Pension debt, property taxes, budget holes: Chicago’s next mayor faces huge financial problems

At a packed City Club luncheon in late January, Chicago Mayor Lori Lightfoot presented a hopeful picture of the city’s economic outlook.

Speaking to a crowd of movers and shakers at Maggiano’s downtown, Lightfoot hailed a “robust” recovery from COVID-19, a slew of credit rating upgrades, potential new revenues from the new Bally’s casino and a deal to sell water to Joliet, and a $750 million reduction in outstanding debt since she took office.

“Here’s the headline, folks: Hard work pays off. When we apply fiscal discipline, invest in ourselves and our people and our places, and we put ourselves on stable financial footing, that’s when the magic happens,” Lightfoot said. “Because we can afford to make those investments that are necessary to uplift our young people, solve the social ills that have plagued us for way too long, and keep our economy going. But it starts with getting our fiscal house in order, and I’m here today to tell you that’s exactly what we have done.”

Though the city has made real strides to shore up its finances under Lightfoot, its fiscal health remains precarious. Her 2023 budget forecast projects a roughly $475 million deficit in 2024 and $550 million the following year.

While the city continues to emerge from the pandemic, its economic impact on tourism, conventions, the CTA and downtown lingers in vacant storefronts and unreliable and often dirty trains. Massive pension payments remain a continued stress on city taxpayers. Federal funds to deal with the coronavirus are already allocated.

The city received $1.9 billion in direct federal COVID-19 aid, but the well will be largely dry for whoever — either Lightfoot or one of eight challengers — wins the Feb. 28 election. The bulk, about $1.3 billion, is slated to replace lost city revenues. The rest were dedicated to addressing the pandemic’s economic fallout, like homelessness, tourism, youth opportunities and direct family assistance, and public health, including violence prevention. Through Sept. 30 of last year, though, the city had only spent $16.3 million of the $567 million it had budgeted, according to city disclosures to the U.S. Treasury.

Civic Federation President Laurence Msallwho passed away suddenly on Saturday after having complications from a surgery, said earlier that critical issues like crime that have dominated this election cycle can’t be addressed without a healthy budget.

“There are not easy answers for the city’s longer-term financial challenges,” Msall said earlier.

Indeed, none of the mayoral candidates want to focus on the city’s economic woes, and most have been reluctant to propose specific plans or potentially unpopular solutions.

When she took office in 2019, Lightfoot inherited a plan that steeply ramped up payments toward grossly underfunded pensions: Ten years ago, contributions to the city’s four retiree funds were about $480 million annually. In 2024, they’re projected to cost $2.4 billion, a sum that will keep increasing in decades to come.

The city’s goal is to reach 90% funding by the mid-2050s, which will be a challenge. The Municipal Employees’ Annuity and Benefit Fund, the city’s largest fund, recorded a funded ratio of just 22% by the end of 2021. The ratio for police pensions was just 24%; fire was at 20.1%; and the smallest, for laborers, was 44.5% funded. Together, their unfunded liability stood at nearly $33 billion.

Lightfoot has taken several steps to be proactive. Riding a wave of higher-than-expected revenues and hoping to offset pension fund investment losses in 2022, Lightfoot included a $242 million extra pension payment in her 2023 budget, pledging to advance “future pension contributions to stabilize and even decrease” liability, estimating the move would reduce future costs by nearly $3 billion.

She also landed a casino for Chicago that she hopes will alleviate that burden, but even by city officials’ projections, it will only pay for roughly 9% of annual pension costs when fully operational. Some aldermen have questioned the administration’s casino projections.

The previous mayor, Rahm Emanuel, issued record property tax increases and other hikes to fines and fees to help shore up the funds, and on his way out of office, recommended amending the state constitution to reduce public workers’ pension benefits. He also floated the idea of borrowing $10 billion to reduce pension debt.

The pension funds would invest the proceeds of the pension obligation bond sale and hope to get returns that would outpace the interest owed. It would be one of the country’s largest issuances, but the idea is generally considered a major risk in the finance world, particularly for Chicago, which is already heavily leveraged.

Mayoral candidate and state Rep. Kambium “Kam” Buckner has proposed looking at pension obligation bonds as part of a “tapestry” of solutions for underfunded pensions. He has also floated extending the payment schedule to give the city more time to meet its funding targets.

“The problem is that the pension thing has been so sticky and so scary that people say, ‘Oh, well it’s too hard,’ and they walk away,” Buckner said. “But listen: Kicking the can down the road when the road leads to your front door is a problem.”

To fund pensions, candidate Paul Vallas, the former Chicago Public Schools CEO, said he would increase returns by making more judicious investments. He also said he would use surpluses from tax increment financing, or TIF, to replace revenue lost during former Mayor Richard M. Daley’s pension holidays.

Vallas, who is viewed skeptically by some labor unions due to his reputation for fiscal conservatism, has made a point of emphasizing that he “will not cut pension benefits.”

“Never did, never will,” he said at a recent event.

