Chicago Mayor proposes property tax increase to close budget gap

Chicago Mayor Brandon Johnson on Wednesday proposed a $17.3 billion fiscal 2025 budget that calls for a $300 million property tax increase, a move that reverses a campaign promise but avoids cutting back on pension payments that are integral to the city’s credit ratings. 

The total budget appropriation represents a 3.2% year-over-year hike driven largely by increases in grant, enterprise and pension fund spending.

To close a $982 million budget gap, the Johnson administration relied on a mix of 80% structural fixes and 20% one-time revenue sources, according to a presentation shared with The Bond Buyer.

Property tax revenues fail to fully cover debt service or pension costs every year, so the corporate fund has to cover the difference, according to city officials. The proposed property tax increase would allow the city to reduce its corporate fund subsidy to pension funds.

“This is a very difficult decision,” Johnson told reporters in a briefing Tuesday. “But to be quite frank with you, with our pension obligations and those who rely upon retirement, we just have had irresponsible administration after administration that have kicked the can down the road, and now it’s in front of my door. With the critical investments that we will still make, it’s important that we do right by the people who served this city.”

About 28% of the 2025 budget is state and federal funding, which is the lowest level in a decade — markedly lower than the 47% and 40% in 2021 and 2022, respectively — and lower even than 2015’s 30%.

“A lot of these problems are from the federal monies running out,” said Howard Cure, director of municipal bond research at Evercore Wealth Management. “The mayor campaigned on not raising property taxes — that’s the easy way out without alienating a lot of the unions. Admittedly, property taxes weren’t overly burdensome in Chicago… but that’s changed.

“With Chicago, it’s very rarely the actual economy [that’s the problem],” he added. “The pension system is grossly underfunded, so you want to at least tread water — make sure you’re not making the unfunded pension liability worse.”

Cure said the city was given credit from the rating agencies for addressing its pension obligations, “albeit over a long period of time.”

Chicago also has a history of “pretty militant unions, and the mayor has a civil servant background as a former teacher. That group helped him get elected, so that’s the debate going on here,” he said.

Chicago is rated A-minus with a stable outlook by Fitch Ratings. Kroll Bond Rating Agency assigns an A rating to the city’s unsecured general obligation bonds and a AA-minus rating to its wastewater revenue bonds; the outlook is stable. Moody’s Ratings affirmed its Baa3 rating on Chicago early this year, with a positive outlook. S&P Global Ratings assigns the city a BBB-plus rating with a stable outlook.

“Chicago still has a lot of work ahead before the proposed budget is adopted,” said Michael Rinaldi, senior director at Fitch. “The inclusion of the advance pension payment is favorable, along with the increase in the property tax levy as a continuing revenue stream for the city.”

Conversely, Rinaldi said, “There remains risk to increasing [Chicago’s] reliance on [tax increment financing] sweeps, the execution of certain cost savings proposed, including elimination of public safety positions, and the increase in projected corporate fund gaps in 2026 and 2027.”

Fitch said in its July upgrade that the continued practice of making advance pension contributions, in amounts sufficient to close the gap between the actual pension contribution and the actuarially recommended contribution, could lead to positive rating action.

Scott Nees, director and lead analyst at S&P, told The Bond Buyer that the mayor’s proposal is potentially significant for a few reasons.

“The proposed increase is structural in nature and represents a meaningfully large down payment against the city’s sizable structural budget gap,” which is on a growth trajectory that is unsustainable long-term, Nees said.

“In addition, because the proposal represents a reversal of the mayor’s campaign pledge not to raise property taxes, its use for the 2025 budget could indicate the potential for other structural budget-balancing measures in the future, including possible tax increases,” he said.

Nees noted that any movement away from supplemental pension payments “could place downside pressure on the rating.” He said S&P would view that as “another form of unsustainable budget practice that prioritizes short-term relief over long-term stability.” 

KBRA and Moody’s did not respond to questions by press time.

