City of Chicago Budget Continues Structural Deficit Tradition

November 03, 2010

Today the Civic Federation released its analysis of the City of Chicago’s proposed FY2011 budget of nearly $6.2 billion. The Federation has a number of serious concerns about the City’s budget proposal, which forecasts a $654.8 million deficit. A detailed listing of those reservations can be found on page 7 of the analysis. Chief among those concerns is the City’s continued structural deficit, which is a condition characterized by annual expenditure increases that consistently outpace recurring revenues over time.

As described beginning on page 27 of the Federation’s report, the City of Chicago has had significant and growing budget deficits during the past five fiscal years. The City ran a $94.8 million budget gap in FY2007 and a $217.6 million budget gap in FY2008. In FY2009 the budget deficit totaled $469.6 million and in FY2010 the deficit totaled $520.0 million. The FY2011 budget deficit of $654.8 million equals 10.6% of the City of Chicago’s total budget.

The increase in the City’s annual budget deficit over time is a leading indicator that the City’s expenses are outpacing its revenues. The deficits continue to grow not only due to economic conditions, but also because the City of Chicago has failed to enact measures that make deep enough spending cuts and/or utilize new or increased recurring revenues. The City has attempted to address its structural deficit with insufficient spending reductions and non-recurring revenues, such as the proceeds from its numerous asset lease deals. The Civic Federation estimates that at least 17.6% of proposed FY2011 Corporate Fund revenues are non-recurring. By the end of FY2011, the City of Chicago is projecting that only $576.0 million[1] of the $2.98 billion generated from asset leases will remain. Nearly 80.7% of the proceeds will have been spent.

This approach is short-sighted and fails to plan for the future. It also fails to acknowledge that a structural imbalance exists between the City’s ongoing expenditures and recurring revenue sources. The result is that each budget is patched with one-time revenues that leave budget gaps in subsequent years. The structural deficit will eventually have to be closed with even larger major service cuts and tax or fee increases in the future.

The Civic Federation recommends that at a minimum, the City should make additional reductions in addition to the $96.9 million in cuts already proposed in the budget. A good starting place would be the budget options presented by the Chicago Inspector General. The Civic Federation estimated that $85.4 million in savings to the Corporate Fund could be implemented immediately from the Inspector General’s report. This action will begin to rectify the City’s structural deficit by slowly closing the gap between annual expenditure increases and recurring revenue growth. It will also decrease the City’s use of non-recurring revenues to close the FY2011 budget gap, thus reducing budget gaps in future years.

Click here to read the rest of the Federation’s recommendations.

[1] City of Chicago, FY2011 Overview and Revenue Estimates, p. 62.