October 13, 2021
Click here to read the full report.
Click here to read the press release for this analysis.
EXECUTIVE SUMMARY
The Civic Federation supports Mayor Lightfoot’s proposed FY2022 budget of $10.6 billion for all local funds (excluding grants and capital). The City of Chicago is in a much better financial position now than a year ago thanks to significant federal COVID-19 relief funding that has allowed the City to continue operating at full service levels, accommodate pay raises negotiated in union contracts, avoid cutting personnel or programs and invest in new programs and infrastructure. While the federal American Rescue Plan Act (ARP) provides the City with short-term budget relief, the Civic Federation cautions that if the economy does not recover as soon as projected the City will need to find a way to raise enough revenue or reduce expenses in order to balance its budgets after ARP funds are spent.
The FY2022 budget proposal represents an increase in spending of 8.4% from the adopted 2021 budget of $9.8 billion. Corporate Fund (general operating) expenditures are projected to increase by 21%, due to an increase in spending on salaries as well as large increases in amounts allocated from the Corporate Fund toward debt service and pension payments. Pension fund contributions are increasing by $461.5 million in FY2022, which is a 24.7% increase from the prior year. FY2022 represents the first year that all four pension funds will be funded based on actuarial calculations. Likewise, FY2022 is the final year of significant increases in pension funding, after which the annual increases in employer pension contributions will mostly level off and create more stability for the budget.
The City will receive a total of $1.9 billion in American Rescue Plan Act funding from the federal government. Of that amount, the majority—$1.3 billion—is going toward closing the budget gaps in 2021, 2022 and 2023. The FY2022 proposed budget allocates $385 million to be used as revenue replacement to help close the $733 million projected budget gap. The City is also using $782 million of ARP funds to close the year-end budget gap for the current 2021 fiscal year. An additional $152 million will be available for this same purpose in FY2023. The remaining ARP funds of $567 million are being allocated to fund investments in services and infrastructure. The use of these funds, which are a one-time source, to replace lost revenue is an appropriate use of the funds. However, the City still faces many structural budget challenges, primarily due to the high annual cost of paying off long-term liabilities: debt and pensions. And by using the bulk of the funds to close the current and upcoming year budget deficits, only a small amount will remain for use in future years.
The Civic Federation offers several recommendations to the City as it moves forward. Regarding use of the ARP funds for service and infrastructure investments, the City should disclose sufficient detail in progress tracking reports that allow members of the public to follow the dollars—including the amount of funding for each project that is coming from ARP funds and from bonds, actual expenditures by department, personnel positions associated with each initiative by department, and plans for how long-term initiatives will be sustained and incorporated into the operating budget. Regarding the operating budget, the Civic Federation recommends that the City add information to the annual Budget Forecast that would make it more useful for financial planning purposes. Importantly, the Forecast should include possible measures that could be taken to address future projected budget imbalances.
Regarding pensions, the City needs to develop a long-term revenue plan for funding the four pension funds. In the absence of sufficient revenue growth, pension obligations will continue to crowd out basic service investments unless the Illinois legislature authorizes significant statutory local pension reform and includes Chicago in further statewide pension consolidations. The City has already identified several sources of funding for pensions including the property tax, emergency communication surcharge and water-sewer charges. However, the pension funds receive large subsidies from other funds, including the general operating Corporate Fund. Pension contributions will continue to grow over time, albeit not as drastically as they have in the past several years. The City is banking on revenue from a future Chicago casino to serve as a pension funding source. The Civic Federation cautions that while its use for pensions was included in the legislation, gambling revenue is highly unreliable, and recommends that the City dedicate other, more stable sources of revenue to supplement pension funding over the long-term.
