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City of Chicago FY2025 Roadmap: Key Financial Challenges, Options and Recommendations

City of Chicago FY2025 Roadmap Cover

October 16, 2024

Click here to read the full report.
Click here to read the press release for this report.

INTRODUCTION

This report lays out several major issues facing the Chicago Mayor and City Council as they prepare to enter the FY2025 budget cycle and beyond, including the City’s structural deficit, pensions, long-term debt, public safety, financial entanglements with Chicago Public Schools, plans for addressing migrant funding challenges and the City’s new economic development and housing bond financing plan. The issues are presented as a framework for City elected officials and leadership when considering both short-term solutions to close the City’s budget deficit in the coming budget year and long-term solutions to address the City’s massive liabilities and persistent structural deficits. The report also includes options to address each of these issues in a fiscally responsible manner. It is our hope that this work elevates the discourse surrounding the City’s finances and provides a roadmap for a sustainable future.

The City of Chicago faces serious financial challenges that will only be rectified through innovative solutions and long-term planning. A generation-long persistence in structurally imbalanced budgets, coupled with high pension and debt burdens, mean the City will face enormous budget shortfalls in the coming years. Now that federal American Rescue Plan Act (ARPA) revenue replacement funding is generally not available to fill budget gaps, it is incumbent on City leadership to develop a responsible fiscal path forward.

The chart below shows Chicago’s initial budget deficits from FY2014 through FY2024, along with the most recent projections for FY2025 and FY2026. Initial budget deficits are addressed by the City through increased revenues, decreased expenditures or use of one-time revenues. The City’s FY2025 Budget Forecast, released in August 2024, estimated a $222.9 million year-end budget shortfall for FY2024, a $982.4 million deficit for FY2025 and over $1.1 billion for FY2026 based on decreased resources and increased personnel expenditures.1 These deficits equal or exceed those faced during the pandemic, and the City must now fill a cumulative $1.2 billion deficit for FY2024 and FY2025 without the benefit of the federal pandemic funding of recent years that allowed the City to end years in surpluses. This is unsustainable. The City already allocates approximately 40% of its operating budget to debt and pension payments year after year, crowding out its ability to deliver services to constituents. In addition, uncertainty remains respecting the fiscal impact surrounding fixes to Tier 2 employee pensions and a pending firefighters contract that may further exacerbate the City’s already daunting future deficit projections. Recourse to purely revenue-based solutions is constrained by the fact that the City already has a high tax burden.2 The Mayor recently announced a hiring freeze across City departments (now purported to exclude police and fire), but no further details have been released.3 More difficult choices will need to be made to reduce future deficits, and the City cannot assume that additional State funds will be made available to soften the blow, as the State itself must attend to significant fiscal challenges in its coming budget cycle.4

 

 

The City’s ability to meet these accumulated burdens is further complicated by the financial shortfalls faced by several of its sister agencies that draw significant portions of their operating budget from the same tax base and/or receive direct funding from the City. The FY2025 Chicago Public Schools (CPS) budget had to fill an initial $505 million deficit, which could grow by hundreds of millions more once contract negotiations with the Chicago Teachers Union are finalized this fall.5 Similarly sized budget gaps of over half a billion dollars are projected over the next five years and it is unclear how the District will address these gaps. The Regional Transportation Authority (RTA) has likewise projected a $730 million budget gap beginning in FY2026 once pandemic funds have depleted, including a nearly $600 million budget cliff facing the Chicago Transit Authority.6 Given that ridership has still not returned to pre-pandemic levels, the loss in farebox revenue will continue to be a drag on the CTA budget absent action from state and local officials to increase its revenues and/or reduce its expenditures. All of this suggests the City has reached a critical inflection point it can no longer postpone.

Click here to read the full report.
Click here to read the press release for this report.

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1City of Chicago FY2025 Budget Forecast, p. 13.

2For more information on the full list of consumer taxes charged to Chicago residents, see the Civic Federation’s 2024 Report on Consumer Taxes in Chicago.

3Fran Spielman, “’Upon further review,’ police and fire departments exempt from Brandon Johnson’s hiring freeze,” Chicago Sun-Times, September 11, 2024.

4See Civic Federation, City of Chicago FY2024 Proposed Budget: Analysis and Recommendations, p. 12.

5Chicago Public Schools FY2025 Budget, pp. 9-11; Civic Federation, Chicago Public Schools FY2025 Proposed Budget: Analysis and Recommendations, July 24, 2024.

6Regional Transportation Authority FY2024 Operating Budget, p. 7; Civic Federation, Reforming Mass Transit Governance in the Chicago Region, April 25, 2024

 

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