Absent the property tax increase, the Johnson administration said, the city would have to cut its workforce by 17%. Most impacted would be the police department, the fire department, streets and sanitation, and fleet and facility management.

Chief Financial Officer Jill Jaworski said cutting back on pension payments is not the answer to the city’s budget woes.

“Supplemental [pension] payments are having a very significant impact on the amount of money we are going to pay over time — we’re projecting that we will save $3.9 million through 2055 over the amount that we would have had to deposit if we did not make the advance contribution,” she told reporters Tuesday. The administration expects to make an advance payment of $272 million in 2025.

The administration plans to use $273.6 million in property tax levy revenue and $186.3 million in corporate fund revenue for debt service in 2025, including planned transactions.

Among the solutions the Johnson administration is counting on to close the budget gap are a Municipal Employees’ Annuity and Benefit Fund (MEABF) payment of $175 million from Chicago Public Schools and an increase in the alcohol tax, which has not been raised in 16 years, that should bring in $10.6 million. The city is also drawing on $54 million in tax increment financing surplus, according to the presentation.

“One of the things that we looked at in this budget very carefully was our TIF districts,” Jaworski said. “We looked, over time, at the expenditures in the various TIFs that exist in the city today. The majority of the expenditures occurred in a pretty small geographic area. In the majority of the TIFs, the expenditures have been relatively modest, really demonstrating the value of doing the [affordable housing] bond and being able to distribute the proceeds of that in a more equitable manner.”

“I don’t fault the city for trying to pull money from the TIF districts,” Cure said. “You just want to do an analysis about, will pulling this money make it harder for economic development?”

Cure noted that the Civic Federation of Chicago, a nonprofit fiscal watchdog, suggested in a recent report expanding the sales tax base to include a tax on services. It was one of a laundry list of revenue options listed in the report before a property tax hike, which is “too often one of the first places government officials look for increased revenue,” the report noted. 

“For a range of reasons, the Civic Federation believes [property tax increases] should be a last resort for the upcoming fiscal year,” the report added. “Mayor Johnson promised throughout his campaign to avoid raising property taxes, and the FY2024 budget did not include a general property increase.”

Civic Federation President Joe Ferguson told The Bond Buyer that the 2025 budget proposal’s reliance on property taxes is “significant,” and comes at a bad moment for taxpayers.

“It looks like the administration leaned hard into property taxes and into a TIF sweep,” he said, adding that it appears the greatest upside to the city of the TIF sweep was freeing up funds for the MEABF payment. “That actually has more value to the city than what flows to the city directly from the TIF sweep,” he said.

“While a lot of the analysis will inevitably focus on what it means to property owners on the north side, the bandwidth to absorb costs is most constricted in the poorer neighborhoods of the city,” Ferguson said. Chicago is already seeing an increase in nonpayment of tax collections, he said.

“Historically, we view the budget as the mayor’s budget, but there’s a reason why Chicago is known as a strong council, weak mayor system,” he said. “It is the city council must pass or approve the budget each year. This year, we should view [the mayor’s proposal] as the end of the beginning.” The council, he said should “not merely tinker at the margins, but propose alternatives to the mayor’s budget.”

“We have not collectively seen anything public-facing that suggests that the mayor actually did convene a gathering of union leadership” to consider suggestions like furloughs, he added.

Cure said other areas of concern are the relationship the mayor has with the governor; the other major districts, like the Chicago Public Schools board, the parks and the Chicago Transit Authority, which rely on the same tax base; potential police misconduct judgments; the outcome of the federal election; and City Council cooperation, with many aldermen dissenting from the mayor’s recent decisions regarding the CPS board.

There’s also the question of how the mayor spends his political capital in Springfield, with the migrant crisis weighing on the city, with CPS and the CTA needing more state funding than they currently get.

“You have to have your priorities straight, and while it would be politically unpopular if the Bears left, I’m not sure if the subsidies that would be given to the Bears to stay in the city equal what [the stadium] would generate,” Cure said. “You’ve got to pick and choose what you want to prioritize.”