Chicago Mayor Brandon Johnson speaks on the Democratic National Convention earlier this yr. Johnson on Wednesday unveiled his fiscal yr 2025 budget proposal.
Bloomberg News
Chicago Mayor Brandon Johnson on Wednesday proposed a $17.3 billion fiscal 2025 budget that calls for a $300 million property tax increase, a move that reverses a campaign promise but avoids cutting back on pension payments which might be integral to the town’s credit rankings.
The whole budget appropriation represents a 3.2% year-over-year hike driven largely by increases in grant, enterprise and pension fund spending.
To shut a $982 million budget gap, the Johnson administration relied on a combination of 80% structural fixes and 20% one-time revenue sources, based on a presentation shared with The Bond Buyer.
Property tax revenues fail to totally cover debt service or pension costs every yr, so the company fund has to cover the difference, based on city officials. The proposed property tax increase would allow the town to cut back its corporate fund subsidy to pension funds.
“This can be a very difficult decision,” Johnson told reporters in a briefing Tuesday. “But to be quite frank with you, with our pension obligations and people who rely on retirement, we just have had irresponsible administration after administration which have kicked the can down the road, and now it’s in front of my door. With the critical investments that we are going to still make, it is important that we do right by the individuals who served this city.”
About 28% of the 2025 budget is state and federal funding, which is the bottom level in a decade — markedly lower than the 47% and 40% in 2021 and 2022, respectively — and lower even than 2015’s 30%.
“A variety of these problems are from the federal monies running out,” said Howard Cure, director of municipal bond research at Evercore Wealth Management. “The mayor campaigned on not raising property taxes — that is the simple way out without alienating plenty of the unions. Admittedly, property taxes weren’t overly burdensome in Chicago… but that is modified.
“With Chicago, it is very rarely the actual economy [that’s the problem],” he added. “The pension system is grossly underfunded, so you desire to not less than tread water — be sure you are not making the unfunded pension liability worse.”
Cure said the town was given credit from the rating agencies for addressing its pension obligations, “albeit over a protracted time period.”
Chicago also has a history of “pretty militant unions, and the mayor has a civil servant background as a former teacher. That group helped him get elected, in order that’s the talk happening here,” he said.
Chicago is rated A-minus with a stable outlook by Fitch Rankings. Kroll Bond Rating Agency assigns an A rating to the town’s unsecured general obligation bonds and a AA-minus rating to its wastewater revenue bonds; the outlook is stable. Moody’s Rankings affirmed its Baa3 rating on Chicago early this yr, with a positive outlook. S&P Global Rankings assigns the town a BBB-plus rating with a stable outlook.
“Chicago still has plenty of work ahead before the proposed budget is adopted,” said Michael Rinaldi, senior director at Fitch. “The inclusion of the advance pension payment is favorable, together with the rise within the property tax levy as a seamless revenue stream for the town.”
Conversely, Rinaldi said, “There stays risk to increasing [Chicago’s] reliance on [tax increment financing] sweeps, the execution of certain cost savings proposed, including elimination of public safety positions, and the rise in projected corporate fund gaps in 2026 and 2027.”
Fitch said in its July upgrade that the continued practice of creating advance pension contributions, in amounts sufficient to shut the gap between the actual pension contribution and the actuarially really useful contribution, may lead to positive rating motion.
Scott Nees, director and lead analyst at S&P, told The Bond Buyer that the mayor’s proposal is potentially significant for just a few reasons.
“The proposed increase is structural in nature and represents a meaningfully large down payment against the town’s sizable structural budget gap,” which is on a growth trajectory that’s unsustainable long-term, Nees said.
“As well as, since the proposal represents a reversal of the mayor’s campaign pledge not to boost property taxes, its use for the 2025 budget could indicate the potential for other structural budget-balancing measures in the longer term, including possible tax increases,” he said.
Nees noted that any movement away from supplemental pension payments “could place downside pressure on the rating.” He said S&P would view that as “one other type of unsustainable budget practice that prioritizes short-term relief over long-term stability.”
KBRA and Moody’s didn’t reply to questions by press time.
