Chicago needs a ‘wartime budget’ to face the COVID-19 crisis

Chicago needs a ‘wartime budget’ to face the COVID-19 crisis

City leaders must prioritize critical spending – and avoid hiking taxes on a struggling economy.

Chicago’s unstable budget faces a dire future during and after the COVID-19 pandemic. Massive revenue losses will make it critical for city leaders to focus on spending only what is necessary so they can provide essential services without raising taxes on residents and businesses also suffering income hits.

Chicago could lose $1.3 billion or more in revenue, depending on the length and severity of the recession. That is based on the city losing the same revenue share as the state of Illinois, which projects the pandemic will cause revenues to fall by 11.73% relative to prior projections.

The city will need to take short-term emergency action to navigate the crisis. It will need a combination of emergency borrowing, such as a two-year liquidity loan from the Federal Reserve’s new Municipal Lending Facility, and budgeting maneuvers, such as reducing spending on any services that are not critical to the wellbeing of residents. Chicago cannot tax its way out of the hole or wait for federal bailouts.

Cities around the nation will suffer for some time because of the pandemic, but they will suffer very differently depending on the actions they take to protect their long-term finances.

New York City is projecting a loss of $7.4 billion in tax revenue and expects to spend $3.5 billion fighting coronavirus by the end of the year. Mayor Bill de Blasio called this crisis “wartime” and is instituting a budget to reflect that.

During the next two years, New York City will make $2.7 billion in cuts, institute a hiring freeze and limit spending on non-essential areas such as infrastructure maintenance, opening city pools and summer programs.

New York City has fared much worse than Chicago throughout the pandemic, but its financial situation was better than Chicago’s before the crisis. Chicago leaders must admit they are deeper in the hole and adopt a similar crisis mentality.

Among the financial challenges, Chicago could lose $121 million in sales tax revenue alone if it sees the same 17.5% hit projected for the state. Chicago projected it would collect $689.5 million from sales taxes in fiscal year 2020 prior to the COVID-19 crisis.

Revenue related to air travel will also take a massive hit, with very few people flying. Air travel was supposed to bring in $1.8 billion or 16.6% of all local revenues this year. Transportation and recreation taxes are also likely to drop significantly with people ordered to stay home for months.

Pensions present a double problem – costs are rising at the same time the pandemic is hurting investment income used to support retirees. Moody’s estimated the average pension fund will lose 21% of its asset value as a result of this downturn. Pensions already consume nearly 20% of the city budget and contributions were already set to nearly double during Mayor Lori Lightfoot’s first term, rising by more than $1 billion in 2023 compared to 2019. Without reform, financial collapse is inevitable.

Moody’s has already given Chicago a junk credit rating while other agencies rank Chicago just one notch above junk. Further economic damage could reduce Chicago to junk status across the board. Investors have already cringed at its $30 billion of pension debt. Without immediate reform, the loss of revenue from COVID-19 will worsen the city’s pension-driven debt crisis, which already sits at $37,100 per person according to Truth in Accounting.

Chicago’s only realistic path to dealing with these challenges is a mix of borrowing and crisis budget maneuvers to prioritize essential services and cut back on expenses. In the long run, only pension reform can prevent further deterioration of city finances – and that requires state lawmakers to pass a constitutional amendment. Chicago needs to put on its war face.

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