(Bloomberg) -- Chicago Mayor Lori Lightfoot is looking for cash.

The first-time mayor and her financial team are trying to fill the coming year’s $838 million budget gap, the largest in the city’s recent history, that is expected to grow in 2021 without new revenue. The coming year’s deficit is fueled by the biggest one-year jump in the city’s mandated pension payments to its retirement system.

Lightfoot is reaching out to state officials and sitting down with residents at town hall meetings across the city this month as she prepares to present her spending plan in October that balances revenue and expenditures.

“We do need new revenue sources,” Chicago Chief Financial Officer Jennie Huang Bennett said in a telephone interview on Tuesday. “A key focus is having a long-term plan for financial sustainability.”

But the search for revenue won’t be easy. Rahm Emanuel, Lightfoot’s predecessor, already raised property taxes and other fees to help shore up Chicago’s four retirement funds that are short $30 billion. The city’s required pension payment ramps up this year as two of the four funds move to an actuarially-based funding plan.

Chicago’s fiscal woes extend beyond the coming year. The budget deficit is forecast to climb 42% to $1.19 billion in 2021 if structural changes aren’t made or new revenue isn’t found, according to city documents released last month. That gap may drop slightly to $1.16 billion the following year, according to the city’s three-year baseline projection.

In 2019, a surplus of $26.5 million is projected due to “strong performance” in some revenue areas and certain contract expenses occurring later than anticipated, city documents show. But for the next three years, the city is projecting deficits. Unlike past years, starting in 2020, the structural budget deficit projections include known long-term liabilities such as pensions and debt service but don’t yet reflect potential new revenue sources.

Salaries and wages, pensions, health care, overtime pay, workers’ compensation, and unemployment compensation make up roughly 80% of total expenditures. One-third of the 2020 budget shortfall comes from rising pension costs and another third is from labor expenses. That cost pressure comes even as the city’s workforce since 2008 has shrunk 8.8% to 36,596 full-time workers in 2019. Lightfoot on Aug. 20 also implemented a hiring freeze as the city looks to run more efficiently.

Lightfoot is considering some sort of traffic congestion plan, though the city hasn’t provided details. Bringing a casino to Chicago is another option under consideration that may bring in cash in later years.

Bennett said the city is also focused on finding structural solutions to address the roughly $350 million projected increase in the gap from 2020 to 2021.

Chicago’s $30 billion of unfunded pension liabilities are a drag on the city’s finances. That growing debt spurred Moody’s Investors Service to cut Chicago’s rating to junk in 2015. Even after Emanuel stepped up the pension contributions, the hole is still deepening. At the same time, the payments are accelerating. The annual projected pension contribution jumps to $1.68 billion in 2020, according to city documents.

“The ramp up in 2020 is very large,” Bennett said. “It’s the largest one-time increase in one year.”

Reducing Chicago’s pension bill won’t be easy. Any move to cut the city’s annual contributions into the retirement system would be negative for the credit, according to S&P Global Ratings, which rates Chicago BBB+, three steps above junk with a stable outlook.

The increase in obligations comes as Chicago’s population has declined, according to U.S. Census data, leaving fewer taxpayers to shoulder the burden.

Lightfoot has highlighted the importance of increasing Chicago’s population, which has dropped 0.8% since 2014, as part of any financial fix. The mayor has said population growth is connected to giving people and businesses “reasons to stay, to come and to grow.” Investing in impoverished neighborhoods, reducing crime and increasing affordable housing may be among her solutions, Bennett said.

“All of these are good social policy and are part of a broader economic policy in terms of increasing the population,” Bennett said.

This is a topic the city has addressed with rating companies, according to Bennett. Measures that push businesses and residents away “could hurt city finances over the long term, potentially weakening credit quality,” according to S&P.

As the city works to close its budget gap, the bond market’s broader rally and investors’ search for yield in a low interest environment may help Chicago. The city is examining its borrowing practices and is considering refinancing bond deals to generate $100 million in savings, according to Lightfoot.

“The market is very good right now,” Bennett said. “It’s a great time to be refinancing debt.”

Bennett said it’s too early to comment on any future bond plans, but the city is unlikely to come to the market before the mayor delivers her budget speech in mid October.

Investors “would currently be fairly receptive” to Chicago’s general-obligation bonds due to technical factors and demand for higher yields, Dennis Derby, a portfolio manager for Wells Fargo Asset Management in Menomonee Falls, Wisconsin, said in an email Wednesday. He said the city’s management “has done an excellent job” apprising investors of financial concerns and potential solutions.

“We look forward to seeing further detail on the potential revenue increases, such as the congestion plan,” Derby said. “Our primary concerns with the city’s outlook are primarily economic, as the city’s fiscal health could be materially impacted by an economic slowdown.”

(Adds bondholder comments in last two paragraphs.)

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net

To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, Michael B. Marois

©2019 Bloomberg L.P.