(Bloomberg) -- Chicago Mayor Brandon Johnson has five weeks to pass a budget that fills the city’s nearly $1 billion deficit. Time is short, and so is the money.
The progressive first-term Democrat, whose policies are drawing opposition from the business community, is currently in a charged debate with aldermen on how to raise revenue to meet rising costs after the city council unanimously rejected his proposed property-tax hike.
Now, they’re negotiating piecemeal items from higher levies on alcohol sales to cloud computing to garbage fees. The fight is putting the city’s credit rating at risk, with S&P Global Ratings warning that the likelihood of ending the year without a budget has increased.
“Chicago is really in some serious trouble,” David Schleicher, a Yale Law School professor who focuses on state and local finances, said. The city is “caught between the failure to address structural problems during Covid and broad unhappiness with the property tax.”
The standoff is shedding light on Chicago’s mountain of debt and pension liabilities, which make up nearly one-third of the city’s spending and limit its budget flexibility. Last week, S&P put the city on a negative credit watch with at least a one-in-two chance of a downgrade in the next 90 days.
Entering the pandemic, Chicago was already in bad fiscal shape, according to Schleicher. It is the most indebted major US metropolis relative to revenue.
Billions in pandemic aid that are set to expire only temporarily strengthened finances, he said, adding that while voter anger over rising property taxes has increased nationally, it’s been bubbling over in Chicago.
As part of next year’s proposed $17.3 billion budget, the city council has to pass a property-tax levy and authorize spending. Without those, the city can’t collect property taxes and its authority to spend is at risk.
Chicago Budget Director Annette Guzman declined to comment on what contingency plans the city has in place if an agreement isn’t reached, but also said all parties are focused on getting it approved on time.
Pressure to Spend
The city stands at a critical juncture, and the mayor’s calls over the next five weeks could determine its financial trajectory. Johnson inherited the liabilities but his critics question if he is doing enough to pull back on spending.
Johnson, who has referred to himself as the “collaborator in chief” during budget talks, recently told reporters that he is “going to continue to do what I was elected to do, which is to respond to decades-old processes and failures, by repairing the structural damage by actually paying into our pensions while making the critical investments that ultimately build a better, stronger, safer Chicago.”
“The important thing in this moment is that we cannot have cuts to services,” Johnson said.
A former social studies teacher, Johnson took office in 2023 with the backing of the Chicago Teachers Union, a local political force that has been pushing the city to spend more on schools as well as homelessness prevention and crime that impact students. At the same time, he faces pressure from labor groups and a federal mandate to improve policing.
But finding money for all that has been difficult. Chicago’s debt service and contributions to its underfunded pensions add up to about $5 billion, roughly 29% of the 2025 spending plan, according to the proposed budget.
Chicago’s total budget has swelled by 62% from 2019. It has expanded given grants during the pandemic but revenue for the corporate fund is set to drop next year from a peak this year of $5.7 billion as federal aid winds down, according to the city’s forecast.
The roughly $982 million budget deficit for 2025 is in the city’s main operating account, the corporate fund, which pays for services including public safety, health services, streets and sanitation.
So far, Johnson’s quest to find revenue has largely failed. In addition to aldermen unanimously nixing his $300 million property-tax hike, voters rejected a higher tax on sales of homes over $1 million.
Still, Chief Financial Officer Jill Jaworski last week told reporters that some level of property-tax increase will likely be implemented. Johnson has floated a $150 million hike.
Some aldermen oppose any increase. Others are polling residents to see if they would accept a smaller hike. It’s a tough sell given roughly 80% of the city’s property taxes go toward paying down the city’s $37 billion unfunded pension liability, not communities directly.
A separate poll commissioned by a group of aldermen gives a glimpse into voters’ frustration. The online survey of 801 Chicago voters from Nov. 18 to 21 showed that 78% of Chicagoans are more likely to vote against their alderman if they vote for a $150 million property-tax increase without prioritizing other options. Roughly two-thirds would blame the mayor more if a city shutdown occurs, according to a letter to Johnson dated Nov. 25 and signed by more than a dozen city council members.
“We know there are many ways we can collaborate and approve a budget that works for all Chicagoans,” the letter said.
Alderwoman Samantha Nugent said increasing the levy could come at a time when property valuations in her ward are rising 25% or more as part of the city’s triennial assessment this year. The threat of residents and businesses moving out of her region is constant.
“If we want to encourage businesses to invest in our city, we have to be a livable city,” Nugent said.
The mayor has repeatedly said service cuts are a non-starter and he opposes layoffs or furloughs. Johnson’s finance team during budget hearings has pushed back on shifting the last of the dollars left over from the American Rescue Plan Act to close the budget gap or downsizing efforts focused on equity.
“We really need to look at prioritizing our investments,” Christopher Taliaferro, an alderman from a ward on the west side of the city and a former police officer, said during a recent budget hearing. “It’s almost like buying caviar when you can only afford Spam. I love Spam but the problem is we are spending beyond our means.”
(Adds results of poll commissioned by aldermen in 20th and 21st paragraph.)
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