Chicago Mayor-elect Brandon Johnson will inherit a healthier fiscal landscape than previously expected, according to an updated forecast Mayor Lori Lightfoot unveiled that raises near-term surplus projections and trims projected gaps in the coming years.
The 60-page Mid-Year Budget Forecast, released Tuesday by the mayor and her finance team, provides a broad view of the city’s fiscal landscape, offers the incoming mayor a roadmap to maintain the city’s upward ratings momentum, and prods him to stay on that path by directing the surplus to cover supplemental pension contributions in coming years.
“We’re delivering this up on a silver platter — continue to work, stay the course, and things will continue to shine bright for the city of Chicago,” Lightfoot said during a fiscal discussion with her finance team — Chief Financial Officer Jennie Huang Bennett, Budget Director Susie Park, and Comptroller Reshma Soni — hosted by the Executives’ Club of Chicago.
The updated forecast raises the final 2022 surplus to $555 million and projects a $143 million surplus this year. It lowers the projected gap in 2024 to $85 million, $124 million in 2025, and $145 million in 2025. The city is currently operating on a $16.4 billion all-funds spending package including a $5.4 billion corporate fund.
Lightfoot, who lost her bid for a second term, intends to sign an executive order directing the surplus dollars toward supplemental pension contributions of $241 million next year, $215 million in 2025, and $186 million in 2026 while also sending $5 million annually to bolster existing the operating liquidity fund which is part of various reserve accounts that total $1.1 billion.
“This one-time money will help build a bridge toward the structural revenues expected from the casino in 2027,” the report reads.
Next year’s project gap marks a low for the city. Lightfoot inherited an $800 million hole when Emanuel handed over the reins to her in 2019 as the city was still absorbing rising pension contributions — known as the ramp — to reach an actuarially based level.
If the new city administration and City Council use structural fixes over one-time measures to close the 2024 gap then the 2025 hole falls to just $39 million and the 2026 shrinks to $21 million, according to the report.
The city’s budget forecast last summer warned of a $127 million hole this year — which was closed by the time Lightfoot unveiled her budget plan —and a $474 million gap in 2024 and $554 million in 2025. The city trimmed $113 million off the 2024 gap and $76 million off the 2025 deficit in an update posted in a December bond offering statement.
The rosier picture stems mostly form higher-than-expected income taxes, personal property replacement and personal property lease taxes, and mirrors what the state and other local governments are seeing, according to fiscal watchdogs. That’s the case at least for those that used conservative revenue estimates anticipating a recession hitting earlier in the year.
The report anticipates a mid-year recession. Watchdogs say that while the upswing is in line with other governments, the new administration must tread cautiously as revenues could sink in a recession.
In the report and discussion, the administration highlights the city’s 13 ratings upgrades across credits, most notably Moody’s Investors Service action last year that lifted the city’s general obligation rating out from junk where it’s sat since 2015. Three of its ratings carry a positive outlook.
“What the positive outlooks mean” is if the city continues along the path in place “it should expect to see further rating upgrades in 2023 and 2024. If the city doesn’t see those rating upgrades at that point what it means is we’ve reversed course on fiscal stability,” Bennett said during the discussion.
Johnson, who takes office May 19, has announced transition chairs but fiscal advisors and top-level cabinet members have not yet been named.
Market participants hope Bennett stays — if asked — but she has told members of the local public finance community that she is ready to move on after a long four years, with her concentration on completing several pending deals and other work that cements the administration’s fiscal legacy.
Sources say Johnson’s advisors would like Bennett to remain at least temporarily during a transition period. Bennett’s name has also been raised in the financial community as a potential candidate for the executive director position of the Civic Federation of Chicago as it launches a search for a permanent successor following the unexpected death earlier this year of Laurence Msall.
“The city of Chicago is at a financial crossroads. The fiscal decisions of at least the last twelve years have halted the Chicago financial downturn and started the financial turnaround,” the report reads which acknowledges steps taken by Lightfoot’s predecessor Rahm Emanuel and his finance team took to begin shedding one-time fiscal measures and to overhaul pension funding that began a ramp up to an actuarial-based payments.
The fiscal blueprint lays out assumptions that provide a nudge for the new mayor to stick with. The forecast assumes statutory and supplemental pension contributions continue. It does not account for the impact on future payments that could result based on several pension bills that would increase benefits pending before state legislature.
“What is difficult for the city” is “having more burdens being placed on the city of Chicago, i.e. increased costs is very difficult,” Bennett said.
Some recommendations could be a hard sell for the new mayor.
The forecast assumes the new mayor sticks with the annual property tax increase based on inflation that was adopted in the last budget. With revenues on the upswing and council members opposed to the hike heading into 2023, Lightfoot cut it from the budget proposal. It’s expected to generate $43 million to $87 million annually in the future
If Chicago had adopted annual CPI increases instead of occasional big hikes the levy would stand at about where it is now but the city could have avoided entering into asset leases, using reserves, and engaging in one-shots like scoop-and-toss debt restructuring and using debt to cover judgments and settlements.
Johnson pledged during the campaign to scrap the CPI hikes and to hold the line on property taxes.
