When it comes to funding public services sustainably, doing the right thing is not only difficult, it can really make folks angry. For proof, look no further than Mayor Brandon Johnson’s latest budget address. Chicago was facing an estimated deficit of $982 million in its corporate fund next year. That’s a problem because that fund is the city’s general operating budget. That means it pays for core services like police and fire protection, streets and sanitation, and social services.
For context, the projected fiscal year 2025 deficit was the second-worst that Chicago has faced in the last 15 years. In fact, the only greater corporate fund deficit, which totaled some $1.2 billion, was realized in fiscal year 2021, during the pandemic. That once-in-a-century crisis mucked-up public sector finances nationwide, leading to a huge federal bailout. Chicago’s current financial challenges are due to structural shortcomings in its fiscal system, which means the feds won’t be showing up with buckets of money to help Chicago make ends meet.
Which means it’s up to the city to grapple with this mess. But here’s the challenge: to eliminate structural fiscal problems, you have to first identify what actually caused them. In Chicago’s case, its structural fiscal difficulties exist because the city’s long-term revenue growth hasn’t typically been sufficient over time to both fund the inflationary growth in the cost of providing core public services from year to year, and to pay the debt service schedule Springfield imposed on the city to cover its unfunded pension liability.
For instance, corporate fund revenue is projected to be just $5.179 billion in fiscal year 2025, a year-to-year decline of $600 million, or 10%. To be clear, declining revenue is no bueno, especially when the economy is growing.
To fix this situation, three things have to happen. First, Chicago will have to raise more recurring revenue. Second, the schedule for repaying pension debt has to be re-amortized. Third, Springfield has to help do both.
To address the looming deficit, Johnson just put a number of proposals on the table. These include everything from saving costs by eliminating 743 vacant positions; to generating one-time revenue by declaring a record tax increment financing surplus of $570 million — the city’s share of which is $132 million; to proposing various new, recurring revenue streams. The biggest of these new revenue streams would be a $300 million property tax increase, which made no one happy. Generating new recurring revenue is never popular, but in this case, it was needed.
More revenue, more city-state cooperation
The problem is, the mayor’s proposal still relies on significant one-time budget fixes, which means Chicago’s fiscal problems will continue unless the state steps to the plate and helps.
Illinois state lawmakers can start by creating a legislative framework that will allow Chicago to repay its pension debt — which jumped by $22.6 billion over the last 18 years — without having to raise taxes or cut service expenditures. Most people think overly generous benefits were the primary cause of that spike, but they’re wrong. The real culprit was a state-created, statutory contribution scheme that permitted Chicago to underfund its pensions for decades. This irresponsible contribution scheme accounted for 59%, or $13.33 billion, of that $22.6 billion spike.
Making matters worse, the state imposed a repayment schedule for the city’s pension debt that calls for installments that increase every year through 2055, at increments Chicago can’t afford. Those debt payments can be re-amortized in a rational fashion that not only gets Chicago’s pension systems financially healthy, but also saves some $11 billion in debt service, dramatically improving city finances and reducing taxpayer costs. But that can’t happen without state action.
Springfield can also help generate more recurring revenue for the city. The state currently shares its income tax revenue with local governments through the aptly named “Local Government Distributive Fund.” A few years ago, when the state increased its income tax rates, it opted not to share any of its new revenue with local governments by scaling back the distributive fund. Restoring that fund to its former level would increase Chicago’s revenue by $235 million annually, without increasing anyone’s taxes.
Bigger picture, Illinois taxes less of the modern economy with its sales tax than any other state. That’s because Illinois’ sales tax applies primarily to transactions involving goods rather than services. That doesn’t work, because the sale of services accounts for over 70% of all economic activity in Illinois, while the sale of goods is only 17%. Simply expanding the base of Illinois’ sales tax to include consumer services — like our neighboring states, Iowa and Wisconsin — would generate recurring revenue that would help every municipality in Illinois, and also address some of the state’s fiscal shortcomings.
The truth is, Chicago’s fiscal challenges can’t be solved with smoke and mirrors. It’ll take some new revenue, and a new era of cooperation between Springfield and Chicago, to get the job done.
Ralph Martire is executive director of the Center for Tax and Budget Accountability, a nonpartisan fiscal policy think tank, and is the Arthur Rubloff Professor of Public Policy at Roosevelt University. Reach him at rmartire@ctbaonline.org
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