(Bloomberg) -- Chicago Mayor Brandon Johnson announced that city’s deficit for 2025 will be close to $1 billion because of higher pension and labor costs. The city will need to fill an unexpected shortfall in this year’s budget as well.
The third-largest US city must close a shortfall of $982.4 million in its main operating account — known as the corporate fund — for next year, according to a budget briefing. That estimate includes the cost of migrant services and revenue declines from a levy placed on corporations known as a replacement tax.
“The size of the budget gap is significant” Johnson told reporters during a briefing. “It’s going to require decisions that will speak to our overall collective desire to build an economy that works for working people. There are sacrifices that will be made.”
Johnson, a first-term Democrat, is also projecting a $222.9 million deficit for this year. The City Council at the end of last year had passed a balanced budget for 2024 after the mayor closed a $538 million hole that was anticipated at the time. He cut costs, projected improved revenue from events and tourism and tapped into funds earmarked for economic development areas known as tax-increment financing districts.
The new gap for this year has come about because of the drop in the so-called personal property replacement taxes from the state, and because Chicago Public Schools is not sending $175 million to pay a portion of pension contributions for its non-teaching employees that participate in the city’s municipal retirement fund.
The entanglements with the public school district and rising pension costs are a challenge for Johnson, a former CPS social studies teacher. Before fiscal 2020, the city covered the entire employer contribution for the workers. A new agreement made the school board to pay two-thirds of the cost, which CPS had not budgeted for.
Lower Revenue
Revenue so far this year is running 3.4% below budgeted estimates due to lower collections from the personal property replacement tax.
The issue this year is not about the city overspending but revenue coming in lower, said Budget Director Annette Guzman. The city is now weighing measures like a hiring freeze to close the gap, according to Guzman.
Johnson would not comment on the exact cost-cutting measures nor would he comment on whether he will bring back a policy to raise property taxes by the rate of inflation, which he opposed. Nearly 80% of property taxes go toward the city’s severely underfunded pension funds, which carry an unfunded liability of more than $37 billion. That is twice the size of the city’s annual budget and the biggest weight on Chicago’s finances.
The city plans to contribute a supplemental $227 million into its four pension funds in 2025 on top of its statutory requirement to continue a policy started two years ago in the Lightfoot administration. In 2024, the city added roughly $306 million as part of the advance pension payment to lower future costs.
Johnson, who is now crafting his second budget, is trying to make good on the progressive social and economic campaign promises while balancing a challenging financial situation. He will outline his full spending plan — including how he plans to close the gap — in the next month or two. The Chicago City Council then will vote on the proposal by the end of 2024.
“It’s clear we are going to have to make some hard choices going forward in our budget process,” Alderman Bill Conway, vice chair of the City Council finance committee, said in an interview before the release of the budget forecast. The city needs to show it is “being more judicious” with taxpayer dollars before asking for more revenue, he said.
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