$4.9B in pension, debt costs squeeze essentials from Chicago 2024 budget

$4.9B in pension, debt costs squeeze essentials from Chicago 2024 budget

Pension contributions and debt service now take up 40% of Chicago’s city’s budget.

Chicago Mayor Brandon Johnson unveiled his inaugural budget of $16.6 billion Oct. 11 and plans to close the $538 million budget deficit with fund sweeps, optimistic revenue estimates and cost reductions.

On the revenue side, Johnson plans to declare a record-setting $434 million in surplus tax increment financing funds, which yields the city $100 million in extra tax revenue, upped revenue projections by nearly $187 million above previous forecasts and plans to collect an additional $35 million from revenue enforcement collections.

Johnson reported over $150 million in “operational efficiencies” and personnel savings, while proposing $89 million in bond refunding. He is dropping the automatic annual property tax hike for 2024, delivering on a key campaign promise.

While these one-time actions may serve to temporarily “balance” the budget, they do nothing to address the real problems driving budget deficits for more than 20 years. The city is currently projecting deficits of up to $1.5 billion and $1.9 billion for 2025 and 2026.

The primary drivers of these recurring deficits are the city’s large pension and debt service costs, which are the largest items in the city’s budget. In 2024, Chicago will make more than $2.8 billion in pension contributions and spend $2.1 billion on debt service costs. Together, these items represent 40% of Chicago’s net appropriations – the city’s budget after accounting for restricted grant funding, interfund transfers and proceeds of debt.

The next-largest line item in the budget is the Chicago Police Department, which will see just shy of $2 billion in spending under Johnson’s proposal. Infrastructure will receive $1.7 billion in spending from local funds, while the Chicago Fire Department will get $784 million.

Increasing pension and debt service costs have been gradually crowding out other areas of the budget for decades. In 1982, the farthest back the city makes appropriations ordinances available online, these costs represented just 16% of the budget. In the decades that followed, these costs have grown and now take up roughly 40% of the budget.

Pension costs are expected to keep growing and forecasts are regularly updated, often requiring higher pension spending than originally planned. Projected pension payments for 2024 came in more than $335 million higher than originally estimated in the past year’s budget.

The increase in pension and debt costs has come at the expense of both taxpayers and other areas of the budget. While all other areas of spending have seen relatively large increases over the years, growing 82% in inflation-adjusted terms from 1982-2024, pension spending is up 612% and debt service spending is up 493% during that time.

Even as pension contributions have continued to grow exponentially, the systems are more indebted than in the past. Currently, the four city-run pension funds have $34 billion in debt with funding ratios ranging from 20%-45% funded. The collective funding ratio is 23.8%. Experts warn pensions with funding ratios below 60% are deeply troubled and plans below 40% are likely to become insolvent.

Rather than using one-time funding gimmicks to bring the city’s budget into balance, Johnson should direct his attention to the city’s largest cost drivers. As the most influential local leader in the state, Johnson should use his influence to lobby Springfield for a constitutional pension amendment that could free-up city finances and protect retirement security for retirees, something former mayors Lori Lightfoot and Rahm Emanuel both advocated for at the end of their terms. Without significant reforms, Chicago’s budgets will continue to be plagued with large structural deficits that become more difficult to plug.

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