The City of Chicago is contending with two merging fiscal challenges: FY2025 budget planning to address a projected $982.4 million deficit, and simultaneously scrambling to meet a $222.9 million deficit still remaining in FY2024. In a new report, the Civic Federation outlines the City’s fiscal situation and provides immediate options for FY2025, along with long-term expenditure and revenue options and recommendations to better position the City for FY2026.
CHICAGO — The Civic Federation today released a report framing stark financial realities and opportunities City of Chicago officials must navigate as they work to build and approve the City’s FY2025 budget this fall. Estimates place the government at a nearly billion-dollar shortfall, with some City agencies facing their own worsening fiscal cliffs that will become dire by FY2026. The Civic Federation offers analysis and recommendations it hopes will elevate public understanding and support City officials through the difficult decision-making process that lies ahead. The full report is available here: civicfed.org/ChicagoFY2025Roadmap.
Key financial challenges addressed in the Federation’s new report include the City’s habitual structural deficit budgeting, or overreliance on one-time revenues to support expanding costs and operations it cannot responsibly sustain; its pension payment obligations and long-term debt burden; the lack of clarity around the effectiveness, accountability and total spending of the Chicago Police Department and related public safety functions; the City’s lingering financial entanglements with Chicago Public Schools (CPS); and uncertainty around what the cost of care will look like going forward for the merging migrant/homelessness program challenges in the City.
“The Federation’s new roadmap provides a framework for addressing what we hope will become the City’s urgent priorities: creating a structurally balanced and sustainable budget; improving police accountability through much greater transparency around spending, staffing decisions and progress made toward the Consent Decree; detangling the City of Chicago and Chicago Public Schools’ finances; and much more,” said Civic Federation President Joe Ferguson.
In late August, the City released its annual budget forecast projecting a $982.4 million deficit for the coming fiscal year, and announced at the same time a projected $222.9 million deficit for the remainder of FY2024. The FY2025 shortfall is comparable to the deficit the City faced during the height of the pandemic but, unlike then, there is no federal revenue-replacement aid available to mitigate the shortage. Compounding the shortfall is the limited funding with which the City is left to operate annually after allocating roughly 40 percent of its revenue to debt and pension obligations. Meanwhile, CPS, with which the City remains fiscally entangled, and the Regional Transit Authority (RTA), which oversees the Chicago Transit Authority, Metra and Pace, have each reached their own urgent inflection points. Estimates show the fiscal cliffs facing CPS and the RTA could reach as high as $900 million and $730 million, respectively, by FY2026.
“Federal pandemic era money papered over a long-building fiscal cliff in City government and adjacent sister agencies,” Ferguson said. “Rather than using the federal assistance to begin a generationally overdue reset, the City and some sister agencies expanded programs and staffing without identifying sustainable future revenue streams to support them. The wind down of pandemic-era funding is now syncing up with the harsh reality of sharply increased overhead. We knew this day was coming. A year ago, the City itself projected the deficit we now confront.”
The Civic Federation has long stressed the imperative of transitioning to long-term financial planning. Having ignored that call, City officials now face exceedingly tough choices about how to balance the FY2025 budget.
“While we applaud the assertion that ‘everything is on the table,’ the main course does not need to be and should not be property taxes,” Ferguson said. “This report maps out a host of options whose consideration and implementation we hope will precede a historically reflexive recourse to property taxes, especially at a time of rising assessments and the looming, likely call for increased levies by other units of government, foremost CPS.”
The Civic Federation offers a number of immediate potential non-revenue options the City of Chicago should first consider before revenue-side actions as it works to urgently address its FY2025 budget over the next 10 weeks:
- Cut or offset dormant vacancies. The City routinely carries thousands of vacancies as appropriated budget expenditures from year to year, meaning it must also find revenue to support those expenditures. The City should make an objective assessment of the number of vacant positions it needs and has the capacity to fill in FY2025 and cut unneeded vacant positions from the FY2025 budget. The change would reduce the projected deficit by tens and possibly even hundreds of millions of dollars.
- Institute a mandatory furlough of City personnel. Personnel makes up the largest portion of the City’s operating budget. Following the Great Recession, the City instituted a long-term furlough of one unpaid day off per every two-week pay period across all departments, resulting in payroll savings of 10%. The City might consider a similar approach now, combined with a commensurate pay reduction for executives and elected officials to ensure equitable burden-sharing.
- Approve a one-time suspension of the City’s supplemental pension payment. The City has made a substantial supplemental pension payment each year in recent years. While the Civic Federation has strongly supported the supplemental contributions as an important improvement to the City’s pension sustainability, suspension of the supplemental pension payment for FY2025 in whole or part, within policy, might be warranted given the size of the City’s projected FY2025 deficit.
- Explore repurposing ARPA funds for eligible non-recurring expenses in the FY2025 budget. The City has $576 million in remaining ARPA funds that cannot be used as a direct revenue replacement. The City should review the Treasury Department’s updated ARPA funding and obligation rules and consider whether it can repurpose a portion of its remaining ARPA funds in a way that would offset eligible FY2025 budget costs.
- Review and suspend Non-Critical Capital Expenditures. Deferring and even canceling capital spending during constrained financial times is common among local governments and can be a prudent cost-saving measure. The City might reduce the scope of capital asset investment, pare down prior planned spending on premium features not immediately needed and defer near-term non-critical capital asset purchases.
- Utilize TIF surplus to help balance the budget. Though the Civic Federation has long warned against overreliance on utilizing TIF surplus to balance its budgets, the magnitude of the City’s FY2025 budget deficit justifies consideration of this practice as a means of minimizing tax and fee burdens on residents. Any TIF sweep would also send more than half of the funds to CPS. Should the City proceed on this option, an agreement should be reached ensuring part or all of CPS’ allocation goes towards the District’s unresolved MEABF reimbursement obligation under a 2019 MOU between the City and CPS.
