Exclusive insight from the Illinois Policy Institute

This edition of The Policy Shop is brought to you by Adam Schuster, senior director of budget and tax research.

Chicago Mayor Lori Lightfoot shared her budget proposal last month. Now what? City council members now have until Dec. 31 to pass a budget for the city.  City council members now have until Dec. 31 to pass a budget for the city.  Here’s the skinny of what Lightfoot proposed and what Chicagoans and the city we love are up against.
 
Finances are so shaky in Chicago that, even with an infusion of $3.5 billion in federal aid, the mayor still included a $76.5 million property tax hike. That increase comprises $22.9 million in automatic increases after Lightfoot pushed for tying property taxes to inflation last year, $25 million for debt service on bonds for Lightfoot’s $3.7 billion infrastructure plan, and $28.6 million from new property. After deducting new property, the $47.9 million discretionary levy increase would raise property tax bills by an average of $72 to $180 depending on the neighborhood. 

We’re from the government and we’re here to help
 
Seriously, with city officials receiving billions of dollars in federal aid, how are Chicagoans facing a property tax hike? Business leaders don’t get it.
 “With the historic level of federal funding coming to the city we can avoid a property tax increase that impacts all residents and businesses.” – Chicagoland Chamber of Commerce. 
 
The business community is right that a property tax increase is unnecessary considering the $3.5 billion in pandemic-related federal aid. Lightfoot’s proposed budget uses $782 million in federal funds to replace 2021 revenues, $385 million for 2022, and reserves $152.4 million for 2023 revenue replacement. That leaves roughly $581 million in flexible aid currently dedicated to new program spending. The property tax hike could be prevented by using just 2.5% of Chicago’s $1.9 billion in American Rescue Plan funding. 
 
Moreover, while U.S. treasury rules prohibit states from using aid to directly or indirectly offer tax relief, this prohibition does not apply to cities. Lightfoot has the greenlight to help overburdened homeowners, if she wants to. 
 
Spin cycle: No new taxes
 
In her budget address, Lightfoot emphasized that her budget proposal achieves balance “without any new taxes, no reduction in city services, and no layoffs.” Similarly, a press release from the mayor’s office claims the budget has “no new tax or significant fee increases for our residents.” Lightfoot claims the $74.5 million property tax hike doesn’t count as a tax increase because automatic annual inflation increases and the increase for infrastructure were approved last year, but this argument is political spin. The bottom line is that city property owners will pay higher property tax bills next year.
 
Lightfoot could have proposed to use the federal aid to undo last year’s property tax increase, which hit during a pandemic and related economic downturn. This would meet the American Rescue Plan’s goal to “support immediate economic stabilization for households and businesses.” Stopping this year’s tax hike would not require cutting anything, just slightly scaling back some of the new spending.  Taking a small portion from each of the larger new line items could prevent the tax hike while still leaving hundreds of millions of dollars more for Lightfoot’s “community priorities” such as youth job training and affordable housing. 
 
A smaller tax increase is still a tax increase
 
How does this $74.5 million property tax increase compare with recent years?

• Way smaller than the $543 million increase under Mayor Rahm Emanuel in 2015.
• Less than the $94 million property tax hike in Lightfoot’s budget last year.

Still, it is an increase and would add an unnecessary burden to a city economy still recovering from COVID-19. (Did we mention it was also unnecessary given the city is sitting on $3.5 billion in federal aid?!)
 
Illinois’ pandemic restrictions, as well as $655 million in state tax hikes pushed in Gov. J.B. Pritzker’s budget this year, have together contributed to the struggle for Illinois’ businesses to create jobs for workers as fast as the rest of the nation. The state’s unemployment rate remains 35% higher than the national average. Piling on even modest additional tax hikes on Chicago residents and businesses will mean fewer jobs and lower wage growth for residents as the economy recovers from the COVID-19 recession. 

Temporary revenue can’t fund permanent programs 

The budget increases spending by roughly $1.2 billion on a range of city services from the Chicago Police Department, affordable housing, and mental health services to a pilot program for a universal basic income. Unfortunately, that spending is propped up by one-time federal aid that expires by 2024, meaning many programs will have to be cut or financed with significant tax hikes within just two years. > If Lightfoot wants to live up to the rhetoric in her budget address – in which she promised to invest in Chicago’s economic recovery while giving predictability and stability to taxpayers – she needs to develop and execute a plan to match revenues and expenses long-term. Only a long-term balanced budget can give city residents confidence programs will continue and taxes will remain affordable.
 
The elephant in the room 
 
Despite calling pension debt the city’s “biggest problem” in May, Lightfoot’s address did not include any plan for Chicago’s pension crisis. Her predecessor, Mayor Emanuel, endorsed a constitutional amendment to allow pension reform late in his final term. Amending the constitution is the only way to unlock changes to 3% compounding cost-of-living increases Lightfoot has called “unsustainable.” 

Pension costs will consume more than $2.3 billion of the city’s budget, or 21.4% of its own source revenue, meaning local collections excluding state and federal grants. That’s $461 million more than last year, a spike that accounts for 63% of the $733 million 2022 budget deficit reported by Lightfoot in August.

Chicago’s pension spending is up nearly $1 billion just during the three years Mayor Lightfoot has been in office and nearly 500% since 2004 in nominal terms. Lightfoot bragged that this is the first year the city is making “actuarially determined” pension payments, but that does not mean they are “actuarially sufficient.” Chicago’s rapid and unsustainable growth in pension spending still won’t be enough without benefit reforms.
 
Springfield must let the people vote on a constitutional amendment to control rising pension costs. Lightfoot needs to use her platform as a public official to push the General Assembly into doing the right thing if Chicago is going to reverse its economic stagnation and provide residents with quality services at a reasonable cost.
 
Read a full rundown of the problems in the proposed Chicago budget here.