How Chicago’s pension crisis drives high taxes, fiscal turmoil

Before deciding who best can lead Chicago through its financial problems, it helps to understand what those problems are. Here’s a primer.

As Chicagoans prepare to cast their ballots for the Feb. 28 municipal election, more than 25% of potential voters say the economy is a top issue mayoral candidates should be addressing.

But the nine candidates aren’t, at least not with any specifics on the campaign trail, at various forums or on editorial board questionnaires regarding city finances. How Chicago collects and spends money is arguably the most important factor for economic development.

The city of Chicago has more pension debt than 41 other states. Its growing debt has led to serious spikes in city property taxes in recent years, while straining the city budget.

Chicagoans need to hear from the candidates about how each of them plans to stabilize city finances to avoid continued tax hikes that make living in the city unaffordable for many people. Here’s what should be top-of-mind for Chicagoans as they weigh their options for mayor, and what each candidate should be addressing in detail.

Pensions

Chicago owes $33.7 billion in unfunded pension liabilities across the city’s four employee pension funds. There is $14.1  billion owed to the municipal pension fund, $12.5 billion to the police pension fund, $5.5 billion to the fire pension fund and $1.6 billion to the laborers’ pension fund.

Here’s an example of how bad things have gotten: Starting in 2023, the statutory payment to the firefighters’ pension fund jumped to 74.48% of payroll and is scheduled to remain constant at that level. For the police pension fund, this figure is 64.1% of payrolls. Chicago is paying for almost two full workforces.

In an effort to begin paying down these massive debts, the city is currently spending nearly $2.7 billion, or 23% of the city’s budget, on pension contributions annually. Ten years ago, pension contributions totaled $478 million and were just 7% of net total appropriations in the city budget. So pensions’ bite from the city budget has more than tripled.

Even as pension contributions have continued to grow exponentially, the systems are more indebted than in the past. Currently, the four city-run pension funds have funding ratios ranging from 20%-45% funded, with a collective funding ratio of 23.8%. Experts warn that pensions with funding ratios below 60% are deeply troubled and plans with funding ratios below 40% are likely to be past the point of no return.

Even though pension contributions are scheduled to continue to grow during the next several years, pension debt is also projected to grow through 2029 for the Police Fund and through 2035 for the Municipal Fund. These projections – and the systems themselves – also rely on assumptions regarding the accrual of liabilities and investment returns, which are difficult to accurately predict. If these assumptions are incorrect, with a recession negatively affecting market returns for example, pension debt could very well continue to grow beyond these projections.

In order to stabilize city finances, prevent further crowd-out of other city functions and secure retirements for city workers, Chicago’s mayor must support pension reform. Lightfoot recently pushed this issue as did her predecessor, Mayor Rahm Emanuel, late in his term. That will require amending the Illinois Constitution to allow for changes to the growth of future benefits. The mayor must lobby state lawmakers to place that amendment before the state’s voters.

Taxes

Chicagoans already pay some of the highest taxes in the nation. Among the 15 most populous cities in America, Chicago’s 911 surcharge, wireless taxes, amusement tax, soft drink tax, bottled water tax, cigarette tax, parking tax, ridesharing fees and homesharing fees were the highest in the country as recently as 2018. Chicago’s total combined state and local sales tax rate is second highest in the nation. However, the largest tax Chicagoans pay are property taxes, which are also among the highest in the nation.

During the past 10 years, Chicago’s property tax levy has doubled, growing from $860 million to more than $1.7 billion in 2023.

These increases raise costs for homeowners, renters and businesses across the city. The most recent reports from the Cook County Clerk showed property taxes increased by up to $472 for the average homeowner on the North Side of the city. For businesses in central Chicago, property tax bills increased by $4,806 on average, while property tax bills for businesses on the North and South Side remained essentially flat.

Chicago’s next mayor needs to make a commitment to families and businesses that they will not continue to be nickeled and dimed with ever-increasing taxes and fees. Top priority should be placed on property taxes, which increase hundreds of dollars annually for the average homeowner in the city and affect rent prices. The mayor should commit to freezing the city’s property tax levy, including forgoing the automatic annual increases under the state’s Property Tax Extension Limitation Law.

Budget

The City of Chicago has faced a structural deficit – meaning growth in expenditures is expected to outpace growth in revenues – each year since at least 2001. However, the city is legally bound to pass a “balanced” budget. In order to close the projected annual budget gap, the city has often resorted to “scoop and toss” budgeting practices, such as refinancing and restructuring debts, which further delay and increase inevitable costs, or relied on one-time revenue sources, fund sweeps or other “efficiency and savings” measures to temporarily provide the resources needed “balance” the current years’ budget.

These short-term solutions, while politically expedient, do little to rectify the underlying problem in the city budget: Chicago spends faster than it earns. As a result, the city has faced a projected budget deficit each year for well over two decades.

Most recently, the city reported a $127.9 million budget deficit for this year, which it closed through fund sweeps, increased revenue projections and additional one-time revenue enhancements. Still, despite closing the 2023 budget gap, the city’s most recent budget projections forecast budget deficits up to $1 billion in fiscal years 2024 and 2025. Even under the most optimistic projections, the city projects large deficits of $266 million to $306 million.

As a result of these poor budgeting practices, the city is also facing massive debt burdens. The city currently has more than $6.3 billion in direct debt – taxpayer-supported debt – the equivalent of $2,311 for every resident in the city, on top of nearly $12 billion in long-term debt in the form of bonds, notes and certificates payable. This debt also takes a tremendous chunk of the city’s budget, with debt service costs totaling $2.4 billion in 2023.

The annual cost of the city’s debt burden has increased by more than $499 million during the past five years and is now eating up more than 20% of the city budget.

Rather than continuing to rely on temporary measures or non-recurring revenues to bring budgets into balance or restructuring debts to push these expenses farther into the future, Chicago’s mayor must commit to truly balanced budgets, where revenues sustainably meet or exceed expenditures without relying on these tricks. Without these changes, the city will not be able to provide long-term financial stability to its residents.

Summary

 Decades of irresponsible spending and budgeting practices have worked Chicago into its current financial state, leaving taxpayers shouldering some of the highest tax burdens in the nation while large chunks of public funds are devoted to debt costs. Combined, current debt servicing and pension costs eat up 42.4% of the city’s budget.

Chicago’s next mayor should commit to pursuing pension reform and more responsible budgeting practices in order to save Chicagoans from suffering more of the same in the future. Chicagoans who will be voting in the upcoming election should also keep these – and other factors – top of mind as they decide who to cast their ballots for in the upcoming election.

Early voting has started ahead of the Feb. 28 city election. Those who vote from the comfort and safety of their homes can research where the candidates stand on these important issues and assess how likely the person would be to lead Chicago out of its fiscal problems – or deeper into them.