Without specifically endorsing any of the following, the Civic Federation offers several immediately available revenue options the City might consider:
- Reassess and consider increasing the garbage collection fee. The City’s existing Garbage Collection fee generates only around 41.1% of the estimated $167.2 million garbage removal cost. The City covers the rest. The City should consider revising this fee to align more closely with the full cost of waste removal, which would free up Corporate Fund resources for other operational purposes.
- Legalize video gambling. The City currently bans video gambling, and lifting the ban would require City Council authorization. If legalized, the City would then receive one-sixth of video gaming tax proceeds from the State’s Local Government Redistributive Fund, and the City as home rule government could also collect an annual fee up to $250 on video gaming terminals.
- Reduce and recalibrate fire department staffing. The staffing requirements for firetrucks and the number of firetrucks as compared to ambulances and emergency medical technicians to staff them has long been a debated and disputed subject. One argument is that staffing requirements for firetrucks are higher than needed. The reality of CFD’s service demand is that today, more than 70 percent of all calls received are for emergency medical assistance, and less than 30 percent related to fire suppression. However, CFD has not optimized its operations model, equipment or staffing to account for this. The budget crisis faced by the City warrants consideration of such a shift, especially to the extent it could yield savings, efficiencies and better alignment of CFD operations to public need.
- Increase the liquor tax. The City has not indexed to inflation its portion of composite rates of liquor taxes charged in Chicago, nor has it increased this tax since 2007. It could increase this tax now through the City’s home rule authority, though Chicagoans already pay among the highest liquor taxes in the nation and a further increase may prompt people to purchase liquor outside the City.
- Implement a local grocery tax through ordinance. As part of the FY2025 State Budget, the Pritzker administration proposed and the General Assembly passed an elimination of the tax beginning in 2026, which will result in an estimated local loss of $80 million in revenue annually. Only 13 states in the country impose a grocery tax, as doing so is generally regarded as one of the more regressive forms of taxation.
- Implement congestion pricing. The City can, through home rule, implement cordon charges (variable or fixed charges to drive within or into a congested area within a City) or area-wide charges (per-mile charges on all roads within an area that may vary by level of congestion).
- Bring back the employer’s expense tax (head tax). This tax is generally imposed on larger businesses at a flat rate based on the number of employees. The City previously imposed a head tax but phased out the tax over a three-year period from 2012-2014 in response to criticism from business leaders. The criticism and attendant risks — potential business flight — remain. While implemented, the tax generated approximately $23 million a year.
- Implement through home rule an increase in other existing local taxes, such as the rideshare tax, checkout bag tax, motor fuel tax, wheel tax (city sticker tax), restaurant tax, amusement tax, accommodations-relaxed taxes and property taxes. For a host of reasons detailed in the report, the Civic Federation believes there is substantial question of whether property tax increases are needed and believes regardless that they should be approached as a last and least resort for FY2025.
The Federation’s FY2025 Roadmap report also outlines several long-term revenue options that would require changes to State statute. In most cases, those options would take too long to implement to be helpful in addressing the City’s deficit for FY2025, and some involve up-front costs. The long-term options, described in greater detail in the report, include expanding the sales tax to services; implementing congestion pricing that includes variably-priced lanes and variably-priced tolls on entire roadways; implementing a Chicago income tax; creating a commuter tax for individuals living in one municipality but working in another; establishing a financial transaction tax on the purchase and/or sale of securities; implementing a graduated real estate transfer tax; increasing the City share of the local government redistributive fund; and taxing retirement income.
Finally, the Roadmap report offers recommendations, many of which might be elevated by the City Council to the level of ordinance obligation and mandate to better position the City to meet the equally daunting deficits projected for FY2026 and FY2027:
- Establish an ordinance-level government efficiency task force that will work to produce the findings and recommendations needed to modify the budget and operations such that the projected deficit for FY2026 is greatly reduced, and in a far more fiscally sustainable and responsible manner than in the past. Such a task force, aside from highlighting opportunities, could recommend specific studies in complicated areas that could themselves be ordinance-prescribed to assure proper cadence and public-facing outcomes, such as a City-County-Sister Agency Collaboration and Efficiency Study for which a 2011 City County Working Group provides a worthwhile historical example;
- Fast-track a working group to resolve legal and fiscal entanglements with Chicago Public Schools well before the fully elected school board is in place;
- Develop a long-term financial plan for City operations and pension funds. The Federation advises the City to undertake a strategic, comprehensive long-term financial planning process in line with those of several other U.S. cities. The City should also identify stable pension funding to supplement uneven casino revenue; find a sustainable solution to fix Tier 2 Safe Harbor issues, such as increasing the pensionable salary cap for Tier 2 employees to match the Social Security Wage Base; and work with the State to explore consolidation of Chicago’s four pension funds;
- Improve police budget transparency and accountability by providing greater clarity on the cost and budgetary impact of the Consent Decree, as well as how the Department makes staffing and deployment decisions based on the staff it has, how the Department is performing and how performance is measured;
- Expand the role of, and resources to, the City Council’s Office of Financial Analysis to do much more proactive analysis, such as by increasing COFA’s budget and staff numbers; ensuring that COFA has access to all the information it needs to conduct analysis; expanding the role COFA plays in providing financial and budget analysis to City Council throughout the year; and more — along the lines of peer municipalities, like the charter-level Independent Budget Office in New York City;
- Increase transparency around migrant care funding and contracting by producing and sharing more detailed information on migrant spending as the budget proposal is released this fall.