The Policy Shop: Chicago’s pension crisis is a ticking time bob

This week’s The Policy Shop is by Bryce Hill, director of fiscal and economic research at the Illinois Policy Institute.

Whether Chicago Mayor Lori Lightfoot wins re-election or one of her eight challengers unseats her, the next mayor has a lot of work to do.

What do Chicagoans want from the next mayor? Crime is top of mind for Chicagoans this election season, according to a recent Harris Poll. A close contender for the next-most important issue? The economy. More than 25% of potential voters said the economy is one of the top issues mayoral candidates should be addressing.

Voters may have noticed a lack of specifics regarding city finances – arguably the most important factor for economic development – on the campaign trail and at various forums and on editorial board questionnaires.

Here’s how the numbers look in Chicago.

Pensions

Status quo: Chicago owes $33.7 billion in unfunded pension liabilities across the city’s four employee pension funds, that’s more than 41 other states. Its growing debt has led to serious spikes in city property taxes on residential and commercial property in recent years, while straining the city budget.

In an effort to begin paying down these massive debts, the city is currently spending nearly $2.7 billion, or 23% of the city’s budget, on pension contributions annually.

Room for improvement: In order to stabilize city finances, prevent further crowd-out of other city functions and secure retirements for city workers, Chicago’s mayor must support pension reform. Lightfoot recently pushed this issue as did her predecessor, Mayor Rahm Emanuel, late in his term.

“Springfield and the governor’s office have to take notice and start the process,” the mayor said. “If we still are pouring money into a system that is fundamentally flawed, it’s gonna become the tail that wags the dog of city government.”

Fixing the problem will require amending the Illinois Constitution to allow for changes to the growth of future benefits. The mayor must lobby state lawmakers to place that amendment before the state’s voters.

Taxes

Status quo: Chicagoans already pay some of the highest taxes in the nation. (Chicago’s total combined state and local sales tax rate is second highest in the nation.) However, the largest tax Chicagoans pay are property taxes, which are also among the highest in the nation. During the past 10 years, Chicago’s property tax levy has doubled, growing from $860 million to more than $1.7 billion in 2023.

Room for improvement: Chicago’s next mayor needs to make a commitment to families and businesses that they will not continue to be nickeled and dimed with ever-increasing taxes and fees. Top priority should be placed on property taxes, which increase hundreds of dollars annually for the average homeowner in the city and affect rent prices. The mayor should commit to freezing the city’s property tax levy, including forgoing the automatic annual increases under the state’s Property Tax Extension Limitation Law.

Budget

Status quo: The City of Chicago has faced a structural deficit – meaning growth in expenditures is expected to outpace growth in revenues – each year since at least 2001. However, the city is legally bound to pass a “balanced” budget. In order to close the projected annual budget gap, the city has often resorted to “scoop and toss” budgeting practices, such as refinancing and restructuring debts, which further delay and increase inevitable costs, or relied on one-time revenue sources, fund sweeps or other “efficiency and savings” measures to temporarily provide the resources needed to “balance” the current year’s budget.

These short-sighted solutions, while politically expedient, have done little to rectify the underlying problem in the city budget: spending more than it takes in. As a result, the city has faced a projected budget deficit each year for well over two decades.

Room for improvement: Rather than continuing to rely on temporary measures or non-recurring revenues to bring budgets into balance or restructuring debts to push these expenses farther down the line, Chicago’s mayor must commit to truly balanced budgets, where revenues sustainably meet or exceed expenditures without relying on these practices. Without these changes, the city will not be able to provide long-term financial stability to its residents.

Voting is underway

Early voting has already started ahead of the Feb. 28 city election. Those who vote by mail, from the comfort and safety of their homes, can research where the candidates stand on these important issues and assess how they will likely lead Chicago.

Decades of irresponsible spending and budgeting practices have worked Chicago into its current financial state, leaving taxpayers shouldering some of the highest tax burdens in the nation while large swaths of public funds are devoted to debt costs. Combined, current debt servicing and pension costs eat up 42.4% of the city’s budget.

Costs from the past are seriously hurting Chicago’s ability to meet the future.