(Bloomberg) -- While Chicago Mayor Brandon Johnson scraped together enough votes to pass a 2025 budget with a patchwork of tax hikes, the city’s fiscal woes are far from over.
Higher wages, pension bills and inflation are still weighing on the city as Covid-era funds used to help plug the 2025 deficit are ending. That means less cushion for future shortfalls, and the outlook for more state and federal aid is uncertain. Johnson said that he’ll keep pushing for progressive revenue like higher levies on the rich, a campaign vow that hasn’t panned out yet.
“While Chicago’s approved 2025 budget underscores a continuing commitment to advance pension payments, it virtually guarantees that the city will face another challenging budget year in 2026,” said Michael Rinaldi, senior director at Fitch Ratings, who added that the spending plan relies on near-term “unsustainable” resources. Prospects for hiking property taxes, getting new revenue and spending cuts are “unclear at best,” he said.
While Chicago’s woes stand out — it has the most debt relative to revenue of any major US metropolis — the city isn’t alone. Governments across the US face tough decisions on spending given limited revenue. In California, Oakland and neighboring San Francisco are weighing budget cuts to close deficits.
On Monday, Chicago’s budget, which avoids major spending cuts, narrowly passed the city council. The plan is projected to bring in roughly $187.5 million in revenue by raising fines and fees on various products and activities, according to the city’s latest estimate. It hikes levies on cloud computing, ride shares, grocery bags, streaming services and parking.
Officials swept roughly $74 million of American Rescue Plan Act funds to help close the gap and they plan to defer a loan payment. Many of the measures were one-time fixes, meaning the challenges are poised to get worse.
“Due to the short-sighted decisions of Mayor Johnson and previous administrations, Chicago is operating in an unfortunate deficit,” said Alderman Bill Conway, finance committee vice chair who voted against the budget. “2026 will be difficult.”
Earlier this year, Johnson had projected deficits of $1.1 billion in 2026 and $1.3 billion in 2027. His administration said about 70% of the 2025 spending plan relied on structural solutions that will generate ongoing revenue to ease these future gaps. But the city also has long-term costs that are outpacing revenue, including more than $37 billion in unfunded pension liabilities.
The mayor and city council took a “big step forward” by mitigating the 2025 gap and those solutions put Chicago “in a much better position as we work to ensure outyear budget gaps are also solved through structural solutions,” LaKesha Gage-Woodard, a spokesperson for the budget and finance offices, said in an email.
The business community is concerned about the slew of tax hikes. Some of the higher levies like the cloud computing tax may hamper economic growth, said Jack Lavin, chief executive officer of the Chicagoland Chamber of Commerce. He said policies to create jobs as well as reforms and cuts will help the city get out of deficits.
After the budget passage, Johnson said he’s reaching out to the state for progressive revenue solutions. But Illinois has its own budget strains with a potential $3 billion gap in the fiscal year that starts July 1. He also reiterated his pursuit of higher taxes on the wealthy.
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. Still, in November, residents signed off on a nonbinding proposal to add a 3% levy on annual incomes over $1 million.
Budget Compromise
Johnson’s original budget proposal included a $300 million property-tax increase that he scaled down and ultimately removed. He also cut proposed hikes to liquor levies and added efficiencies like shrinking his own staff, said Finance Committee Chairwoman Pat Dowell.
“The budget is not perfect” but it is a compromise, Dowell said before voting in favor of the plan on Monday.
The budget continues to put more money than statutorily-required into pensions and maintains critical investments in basic services like alleviating homelessness and tree trimming, said Alderman Carlos Ramirez-Rosa.
Many aldermen who didn’t support the approximately $17 billion spending plan said there needed to be more cuts.
“Chicago has a history of making financial decisions in the interest of short-term political expediency that lead to disastrous long-term consequences,” said Alderman Andre Vasquez said. “This budget represents more of the same.”
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