The Kickoff to Chicago’s Budget Battle

On August 11, 2021, Mayor Lori Lightfoot kicked off the budget process for 2022 with the release of the city’s budget forecast. Rather than a detailed, in-depth financial report this document should be viewed as an agenda setting tool for what is ultimately a political debate.

At the heart of the upcoming budget battle are three issues: 1) the police department budget; 2) how to spend the federal funds Chicago is receiving as part of the American Rescue Plan Act (specifically the fiscal recovery funds); and 3) the pension payments.

Before diving into these three topics, I want to flag a few things. This post is not an in-depth analysis of the city’s finances or the 2022 forecast, in part because the actual report is very confusing and there’s not enough information in it to do that. The forecast is also not a full budget proposal; Mayor Lightfoot has until October 15th to introduce a formal budget proposal.

Some relevant budget details/items from the forecast:

• The forecast report only looks at the city’s Corporate Fund, and the city’s total budget is made up of multiple funds.
  • The Corporate Fund, however, accounts for most discretionary spending, and is what most people are referring to when they talk about Chicago’s budget.
  • Corporate Fund spending in 2020 was $4 billion, which is about 32% of the $12.8 billion total (or “all funds”) budget.
• The forecast document also includes a review of the current budget year (which is 2021) and a look forward, so it has an updated estimate for this year’s budget surplus/deficit and a projection of what the 2022 deficit will be absent any major changes.
• Forecasted 2022 Corporate Fund spending is $4.95 billion and revenue is projected to be $4.22 billion, creating a $733 million budget gap.

Issue 1: the Police Budget

The budget is ultimately a document that reflects elected officials’ policy priorities and a commitment to them through the allocation of the city’s revenue. A major policy issue in Chicago is policing, and there are pushes for major reforms of the Chicago Police Department (CPD) and greater investments in alternatives to policing and addressing the root causes of crime and violence by reducing CPD’s budget and re-allocating those resource. This is an especially current issue because the Lightfoot administration has been in negotiations with the police union (the FOP) over a new police contract, reaching a tentative agreement in July. Part of this contract involves salary increases, including retroactive pay.

The retroactive pay would cost the city several hundreds of millions of dollars, and Mayor Lightfoot is planning to pay for $275 million of that cost in 2021 by refinancing outstanding debt (essentially swapping a higher interest rate with a lower one). Whether the city would be able to refinance some debt successfully is a big TBD, so the savings may or may not materialize. The contract also isn’t finalized yet. While it was just announced that the FOP ratified the contract, it still needs to be approved by the City Council.

Issue 2: Chicago’s American Rescue Plan Act Money

As part of the American Rescue Plan Act (ARPA), Chicago is getting nearly $1.9 billion in federal aid. While not completely discretionary, the city can decide how to use the money. Spending has to fall into one of four general categories: a) addressing the direct health and economic impacts of COVID; b) government services and revenue replacement for COVID revenue shortfalls; c) water, sewer, and/or broadband infrastructure projects; and/or d) premium pay for essential work.

In a nutshell, Mayor Lightfoot’s plan is to use nearly $800 million of Chicago’s ARPA money on plugging the 2020 and 2021 revenue shortfalls and maintaining pre-COVID service levels and personnel costs (item b in the paragraph above). As part of the 2021 budget, the city planned to plug the COVID related revenue losses for fiscal years 2020 and 2021 and avoid spending cuts by issuing debt. Because of this spending cuts were never felt.

Cash flow wise this means the city would indirectly be using the ARPA money to pay that debt off, rather than paying the debt off over several decades. The complexity of how the city is using the ARPA money is because the U.S. Treasury Department, who is overseeing the ARPA program, has said the funds can’t be use to pay off outstanding debt early. The mechanics and details of figuring this out took me and a friend several hours…..I’ll spare you the details. Mayor Lightfoot has not put forward a plan for how to spend the remaining $1B+ of Chicago’s ARPA money. In theory the remaining funds could be used to plug the 2022 budget hole.

How the city should spend its ARPA money is up for debate. Members of the Progressive Caucus have objected to Mayor Lightfoot’s proposal, arguing the money should go to direct aid for the people and communities most adversely impacted by the pandemic. Some from the Progressive Caucus have also put forward an alternative spending plan, the “Chicago Rescue Plan (CRP)” (get the proposed ordinance here).

Issue 3: the Pension Payments

One driver of the 2022 budget gap is an increase in the city’s pension payments, specifically sharp increases in payments to two of its four systems (I have been writing about this for years…see posts here, here, and here). Budget year 2022 will be the first time that Chicago’s annual pension payments to all four systems will be based on actuarial calculations and tied to reaching a specific funding target. The city’s total pension contributions are estimated to go from $1.8 billion in 2021 to $2.3 billion in 2022, a 21% increase (note, this is based on 2019 projections).

This big jump in the city’s pension contributions accounts for a good chunk of the anticipated 2022 budget gap of $733 million. The bulk of the city’s pension payment is made from special funds, not the Corporate Fund. The Corporate Fund pension payment is project to increase from $85.5 million in 2021 to $339.4 million in 2022. The Mayor has not identified a revenue source to pay for the increase, and because the pension payments are ongoing expenses that will increase over time the city needs to identify a long-term resource.