Chicago mayor’s budget planss pension payments, raises revenue
Bloomberg News
Chicago Mayor Brandon Johnson’s $17.6 billion 2027 budget pledges to continue the city’s supplemental pension payments but calls for a host of revenue-raising measures, including a personal property lease tax hike, increased sports wagering and liquor tax rates, and a revival of the corporate head tax that aldermen voted down last year.
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In an updated credit opinion on Thursday, Moody’s Ratings noted the approximately $800 million budget gap for 2027 and said the city “will need to make material adjustments to achieve structurally balanced operations and begin improving reserves while accommodating growing pension contributions.
“Material expenditure reductions could close some of the gap but are unlikely given the high fixed costs and the desire to maintain current service levels,” Moody’s added. “While potential revenue enhancements have not been formally adopted, the city has several proposals outlined in the menu of options available through its work with Ernst & Young and with the Financial Futures Task Force.”
Continuing “the pension funding policy is a positive,” Ben VanMetre, vice president of public finance at Moody’s, said by email.
VanMetre said factors that could lead to a downgrade are an inability to adopt a structurally balanced 2027 budget or a decline in reserves in 2026.
“A demonstration of prudent fiscal management practices that preserve financial flexibility and support structurally balanced operations without a reliance on one-time revenue” could lead to an upgrade, he said.
Moody’s affirmed its Baa3 issuer and general obligation unlimited tax ratings on Chicago last week. The outlook is stable.
The Civic Federation, a Chicago-based fiscal watchdog group, criticized several key elements of the mayor’s proposal.
President Joe Ferguson said the proposal “represents an unacceptable abdication of responsibility to meet the fiscal realities facing the city of Chicago.”
The administration has not meaningfully acted on the reforms outlined in the Ernst & Young and Chicago’s Financial Futures Task Force reports, he said, “instead relying again on short-term fiscal maneuvers that perpetuate the city’s structural imbalance and shift costs onto future taxpayers.”
Specifically, Ferguson said, “Borrowing to pay for recurring police misconduct settlements, exhausting one-time proceeds from the parking meter transaction to balance a single year’s budget, and failing to implement meaningful savings would only dig the city deeper into a financial hole.”
In his Oct. 21 prepared remarks, Johnson defended his administration’s record on finding efficiencies.
“As we balanced the Fair Share Budget, we heeded calls to prioritize savings and efficiencies,” he said. “Over the past three budgets, we’ve found $740 million in savings and efficiencies without layoffs,” and will account for another $120 million in savings “through corporate cost reduction initiatives. … To be responsible stewards of taxpayer dollars, we are renegotiating contracts, consolidating real estate, and modernizing our fleet.”
Johnson noted, “organizational improvements to debt collection practices” brought in an additional $500 million over the past year. “We did not resort to predatory practices or selling residents’ personal information to third parties,” he said.
The failure to wring more revenues from the 2026 budget’s planned sale of debts has been a point of contention with some aldermen.
Alderman Bill Conway suggested the revived corporate head tax won’t get very far this year, notwithstanding the addition of the Socioeconomically Disadvantaged Area Employment Expansion & Development (SEED) tax credit to reward companies that hire in disadvantaged neighborhoods.
“The head tax was a dead tax several times over the last year,” he said. “It is an unserious bit of political theater to simply put it back in the budget.”
The supplemental pension payment is also a source of controversy because it includes the $75 million upfront payment from the recent updated sale of the city’s parking meters.
“It was the collective understanding of city council that that $75 million would be above the actuarial pension payment and the supplemental,” Alderman Bill Conway said. But that amount is only contributing toward the supplemental payment.
“As originally constructed in 2008, (the parking meters sale) was a taxpayer disaster, and it was a taxpayer disaster for two reasons,” he said. “One, Mayor [Richard M.] Daley sold them for far too little. But secondly, they used a good chunk of the money right away to fill operating costs, and it seems as though we’re doing that again.”
Bond rating agencies will be watching how the city handles the supplemental pension payment, said Howard Cure, partner and director of municipal bond research at Evercore Wealth Management.
“That’s always a trigger point for the rating agencies, if the city’s continuing to fund the pensions,” Cure said. “The more money they can dedicate to the pensions, the better off they are from a credit perspective.”
The $480 million of borrowing to pay police misconduct settlements “makes sense, if you’re settling what would be multiple years of expenses, that makes some sense, and a part of that $480 million is going to settle the [Detective Reynaldo] Guevara cases,” Conway said, referring to a disgraced detective who committed multiple abuses in the late 1980s and ’90s.
“However, that is either $130 [million] or $260 [million] of the $480 [million] total,” he said. “It seems as though the remainder of that total is basic operating litigation that we have regularly, and that’s then much more much more of an operating expense.”
Justin Marlowe, research professor at the University of Chicago’s Harris School of Public Policy and director of the Center for Municipal Finance, pointed to
“The main takeaway … was that police misconduct settlements are a completely predictable budget line item,” he said. “The exact amounts are certainly going to vary from year to year, but there’s really no reason that the city should not be planning for and budgeting for police misconduct settlements.”
Chicago could improve the coordination between its legal department and its finance team, he said, heeding the example of other major cities.