A Politifact analysis from 2018, however, pointed out that Vallas used money that was previously earmarked for pensions to cover operating costs at CPS, a practice that deepened the problem.

Lightfoot has had a complicated history with pensions. She has repeatedly said pensions already promised to workers must be honored but has repeatedly suggested going to Springfield for unspecified changes. At the recent City Club speech, Lightfoot said labor unions and politicians need to “make some hard choices but do the right thing to make sure that our pension funds are actually available for our retirees.” She suggested that might entail consolidation with other ailing funds statewide, but declined to offer specifics.

As a candidate in 2019, Lightfoot floated exploring “alternatives to a city-funded pension for people hired” after a certain date. “Just as pensions are a promise, we cannot make promises that we have no ability to keep,” she wrote in response to a WBEZ questionnaire.

That move would be highly unpopular with powerful labor unions, which is why Lightfoot and other candidates won’t touch it.

At a recent candidate forum, Buckner, U.S. Rep. Jesús “Chuy” García and activist Ja’Mal Green raised their hands when asked who would commit to not raising taxes.

But their promises ignored a key reality: While the city has made some strides in recent years, its finances remain precarious, and it’s unlikely that the next mayor can govern without raising a single tax or fee.

“We always like to hear people say that we don’t want any taxes,” Ald. Roderick Sawyer, 6th, told voters at a candidates forum last month, noting the city had to meet its obligations and maintain solid ratings to keep its borrowing costs low. “What we want are responsible and predictable taxes.”

Sawyer and the other City Council member running for mayor, Sophia King, 4th, voted yes on Lightfoot’s first three budgets; King voted no on the mayor’s 2023 spending plan.

Few campaigns have released formal financial plans. García, who ran for mayor against Emanuel in 2015, has said he would “exercise leadership” to get the city’s economy “firing on all cylinders again,” noting he had helped secure federal COVID-19 relief funding in Congress.

For García, city finances are a potential weak point. One of Emanuel’s most effective attacks in the 2015 race was to question García’s ability to solve the city’s massive budget deficit and looming pension shortfall. In the weeks before the election, Emanuel allies rolled out budget books on wheels and suggested García use them to craft his plans, saying his proposal to launch a blue ribbon committee to study budget performance before identifying specific taxes or cuts was as realistic as “leprechauns and unicorns.”

Candidate Brandon Johnson released a budget plan that promises to “eliminate the city’s structural deficit, clearing the deck to make historic new investments” without raising property taxes. Johnson, however, said he would reinstate the per-employee corporate head tax on large companies for workers who perform 50% or more of their work in Chicago and would tax jet fuel at 9.2 cents per gallon, “making big airlines pay for polluting the air in our neighborhoods.”

Johnson, a Cook County commissioner, also proposed a 1.6% “mansion tax” on real estate transfers valued at more than $1 million, a new $1 or $2 charge on securities trades and an increase in the hotel accommodations tax, from 4.5% to 6%.

Green responded bluntly: “Ridiculous. Tax. Tax. Tax. HELL NO. Brandon is BAD for Chicago.”

Green has some unconventional ideas on economic revitalization. He proposed a city-owned bank that would prioritize affordable housing, home ownership, new development projects and small business lending. It would start with $250 million from the city’s $1 billion reserves, plus $250 million from the state and from federal relief dollars — an ambition that would be a challenge to implement.

Green also wants to prop up a single-family mortgage bond fund to assist 10,000 new homeowners, using bonds with a $1 billion capacity each year, as well as freeze taxes on city property that has been developed in the last year.

Though Green criticized Johnson’s tax proposals, Green has also supported a similar tax on high-end real estate sales to fund homelessness services.

Buckner, too, has found fault with Johnson’s plans, arguing they would stymie growth. Buckner has said he would expand the city’s current downtown congestion tax, potentially by charging all drivers, not just those in Ubers or Lyfts, and placing a fee on large businesses whose stormwater runoff stresses the city’s sewer system.

Business owner Willie Wilson is perhaps the most vocally anti-tax candidate in the race, having blamed high levies for everything from the loss of population and businesses to homelessness. He called for Lightfoot to cut property taxes, arguing that lowering them would keep more residents in Chicago and provide an infusion to the city.

“I wouldn’t support taxes on nobody. … I’m sick and tired of taxes. And I can afford to pay them,” the wealthy philanthropist said.

Vallas has promised tax relief and derided the mayor’s initial plan to increase property taxes in the 2023 budget, which she later scrapped. But he now says he doesn’t believe in levy caps and will instead work with the state legislature to cap property tax increases on individual properties. Should that not work, he would implement a city tax rebate program.

“We need to explore the feasibility of having a cap on individual property,” Vallas said, arguing that is the only way to protect against rapid gentrification. ”So if you’re not improving your property, you’re not expanding your property holdings, you simply don’t get some dramatic arbitrary increase in your property taxes that bear no relationship to your ability to pay.”

That proposal would likely require substantive changes to state and county law, experts say, and could result in other property taxpayers shouldering a higher burden.

