Analysis also explores options and offers recommendations for reform
(CHICAGO) – The Civic Federation released today a report detailing the City of Chicago’s major financial challenges, as well as options and recommendations to stabilize the City’s financial position. The report has been released in advance of the April 2 municipal election for consideration by the public and candidates for Mayor, Treasurer, Aldermanic Office and the City Clerk. The report is available here.
The City’s incoming political leadership will immediately face three major fiscal challenges: funding the City’s massive pension shortfall; a persistent structural deficit; and a chronically high debt burden. All four of the City’s pension funds are below 50 percent funded and carry a combined unfunded liability just shy of $28 billion. Contributions to the pension funds are projected to nearly double in the next five years as the four funds finish their funding ramps and begin actuarially-based funding schedules.
In addition to increased pension contributions, the City has projected corporate fund budget gaps of $251.7 million in 2020 and $362.2 million in 2021. Concurrently, the City’s debt burden continues to climb. Addressing these urgent fiscal needs will crowd out spending for desired programs and services absent major government restructuring, enormous tax increases, state financial assistance or massive new borrowing efforts. The City of Chicago’s unfortunate fiscal position is further complicated by the possibility of an economic downturn in the near future.
“The City and State of Illinois descended into their worst-in-the-nation financial condition during one of the longest economic expansions in U.S. history,” said Civic Federation President Laurence Msall. “Neither government is currently prepared to weather the storm in the event of a recession, particularly if it is deep or long lasting.”
The Civic Federation recognizes that improving the City’s financial position will require significant support from the State and urges new City leadership to work closely with Springfield.
“As the State of Illinois struggles to address its own fiscal challenges, there has been insufficient appetite for addressing the financial crises of Illinois’ local governments, including in the economic engine, Chicago,” said Msall. “This dynamic cannot continue.”
The report offers the following recommendations, among others, for consideration by the City’s new leadership:
- Reform the practice of aldermanic privilege and reform the aldermanic menu program;
- Follow best practices for debt issuance;
- Implement City government structural reforms, including making the City Clerk and Treasurer’s Offices appointed and reducing the size of the City Council;
- Conduct a cost of services study;
- Develop a comprehensive land use plan and a formal long-term financial plan; and
- Strengthen the City Council’s Office of Financial Analysis.
The report also provides analysis of various options for spending reductions, operational efficiency, borrowing and revenue enhancement that City policymakers might consider in the near future to address Chicago’s fiscal challenges. The Civic Federation does not take a position on these particular issues. Further, the Federation does not support revenue increases in the abstract, as new revenue should only be pursued in the context of a specific, comprehensive long-term plan. Among others, topics analyzed in this report include:
- A local income tax;
- A commuter tax;
- A financial transaction tax;
- A graduated income tax;
- Taxing recreational marijuana;
- New gaming taxes and a Chicago casino;
- Alternative service delivery;
- Pension fund consolidation;
- A public bank; and
- Pension obligation bonds.
Throughout the analysis, the Federation warns against relying on inconsistent or one-time revenue sources and constraining future budgets by overly securitizing revenue or issuing massive amounts of debt. Above all, the Federation urges maximum transparency moving forward.
“Because of the magnitude of the financial problems facing the City, it is worth considering a plethora of options,” said Msall. “However, the Civic Federation urges the next leaders of Chicago to approach many of the proposed solutions with caution. It is important to have a good ‘Plan A,’ but sound financial planning requires a strong backup strategy for when ‘Plan A’ doesn’t materialize as hoped or expected.”