Absent the property tax increase, the Johnson administration said, the town would should cut its workforce by 17%. Most impacted could be the police department, the hearth department, streets and sanitation, and fleet and facility management.
Chief Financial Officer Jill Jaworski said cutting back on pension payments just isn’t the reply to the town’s budget woes.
“Supplemental [pension] payments are having a really significant impact on the amount of cash we’re going to pay over time — we’re projecting that we are going to save $3.9 million through 2055 over the quantity that we’d have needed to deposit if we didn’t make the advance contribution,” she told reporters Tuesday. The administration expects to make an advance payment of $272 million in 2025.
The administration plans to make use of $273.6 million in property tax levy revenue and $186.3 million in corporate fund revenue for debt service in 2025, including planned transactions.
Among the many solutions the Johnson administration is counting on to shut the budget gap are a Municipal Employees’ Annuity and Profit Fund (MEABF) payment of $175 million from Chicago Public Schools and a rise within the alcohol tax, which has not been raised in 16 years, that ought to usher in $10.6 million. Town can also be drawing on $54 million in tax increment financing surplus, based on the presentation.
“Certainly one of the things that we checked out on this budget very fastidiously was our TIF districts,” Jaworski said. “We looked, over time, on the expenditures in the varied TIFs that exist in the town today. Nearly all of the expenditures occurred in a fairly small geographic area. In the vast majority of the TIFs, the expenditures have been relatively modest, really demonstrating the worth of doing the [affordable housing] bond and having the ability to distribute the proceeds of that in a more equitable manner.”
“I do not fault the town for attempting to pull money from the TIF districts,” Cure said. “You simply wish to do an evaluation about, will pulling this money make it harder for economic development?”
Cure noted that the Civic Federation of Chicago, a nonprofit fiscal watchdog, suggested in a recent report expanding the sales tax base to incorporate a tax on services. It was one in all a laundry list of revenue options listed within the report before a property tax hike, which is “too often one in all the primary places government officials search for increased revenue,” the report noted.
“For a spread of reasons, the Civic Federation believes [property tax increases] ought to be a final resort for the upcoming fiscal yr,” the report added. “Mayor Johnson promised throughout his campaign to avoid raising property taxes, and the FY2024 budget didn’t include a general property increase.”
Civic Federation President Joe Ferguson told The Bond Buyer that the 2025 budget proposal’s reliance on property taxes is “significant,” and comes at a nasty moment for taxpayers.
“It looks just like the administration leaned hard into property taxes and right into a TIF sweep,” he said, adding that it appears the best upside to the town of the TIF sweep was freeing up funds for the MEABF payment. “That really has more value to the town than what flows to the town directly from the TIF sweep,” he said.
“While plenty of the evaluation will inevitably concentrate on what it means to property owners on the north side, the bandwidth to soak up costs is most constricted within the poorer neighborhoods of the town,” Ferguson said. Chicago is already seeing a rise in nonpayment of tax collections, he said.
“Historically, we view the budget because the mayor’s budget, but there is a reason why Chicago is often known as a powerful council, weak mayor system,” he said. “It’s the town council must pass or approve the budget annually. This yr, we must always view [the mayor’s proposal] as the top of the start.” The council, he said should “not merely tinker on the margins, but propose alternatives to the mayor’s budget.”
“We’ve not collectively seen anything public-facing that means that the mayor actually did convene a gathering of union leadership” to contemplate suggestions like furloughs, he added.
Cure said other areas of concern are the connection the mayor has with the governor; the opposite major districts, just like the Chicago Public Schools board, the parks and the Chicago Transit Authority, which depend on the identical tax base; potential police misconduct judgments; the consequence of the federal election; and City Council cooperation, with many aldermen dissenting from the mayor’s recent decisions regarding the CPS board.
There’s also the query of how the mayor spends his political capital in Springfield, with the migrant crisis weighing on the town, with CPS and the CTA needing more state funding than they currently get.
“You’ve got to have your priorities straight, and while it might be politically unpopular if the Bears left, I’m unsure if the subsidies that will be given to the Bears to remain in the town equal what [the stadium] would generate,” Cure said. “You have to select and select what you desire to prioritize.”