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 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.
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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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