(Bloomberg) -- Chicago Mayor Brandon Johnson is proposing a $300 million property tax hike — breaking a campaign promise — to help close next year’s nearly $1 billion budget shortfall.
Johnson released the second budget of his first term on Wednesday as he faces mounting fiscal challenges that make his progressive agenda increasingly difficult to accomplish. Plus, federal pandemic aid is running out, revenue is falling short of expectations and woefully underfunded pensions are testing the third-largest US city.
His 2025 spending proposal pulls a record sum from unused economic development funds, raises taxes on alcohol and eliminates vacant positions to help cut costs. The $17.3 billion total budget plan includes the $5.6 billion corporate fund — the city’s main operating account used to pay for public safety and other services. Johnson needs to close a $982.4 million gap in that account.
The proposed $300 million property tax increase is estimated to relieve some pension costs for the corporate fund and would be the largest increase in the levy since 2016. According to the mayor’s office, property owners will see an estimated 4% increase on average on their property tax bill using 2023 assessed values. Nearly 80% of the city’s property taxes go to its underfunded pension funds but the corporate fund also often adds more.
“This was a very excruciating process,” Johnson told reporters regarding the decision to propose a property tax increase. “The alternative is just not acceptable.”
Property Tax Hike
Without the property tax hike, the city would be required to slash its workforce by 17%, with police and fire among departments most impacted, according to budget documents. The proposed increase will bring the levy to the same amount it would have been if it rose with the consumer price index since 2019, the documents say. Johnson had campaigned against a property tax increase tied to inflation that his predecessor Lori Lightfoot had put into place.
The Civic Federation, a budget watchdog group, cautioned earlier this month that an increase “should be a last resort” because the city’s ongoing triennial property assessment could shift the burden from stressed commercial real estate to residents.
“The choices we made to present a balanced budget have certainly been sobering,” Johnson said in an address to the city council on Wednesday. “As a city, we are constrained by our legacy pensions and our debt costs. These past debts challenge our budget and ability to invest in the great city that we all love.”
The administration was cognizant when looking at resources that underfunding pensions and other obligations could negatively impact Chicago’s credit rating after the city has seen a series of upgrades, Annette Guzman, the city’s budget director, said after the mayor’s speech. The city is rated BBB+ by S&P Global Ratings, A- by Fitch Ratings and Baa3 by Moody’s Ratings.
Johnson’s willingness to back off his promise not to raise the property tax levy signals more tax increases are possible in the future, said Scott Nees, a director at S&P, in an emailed statement.
The city’s sizable budget gap — absent structural solutions — is “unsustainable on a long-term basis,” he said.
Johnson also intends to declare a record $570 million surplus from the city’s tax-increment financing districts to balance the budget. That surplus allows him to pull unused money from economic development funds for the city’s budget and distribute it to other entities like Chicago’s cash-strapped school district. The city will use $54 million from the so-called TIF surplus toward closing its 2025 budget deficit.
Chicago Public Schools will get more than $300 million from the surplus, which will help the district send the city a pension payment that’s been at the center of a months-long fight between the district’s leadership and City Hall.
Johnson said Chicago will continue to work with state and federal sources for more funding. Voters in Illinois and Chicago have rejected ballot measures in recent years to move from a flat income tax rate to a graduated one and to increase levies on the sale of real estate over $1 million.
The mayor’s budget proposal is about two weeks later than originally planned to give his finance team more time to craft solutions.
The city council will hold hearings about Johnson’s budget proposal over the next month or so. The 50 members are expected to vote on it before the end of 2024, with a simple majority needed to pass.
Several aldermen said they don’t know yet how they will vote after the budget address and roughly a dozen members signed a letter calling a property tax increase a “non starter.”
(Updates to add details on city bond ratings beginning in ninth paragraph and aldermen votes in last paragraph.)
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