Lightfoot has generally avoided big property tax increases, but has not avoided levy hikes to keep up with rising pension costs. The city’s levy under Lightfoot has risen from roughly $1.54 billion in 2020 to $1.73 billion in 2023. Her first budget raised the levy by $64 million. Her next included her largest increase, $94 million, followed by a $76 million rise the next year and $25 million for 2023, in which she waived her policy of tying increases to inflation.

Lightfoot argued the inflation policy made practical sense for both the city and taxpayers, and also showed she had a political discipline that her predecessors lacked.

This year’s waiver was possible thanks to better-than-expected revenues, but others suspected it was to avoid having an election-year property tax increase.

Most candidates said the city needs to grow to reduce the tax burden. In 2019, Lightfoot and former U.S. Commerce Secretary Bill Daley set a goal of getting Chicago’s population, now at about 2.7 million, back to 3 million people by 2030.

Referencing the aspirational 1909 Burnham plan to reimagine the city, Vallas said recently that he wants to expand programs to rebuild the South and West sides.

Vallas’ development plan focuses on a series of financial tools that he said would invest in the South and West sides. That includes creating an “independent community development authority” that will be in charge of doling out city funds and directing city agencies to spur local economic growth.

“It would operate free of City Hall politics … and of aldermanic privilege,” Vallas said. “The determinations of what must be done will not be driven by LaSalle Street and the Department of Planning.”

The commission would use the money for projects including renovating homes, funding small businesses, micro-financing loans, developing industrial parks and supporting social services. Vallas also floated a municipal “fair share investment trust” that would operate like the city’s own hedge fund, using an allotment of new tax-increment financing revenues, developer fees and gambling revenues toward commercial and mortgage loans on the South and West sides. That idea would also likely need state approval: Revenues from the Chicago casino are expressly dedicated to funding police and fire pensions.

Vallas also proposed a “city land trust” to use TIF bond profits, property tax abatements and eminent domain to acquire vacant buildings and lots and flip them to local developments and community organizations, which would be eligible for financial support in the form of equity grants and loans.

Johnson has defended himself from criticism that he wants to defund police or raise taxes by saying he would spend money on the city’s residents, which he said would lead to positive results down the road. Programs include reopening mental health clinics.

“If anything, call me the investor-in-chief, because that’s exactly what I’m going to do as mayor: invest in people,” Johnson said.

King said “safe communities and good schools” would foster growth. “We also have to give incentives to teachers and police to make sure that they don’t leave quicker than we can hire them,” including mortgage assistance for those who build on vacant lots.

Sawyer has criticized the city’s TIF system, which creates districts from which additional taxes generated from rising property values are sent to a special fund for further development or investment. Under Lightfoot, the program has expanded, to the complaints of some aldermen who say it has grown too large and is focusing on areas not in need.

“The TIF system is flawed,” Sawyer has said. “It started out as a good idea when serving blighted areas. Now it has devolved into areas that are pimping the TIF program to continue to highlight affluent areas. We have areas like Fulton Market … that continue to extend their TIF life, and they don’t need it any longer. We need to be in Englewood. We need to be in Lawndale, East Garfield Park. These areas that need TIF funding and assistance.”

As a candidate in 2019, Lightfoot pledged to end Chicago’s “addiction” to fines and fees. She reiterated the promise repeatedly as mayor and, earlier in her term, introduced a series of reforms like ending the practice of suspending driver’s licenses of people who haven’t paid parking tickets, and reducing vehicle sticker penalties.

Lightfoot’s overhaul created a six-month payment plan that reduces down payments and gives those with ticket debt more time to pay. It also allows people to request a 24-hour extension to pay fines in full or get on a payment plan if their vehicles are booted. She also eliminated late fines at Chicago Public Libraries.

The mayor has, however, greatly expanded the reach of Chicago’s controversial speed cameras, lowering the ticket threshold from 10 mph over the limit to six, generating tens of millions of dollars and helping balance the budget. Lightfoot has defended the lowered threshold by calling it a safety issue while also acknowledging that raising it again would lead to fiscal problems.

On the topic of fines and fees, several challengers have signaled they’d be in favor of abolishing the use of red-light and speed cameras, saying they’re regressive taxes that unduly burdens minorities. Those candidates are Johnson, Sawyer, Vallas and Wilson, according to a Tribune questionnaire, though Sawyer said he would make a few “safety” exceptions.

Green said he would ban red-light cameras only, but he, along with King and Buckner, have called for curtailing the use of vehicle booting. Green wants to end booting for nonpayment of violations, King wants to end booting on private property and Buckner simply wants to “ban the boot” entirely. King also said she would distribute speeding and red-light cameras more “equitably” across the city.

Garcia, meanwhile, called for a return to the 10 mph the end of Lightfoot’s lower 6 mph threshold for fining drivers for speeding, reversing it back to 10 mph, as well as a seven- to 10-year statute of limitations on ticket debt collections.