“We could probably argue that it should be trial lawyers and not budgeting people actually negotiating these settlements,” he said. “But … other cities have a very different approach to this. They have a framework up front that says, ‘Yep, police misconduct happens. When it happens, this is the baseline payment that we typically make, and there’s room to negotiate beyond that.’ But some expectations are (set) up front, and that fixes everybody’s bargaining position and makes budgeting a lot easier.”
The added costs incurred by borrowing for misconduct settlements, “and especially now the additional costs in a rising interest rate environment — we can trace those costs directly back to just a lack of planning,” Marlowe said. “This problem is going to go on, and it’s going to become more expensive to deal with every single year.”
Marlowe also highlighted the proposed budget’s increase in the personal property lease transaction tax, which Johnson says will “ensure that data centers, artificial intelligence services and large technology companies pay their fair share.”
Marlowe called it “an interesting study in how Chicago, despite all of its financial foibles, has happened to be in the right place at the right time,” managing to capture some of the growth in the digital economy. But he warned some evidence suggests the costs are not primarily borne by big business.
It’s possible “a lot of those costs are ultimately passed on to those small businesses and consumers,” he said. “The truth is we don’t know. It’s a relatively new tax. It’s a relatively new part of the economy, and so we’re still learning.”
Cure noted, the PPLT increase comes on top of hikes in recent years. “It used to be 9%, in 2025 it was 11%, in 2026 it was 15%,” he said. “Now they want to raise it to 20%. That’s a big increase over just a pretty short period of time.
“If you’re going to put taxes on businesses, is there a breaking point?” he added. “There are certain limits to how much you can raise taxes.”
The budget also projects a $522 million tax increment financing surplus, $117.9 million of which would go to the city, $9.4 million of which would go to the public library system and $286.1 million of which would go to Chicago Public Schools.
“That we are sweeping that much money that would otherwise be used for infrastructure is concerning,” Conway said, adding that aldermen are “going to have to dig into what the impact of that will be on future infrastructure spending.”
He called the surplus “surprising” and noted, “It was my understanding from previous comments by the Office of Budget Management that the TIF surplus was likely to be something like $360 million. The fact that it jumped to $520 (million) — it’s not clear what projects have been canceled or how that jump was able to be made.”
Conway said he’d also like to “hear much more about what’s going on with” the efficiencies outlined in the Ernst & Young report that cost the city millions.
Another question mark is the extent to which the city can find budget savings from debt refinancing. In a recent outlook report, Municipal Market Analytics warned the Sales Tax Securitization Corp. credit will likely offer “reduced refinancing benefits for budget relief.”
It added, “To temper the downward credit trajectory, the city will likely need more reliable recurring revenue, a commitment to fiscal discipline (including supplemental pension payments), and evidence of less fractured governance.”
MMA Chief Credit Officer and Managing Director Lisa Washburn said, “on balance,” the proposed budget “leans toward not meeting those objectives.”
Washburn pointed to the upfront use of $75 million from the parking meters sale to make the supplemental pension payment — rather than making an extra payment as some aldermen had wanted — “which means that that is not coming from a recurring source,” Washburn said.
The borrowing for police misconduct settlements is “not funding anything that’s going to generate any sort of economic growth … so that’s just adding nonproductive debt to the city’s balance sheet,” she said. “It’s not a capital expenditure, which is what debt is for.”
That nearly half a billion dollars “will be higher-cost debt,” Washburn added. The higher-rated STSC refundings “were less favorable to the city than expected.”
Chicago may be running out of room to continue the budget-balancing strategies it’s leaned on in the past. Conway said the city needs to create more jobs and grow its housing stock.
“Chicago can’t simply cut or borrow or tax its way out of our structural budget deficit,” he said. “We need to grow the size of the city, and part of that comes through jobs, and another part of that comes from housing. I mean, we make it painful to get a housing permit in this town, and that’s something that we need to work on.”
But with a city election looming in February, major structural reforms seem unlikely in the next few months.
“It doesn’t look like there’s been an effort to reach some sort of consensus or compromise (with aldermen),” Washburn said, and the work to achieve more structural solutions “now becomes harder with an election so close.”
Chicago still has plenty of advantages. Cure noted revenue projections have improved since September.
“The economy is doing pretty well,” he said. “(That) hasn’t been a problem for years.”
“There is a bit of reason for short-term pessimism, but a lot of reason for long-term optimism,” Conway said. “When you look at the natural gifts that Chicago has … (the city) is in a good place, and fortunately, all those gifts, not even the politicians have screwed them up yet.”
But “given Chicago’s challenges, it would be beneficial for there to be more compromise so that they’re all rowing in the same direction,” Washburn said of city leaders. “In not working together to have some sort of agreed-upon plan on both sides, it increases the likelihood that there’s more damage done to the credit rating.”
In general, bond rating agencies tend to view a credible plan and strong governance as credit positives, Washburn noted.
“Management is so incredibly important,” she said. It “flows through every rating factor. … That’s when management shines, when there are challenges.”
Chicago’s general obligation bonds are rated BBB-plus by KBRA, BBB-plus by Fitch Ratings and BBB by S&P Global Ratings, with negative outlooks.
