Mayor-elect Johnson faces fiscal cliff in general operating budget

During his mayoral campaign, Brandon Johnson differentiated himself from Paul Vallas in meaningful ways. On everything from public safety to public education, Johnson offered a progressive vision, while Vallas advanced a more conservative perspective. Another key difference between the two involved fiscal policy.

Vallas insisted his wizardry at managing budgets, in and of itself, would get the city’s fiscal house in order. Johnson argued Chicago couldn’t meet its current fiscal obligations-and invest more in services like mental health, youth employment programs, and affordable housing — without generating new, recurring revenue.

The data shows Johnson was right.

Start with the fiscal cliff in the corporate fund that’ll face the new mayor. The corporate fund is Chicago’s general operating budget. It covers core services such as police and fire protection, streets and sanitation, and social services.

The corporate fund budget for FY 2023 — the current fiscal year — is roughly $5.4 billion. Supporting that budget is $152.4 million in federal assistance Chicago received under the American Rescue Plan Act of 2021, which the feds passed to help local governments weather the pandemic. But that $152.4 million is the final tranche of ARPA dollars targeted to Chicago. When Johnson takes office, that federal help won’t be available.

The FY 2023 corporate fund covered other expenditures with one-time revenue, including $56 million in TIF surplus, and $221 million in drawn-down reserves. Which means next year, Chicago will have to find at least $429.4 million of new revenue, just to keep providing services that were funded with one-time revenues this year.

And that revenue shortfall isn’t the sole fiscal challenge awaiting Johnson. The corporate fund also faces some significant scheduled growth on the cost side of the ledger, particularly if Johnson holds to his pledge not to increase property taxes.

Here’s why:

For decades, state law allowed Chicago to make contributions to its four public pension systems that were well below what was needed. Fiscal note: Underfunding pension systems provides a modest short-term financial benefit, at a staggering long-term cost. In Chicago’s case, those inadequate contributions have been the primary reason the city has run-up the $33.7 billion in unfunded liabilities — read that as “debt” — it owes to its pension systems.

A few years ago the state enacted a new repayment schedule for Chicago’s pension debt. Under this new schedule, debt payments increase annually through FY 2055, at which time Chicago’s pension debt will be nearly paid in full. During the first four years Johnson is mayor, Chicago’s pension payments were set to increase by an average of $47 million per year. But that was before the city’s pension systems suffered a 12% investment loss in 2022 — which Chicago estimates will increase all remaining pension payments by an average of $100 million per year.

Chicago pays a substantial portion of its pension debt with property tax revenue. Indeed, of the $2.6 billion pension contribution Chicago made this year, $1.4 billion, or more than half, was from property taxes. If Johnson isn’t willing to increase property taxes, then that full $147 million projected growth in pension costs will have to come from the corporate fund. Which in turn means the minimum fiscal cliff in the city’s Corporate Fund confronting the new mayor just ballooned from $429.4 million to $576.4 million. I say minimum, because the preceding analysis doesn’t account for a number of items. Like the contractual obligations Chicago has to increase the pay of public sector workers, or growth in the city’s debt payments.

Of course, even more revenue will be needed to enable Johnson to increase spending on social services or to hire additional police officers to fill some of the 1,400 vacancies in sworn positions.

The good news is Johnson recognizes Chicago’s fiscal challenges can’t be solved with smoke and mirrors. It will take some new revenue, and a new era of cooperation with both Springfield and the City Council, to get the job done.

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University. rmartire@ctbaonline.org

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