City of Chicago FY2020 Proposed Budget: Analysis and Recommendations

November 12, 2019

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

EXECUTIVE SUMMARY

The Civic Federation supports Mayor Lightfoot’s proposed FY2020 local funds budget of approximately $9.9 billion, but with several significant concerns.

Entering FY2020 Mayor Lightfoot faced a historic $838.2 million Corporate Fund budget deficit driven largely by a $281.2 million increase to the City’s statutory contribution to the police and fire pension funds. The deficit is also impacted by a projected increase in personnel expenses tied to not-yet-completed collective bargaining agreements. In addition, the City is increasing the amount of money budgeted in the Corporate Fund to cover settlements and judgments rather than relying on borrowing to cover those expenditures.

Mayor Lightfoot’s FY2020 budget incorporates a number of savings and efficiencies including implementing zero based budgeting, merging departments and improved fiscal management practices that should reduce expenditures and increase stability. The Mayor’s budget also relies on a number of targeted taxes and fees. In an effort to alleviate congestion in the downtown area and provide much needed revenue the City is projected to generate an additional $40 million in FY2020 by increasing taxes on ridesharing companies; generating an additional $7 million by increasing parking meter rates and installing new parking meters in certain areas; and increasing the Personal Property Lease Tax by two percentage points to 7.25% and the restaurant tax by 0.25% to 0.50% generating $37.2 million. In addition, with the legalization of the sale of recreational cannabis in Illinois set to go into effect on January 1, 2020 the City is projecting it will generate an additional $3.5 million in FY2020 from a 3.0% excise tax on sales of marijuana and increased sales tax revenues.[1] The budget also includes an increase in the portion of the property tax levy dedicated to library services to expand hours and reduce the Corporate Fund subsidy to the library.

However, the originally proposed City budget relied on two revenue sources that will require approval by the State of Illinois and federal government and are therefore less certain. Ambulance transport expense reimbursements of $133 million from the federal government have yet to be approved, though the State and City have worked together to submit the proposal to the Centers for Medicare and Medicaid Services (CMS) and from information provided by the City and State it seems reasonable to assume that CMS will approve. And as of publication of this report, legislation has not received approval from the Illinois General Assembly and Governor that would allow the City to implement a graduated real estate transfer tax that would increase the amount paid on high end real estate, generating an additional $50 million in FY2020. As our analysis was being finalized City of Chicago budget staff indicated that the Mayor will introduce budget revisions with additional savings to replace the real estate transfer tax if necessary.[2]

The City is also relying on some one-time resources to close the budget shortfall, including a record $74.1 million in tax increment financing (TIF) surplus and $200 million in upfront savings that are non-recurring from a debt refunding plan.[3] Using one-time resources for recurring expenditures is not an ideal practice and will cause budget difficulties in future years.

While the City’s financial challenges are daunting, the Civic Federation commends Mayor Lightfoot’s approach to addressing this year’s spending plan that focuses on savings and efficiencies and at the same time emphasizes targeted taxes and fees rather than a large property tax increase. Additionally, the Federation is encouraged by Mayor Lightfoot’s actions to institute good government reforms, such as curbing aldermanic privilege, reforming the workers’ compensation program and implementing ethics reforms that could help to begin rebuilding trust in a city that faces severe financial and economic challenges. The budget plan also includes $51.8 million in investments to improve social and economic ills facing the City such as affordable housing, homelessness, violence prevention, mental health and neighborhood improvements.

The Federation recognizes that Mayor Lightfoot and her administration had limited time to achieve her legislative agenda in Springfield after being sworn into office in May 2019 and the spring legislative session ending on May 31, 2019. And we continue to believe that the State must assist the City in overcoming the financial difficulties the State helped create. The members of the Chicago City Council have made difficult fiscal choices in recent years by approving a series of tax increases to address the severe underfunding of its four pension funds and put the City on better financial footing. However, the difficult financial choices are not over. Over the summer the City projected Corporate Fund budget gaps of $1.19 billion in FY2021 and $1.16 billion in FY2022.[4] At the same time, it faces a growing debt burden and labor negotiations with unions representing the City’s police and fire workforce are ongoing and may add additional fiscal stress.