The forecast also depends on Chicago Public Schools covering $245 million of what amounts to a $291 million responsibility for its non-teaching employees that participate in the city’s municipal fund in the current budget. The city’s payment totals $976 million this year. The $250 million it asked CPS to pay this year is up from $175 million last year and the 2024, 2025, and 2026 projected gaps rely on CPS covering its full share which grows to between $304 million and $309 million annually.
The Chicago Teachers’ Union has criticized the city for transferring the burden and Johnson, who is a former teacher and organizer for the CTU, has said that the city should continue to financially help CPS even as it moves to an elected board in the coming years.
The forecast also relies on ongoing declarations of tax increment surpluses of $272 million annually and modest sweeps of old non-corporate fund accounts.
The out-year forecast assumes annual bond issuance of between $683 million and $840 million, sold at an assumed 5% interest rate that will raise debt service by $35 million in 2024, another $35 million in 2025 and then $39 million in 2026.
The report pegs the need for structural fixes annually at $100 million to $150 million and urges the next administration to avoid using one-shots that would again build up the structural imbalance.
On the campaign trail, Johnson stressed his aim to structurally balance the city’s books so that suggestion should go down easier than others.
On pensions, the report recommends that the city consider shifting from a payment formula that relies on actuarial assumptions to reach a 90% funded ratio in the coming decade — a step up from its old funding plan that set payments based on a percentage of employee contribution — to a formal actuarially determined contribution recommended by actuaries that targets 100% funding.
All four funds are paying an actuarially “calculated” contribution, but the city is still $330 million short of funding the ADC in fiscal 2024, even with supplemental payments and $606 million short based solely on the statutory payment.
“That contribution isn’t enough to get to full funding” while an “ADC would target full funding,” Bennett said.
The city’s statutory payment rises from $2.4 billion this year to $2.7 billion in 2028. The city has $33.7 billion of net pension liabilities with the funded ratios of its four funds ranging from 21% to 46%, for an average of 23%, the lowest among major cities.
The forecast lays out a scenario whereby the city makes supplemental contributions of $275 million next year, $245 million in 2025, $212 million in 2026, $181 million in 2027, and $150 million in 2028 which would hold growth of the net liabilities in check, tamp down payment growth, and reduce the need to sell off assets to meet annual benefit payouts after a bad investment year.
By making supplemental contributions, the city expects $2.6 billion of savings over the course of its payment schedule that targets 90% funding in 2055 for police and fire and 2058 for the municipal and laborers’ funds.
In addition to the supplemental payment next year, the city anticipates making a $141 million payment to cover 2022 investment losses. An additional $73 million above the statutory payment and a supplemental payment is expected in 2025 to cover this year’s anticipated investment losses.
During Lightfoot’s tenure, the city absorbed a $1.3 billion hike in pension contributions and $275 million to account for phasing out scoop-and-toss debt restructuring and has paid down $747 million in debt.
The city’s healthier finances and $1.9 billion of federal COVID ARPA relief paved the way for $8 billion in investments under three capital investment plans; the $1.2 billion Chicago Recovery Plan that relies on a mix of debt and ARPA dollars for social, economic, and environmental projects; the $4.5 billion Chicago Works capital plan; and, the $2.2 billion Invest South/West that that investments in underserved corridors that relies on $1 billion of city funds to leverage private and not-for-profit investments of $1.2 billion.
The forecast anticipates the city’s first casino that is in the works will generate $200 million for pension contributions. The forecast for future budgets doesn’t rely on future federal COVID-19 funding so the finance team contends there is no funding cliff. Park said the city’s $1.2 billion recovery plan spending could eventually add $60 million to $90 million to annual spending if Johnson sticks with it.
The city has bolstered reserves by 31% over the last four years with the total level this year at $1.1 billion or 20% of 2023 operating expenditures. An operating liquidity fund that holds $50 million in among the various reserve accounts and the forecast assumes $5 million annual deposits.
“The city is for the most part, better off than four years ago,” said Howard Cure, director of municipal bond research at Evercore Wealth Management LLC.
Cure offered praise for the supplemental contributions but liabilities remain a stress point and cancelling those payments in the future would raise market concerns. Cure said he also hopes the new administration doesn’t resort to pension obligation bonds.
While the report offers suggestions, Cure said questions abound that he’s watching closely over the path Johnson will take on potential changes to the city’s use of ARPA dollars, the recovery plan, and capital spending, and whether changes loom over where dollars are spend. The city’s business appeal, downtown recovery, Johnson tax proposals, and policies to deal with crime rates all loom large, Cure said.
Johnson, a Cook County board commission, has proposed $800 million in new taxes that range from restoring the employee head tax on business, levying tax on financial transactions, taxing some commuters, and raising the property transaction tax on high end properties, imposing a jet fuel tax, and raising the hotel tax. Some he has backed down on and some that require state approval face opposition.
One warning flag for the city comes in the form of lost revenues post COVID. The report warns that while some revenues have fully recovered or exceeded pre COVID-19 pandemic levels — which is calculated at 2019 levels plus 3% annual growth — some lag including business licenses, permits and fees as well as parking tax, utility and vehicle fuel tax which are indicators of work-for-home activity and some tourism-based taxes.
They account for about $192 million of total revenue potential for the city if they eventually return, but if no the city must find replacement revenues or risk backsliding fiscally, Bennett said.