spending. This would require tough choices, which to her credit Mayor Lori Lightfoot is talking about some this year, like a property tax increase, layoffs and other spending cuts. In the past these tough decisions weren’t necessary because the city relied on magical sleights of hand during the budget phase and then borrowed during the operating year. Unfortunately, the mayor is continuing some of the routine gimmicks.
Let’s understand how these gimmicks work.
The first reality is that, while the law says that a balanced budget must be passed, it does not specify at all what is included in revenues or what constitutes expenses. It is completely up to the city to say what is revenue or expense. The budget is a fairytale.
The gimmicks used in budgeting have included selling the parking meters, underfunding pension promises, taking a pension holiday and charging expenses to sister agencies like the Chicago Public Schools.
In the past two years the favorite trick was refinancing debt. The idea is that the city owed some old bonds at high interest rates and it was able to borrow money at much lower rates to pay off those bonds. This results in annual savings of interest costs. In the past, the city has calculated what the total annual savings would be and included the total as income that year. Then, every year thereafter the budget also benefits from these interest savings. Is this what they mean by double-entry bookkeeping?
It’s unclear what the mayor is saying but she has mentioned a whopping $1.7 billion of such savings, some for this year and some for next year. Is this just borrowing or is it the savings from refinancing?
This year the mayor is also planning to lengthen the time the loan will be repaid, which will “save” money now but will require taxpayers to pay interest on this debt for decades. Either way, none of this is real revenue.
The effect of the disconnect between the budget and actual performance is continual shortfalls which are actually closed only by borrowing. That is why debt is rising at alarming rates across the city government, amounting to $39,400 per taxpayer. And that is why the city’s bond rating is in the junk category.
The city is headed for a financial reckoning. What happens then?
If we follow the example of New York City, the state will appoint a financial control board. That board will act as a defacto bankruptcy judge. It will override contracts, cut spending, look at sources of revenue and approve or reject budgets. In short, it will take all the actions that the city government should have taken all along but lacked the political will to do so.
Our choice this year is to turn the corner with our bad budget habits or wait for a control board. That is no joke, it is reality.
Ed Bachrach is the founder of the Center for Pension Integrity and co-author of “The New Chicago Way: Lessons from Other Big Cities.” Sheila A. Weinberg, CPA, is the founder and CEO of Truth in Accounting, a nonprofit government finance watchdog.
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