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CHICAGO’S
PLAN TO PAY OFF COVID-19 DEBT WITH FEDERAL AID HITS A SNAG
Illinois Policy Institute/
Justin Carlson
Chicago had planned to use half of its
federal relief funds to pay down pandemic debts, but new federal
guidance may prevent that. Regardless, without pension reform the city
will continue drowning in debt. |
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 Chicago will get nearly $1.9 billion for COVID-19 relief from
the American Rescue Plan Act, but the U.S. Treasury Department’s May 10 guidance
upends the city’s plan to use half to pay down debt.
The state had similar plans for its $8.1 billion.
However, top Illinois Democrats are pushing U.S. Treasury Secretary Janet Yellen
to allow the state to use the new funds to pay back money Illinois borrowed
during the pandemic from the Federal Reserve – the only state to do so. They
argue the borrowing was a direct result of the pandemic and they should be
allowed to repay it with coronavirus relief aid.
Chicago leaders also intend to seek further guidance on the rules. They, too,
may argue the debts the city intends to repay resulted from the pandemic.
As Chicago now decides how to spend its share of the funds, Mayor Lori Lightfoot
cautioned aldermen not to get too excited about fulfilling their wish lists.
Lightfoot said the money comes with restrictions, such as a prohibition against
funding pensions, and is “not a slush fund that [the city] can use” as aldermen
please.
Lightfoot had hoped to use about half of the money, some $965 million, to pay
off “scoop-and-toss” borrowing used to shore up a pandemic-induced budget
shortfall. Those plans are now on hold thanks to the new rules.
The city has a history of scoop-and-toss borrowing in which new debt is used to
pay off old debt. Both Lightfoot and Chief Financial Officer Jennie Huang
Bennett have said the priority for the money must be to pay down debts for the
long-term health of the city.
Lightfoot’s administration is right that paying down short-term debt is the most
fiscally responsible use of the funds. Left unaddressed, the cost of servicing
that debt would add to future fiscal pressures and threaten the city’s ability
to provide services – exactly what the state and local fiscal recovery funds are
intended to prevent.
Some aldermen are unconvinced of the urgency of shoring up Chicago’s shaky
finances with the federal funds. They have called for a universal basic income
program that would aid 5,000 of the city’s most needy residents with $500 a
month.
When asked whether she supports creating a universal basic income program in
Chicago, Lightfoot said, “I favor jobs. In the long-term, building a strong,
robust and inclusive economy that deals people in from across the city is the
best way that we can cure some of the economic woes that folks are facing.”
Economic growth will be difficult to achieve without addressing Chicago’s poor
financial condition, which is driven by enormous pension debt and has led to
increasing taxes, fines and fees. Chicago’s eight retirement systems have
accumulated nearly $45 billion in debt – that’s more pension debt than 44
states.
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Financial watchdog Truth in Accounting also
recently ranked Chicago one of the worst sinkhole cities for its
massive debts and troubled budgets. Each Chicago taxpayer would need
to send $41,100 to the city just to pay off debt, amounting to the
second-highest taxpayer burden in the nation. That doesn’t include
the $52,000 each Illinoisan owed for state debt in 2020. In 2019,
Chicago had just $10.05 billion available to pay $46.47 billion in
unfunded pension and retiree health care benefits, bond debts and
other liabilities.
It is important to remember the American Rescue Plan funding is a
one-time cash infusion and not a long-term solution to the city’s
financial problems. There are four authorized uses for the funds:
Responding to public health needs and economic costs associated with
the pandemic.
Providing premium pay – which cannot exceed $13 per hour or $25,000
per worker – to essential employees.
Replacing any lost revenues because of the pandemic.
Investing in water, sewer and broadband infrastructure improvements.
The Act allows for significant flexibility in what the funding can
be spent on within those four general categories. That flexibility
can be a good thing for cities with strong fiscal foundations that
can afford to add new programs or services to their budgets. For
cash-strapped cities such as Chicago, the flexible funding will
encourage city leaders to commit to costly new projects they will
have to repay long after this federal funding is spent.
To achieve long-term fiscal health, Chicago must address
out-of-control pension spending and begin to reverse its course
toward insolvency. A one-time federal bailout will do nothing to
solve those longstanding financial problems, but those problems will
be worse if the federal funds are used for costly new social
programs or even infrastructure improvements that will require new
spending to maintain and upgrade long after this federal funding is
spent.
Chicago’s chronically poor fiscal health has forced it to consider
spending much of the aid on paying down debts.
Without structural pension reforms, Chicagoans will continue to be
hit with tax increases and fines once the federal funds have all
been spent.
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