Properly addressing these challenges will require cooperation among City officials, labor partners, residents and the State of Illinois to control the cost of government by enacting meaningful reforms and ensuring Chicago remains a strong economic engine for Illinois for years to come. As the Civic Federation emphasized in our report on the financial challenges facing the new Mayor and City Council released in March 2019[5], the State’s role in improving the City’s and other local governments’ financial positions is particularly important.

The Civic Federation offers the following key findings on Mayor Lightfoot’s originally proposed FY2020 budget:

• The City proposes a FY2020 local funds budget of approximately $9.9 billion; this is an increase of 11.7% above the FY2019 adopted appropriations of $8.9 billion across all local funds;
• The FY2020 Corporate Fund budget proposal will increase by 17.0%, or $649.4 million, from approximately $3.82 billion in FY2019 to $4.47 billion in FY2020 due to increased personnel expenses and pension contributions;
• The FY2020 budget proposes to increase staff by 26 FTEs or 0.1%, from 35,413 FTEs to 35,439 FTEs, not including grant-funded positions;
• Community Services will see the greatest increase in FTEs, growing from 1,261 FTEs in FY2019 to 1,414 FTEs in FY2020, an increase of 153 FTEs or 12.1%;
• Corporate Fund personnel services are projected to increase by $175.7 million, or 6.1%, from approximately $2.88 billion in the adopted FY2019 budget to $3.05 billion in FY2020;
• The City’s proposed FY2020 gross property tax levy is approximately $1.51 billion, which is a 5.0%, $72.3 million increase over the $1.44 billion levy adopted in the FY2019 budget;
• Between FY2009 and FY2018 total net direct debt rose by 18.5%, or $1.3 billion. This represents an increase from $6.9 billion in FY2009 to $8.1 billion ten years later;
• The total pension unfunded liabilities for the four City funds increased to $29.2 billion in FY2018 from $27.6 billion in FY2017; and
• Between FY2009 and FY2018, total unfunded pension liabilities per resident of Chicago grew from $4,597 per capita to $10,782 per capita. This is an increase of 134.5%.

The Civic Federation supports the following initiatives and elements of the City of Chicago’s originally proposed FY2020 budget:

• Emphasizing management efficiencies and reforms;
• Funding more settlements and judgments from the Corporate Fund;
• Funding police and fire pensions on an actuarially calculated basis;
• Encouraging public participation by conducting a public survey and holding multiple stand-alone town hall meetings;
• Improving transparency and accountability by live streaming city council committee meetings;
• Improving the effectiveness of the Council Office of Financial Analysis;
• Seeking reimbursement from Chicago Public Schools to cover a portion of the contribution to the Municipal Employees’ Annuity and Benefit Fund;
• Increasing the portion of the property tax levy for library services to expand hours and eliminate the Corporate Fund subsidy; and
• Increasing targeted taxes and fees for additional revenue.

The Civic Federation has concerns about the following issues related to the City of Chicago’s originally proposed FY2020 budget:

• Use of one-time and less certain gap closing measures;
• Pension contribution spike in 2022 for Municipal and Laborers’ Funds;
• Ongoing fiscal imbalance;
• High bonded debt burden;
• Lack of cost of services data for the programs in its budget;
• Uncertainty with regard to the outcome of outstanding collective bargaining agreements;
• Planned reliance on gaming revenues in future years; and
• Potential for large property tax increase or major cuts if certain revenue sources do not come through as planned.

The Civic Federation offers the following specific recommendations as a guide to improving the City of Chicago’s financial management:

• Work with the Governor’s Pension Consolidation Task Force to Explore the consolidation of Chicago’s public safety pension funds;
• Seek reasonable and sustainable collective bargaining agreement provisions;
• Develop a formal long-term financial plan for city operations and pension funds;
• Include finance general costs in city department budgets to sow the full cost of services;
• Maximize transparency of the sales tax securitization corporation;
• Re-evaluate the use of TIF funds to address the City’s and overlapping governments’ financial challenges; and
• Annually reassess the garbage collection fee to better ensure revenues are aligned with expenses associated with providing the service to residents.