The Civic Federation offers the following key findings on Mayor Lightfoot’s proposed FY2022 budget:
- The projected net appropriations for FY2022 total $10.6 billion. This is an increase of $821.4 million, or 8.4%, from the FY2021 adopted net appropriations of $9.8 billion;
- The proposed FY2022 Corporate Fund (general operating) budget of $4.9 billion represents an increase of 21.0%, or $846.3 million, from $4.0 billion in FY2021;
- Pension fund contributions to the four City pension funds combined will total $2.3 billion in FY2022, an increase of $461.5 million, or 24.7%, from the prior year. The pensions are funded with $1.4 billion in property tax revenue, $206 million from the water and sewer tax, a $115 million water-sewer escrow, $27.6 million in emergency communication revenue, $242.6 million in transfers to the pension funds from the enterprise funds and $329 million in transfers from the Corporate Fund;
- Personnel positions across all local funds will increase by 436 from the prior year to a total of 33,807 full-time equivalent (FTE) positions proposed in FY2022. The largest increase, 346 FTE positions, will be within the Infrastructure Services program area to support additional positions within the Department of Aviation and the Department of Transportation;
- Public Safety personnel make up the largest portion of budgeted personnel positions at 20,544 FTEs, or 61%. Of that total, the Police Department accounts for 13,970 budgeted positions. Personnel within the Public Safety program area has decreased by 7% in the five years since FY2018. Budgeted FTEs in the Police Department have decreased by 697, or 4.8%, during the same period;
- While the number of budgeted personnel positions has decreased from 35,033 to 33,807 FTEs over the past five years, personnel services appropriations (which account mostly for salaries and other costs associated with pay) have increased from $3.7 billion to $4.1 billion;
- Personnel Services appropriations within the Corporate Fund are projected to increase by $113.1 million, or 3.8%, from the prior year, from $2.9 billion in the adopted FY2021 budget to $3.1 billion in FY2022;
- The City’s proposed FY2022 gross property tax levy is approximately $1.7 billion, which is a 4.7%, or $76.5 million, increase over the $1.6 billion levy adopted in the FY2021 budget;
- The City had $11.1 billion in outstanding tax-supported debt at the end of FY2020. Another $16.6 billion in debt supported by enterprise revenue (water-sewer and airport revenues) was outstanding as of the same period.
- Over the ten-year period from FY2011 through FY2020, the City’s total net direct debt decreased from $7.9 billion to $7.1 billion. During this same period, direct debt per capita decreased from $2,830 per resident to $2,631 per resident; and
- Total long-term liabilities, including net pension liability, increased by 6.6%, or $2.8 billion, in the two years between FY2019 and FY2020, from $41.5 billion to $44.3 billion.
The Civic Federation supports the following initiatives and elements of the City of Chicago’s proposed FY2022 budget:
- Federal COVID-19 relief provided to the City of Chicago and all other state and local governments;
- All four City of Chicago pension funds will be funded based on actuarial calculations beginning in 2022;
- Collective bargaining agreements finalized with the Fraternal Order of Police and other unions;
- Increase in reimbursement from Chicago Public Schools to the City of Chicago to help cover the CPS employees’ portion of the annual contribution to the Municipal Employees Pension Fund;
- Relative restraint on tax increases;
- Reduction in planned use of general operating reserves in the FY2022 budget compared to the prior year;
- Cancellation of scoop and toss debt refinancing to balance the FY2021 budget and plans to avoid this practice in the future;
- Community engagement for the FY2022 budget process; and
- Budget schedule allows sufficient time for the public to review the budget proposal prior to the public hearing.
The Civic Federation has concerns about the following issues related to the City of Chicago’s proposed FY2022 budget:
- Budget sustainability after American Rescue Plan Act funds are expended;
- Using all savings from debt refinancing upfront to balance the FY2021 budget;
- The City’s continued high level of long-term debt;
- The cross-department Finance General category in the budget does not allow for evaluating the true cost of services by department;
- Planned reliance on casino revenues to fund police and fire pensions in future years.
The Civic Federation offers the following specific recommendations as a guide to improving the City of Chicago’s financial management:
- Ensure that public progress reports on the investments in the Chicago Recovery Plan include detailed information about expenditures;
- Expand the information contained in the annual Budget Forecast to make it more useful for long-term financial planning;
- Identify stable long-term pension funding sources to supplement uneven casino revenue;
- Work with the Governor’s Pension Consolidation Task Force to explore the consolidation of Chicago’s public safety pension funds with downstate police and fire pension funds;
- Include finance general costs in city department budgets to show the full cost of services; and
- Re-evaluate the use of TIF districts.
Click here to read the full report.
Click here to read the press release for this analysis.