December 6, 2023
Paul Vallas: How Chicago can save itself from financial crisis

It’s no surprise that Mayor Brandon Johnson’s preliminary budget estimate shows a massive deficit of $538 million and a $1.9 billion gap projected for 2026 from the once-promising long-term midyear budget forecast presented by predecessor Lori Lightfoot in April. Has increased to.

Explanations for these sudden deficits aside, the undeniable fact is that Chicago is headed toward a worsening financial crisis, which was largely exacerbated by deferred federal COVID-19 funding. This is due to two fundamental issues.

First, Chicago’s government operates like a one-man show, devoid of transparency and accountability. Whether it is budget making, programs, city services, or public representation, the office of the mayor exercises unchecked power. Second, Chicago’s fiscal ruin is a direct result of the lack of long-term financial planning and the enactment of annual budgets that continually increase rather than reduce long-term liabilities.

As the City Council examines the 2024 budget, it’s important to look back at how the city wasted many of the windfall gains. Let’s first look at the leasing of city properties during the administration of Mayor Richard M. Daley. The story is that the city negotiated bad deals, particularly on the parking meter lease. While the city had shortages, a major disaster was the decision to spend the money rapidly rather than invest it as if it were a permanent revenue source.

If the $1.16 billion from parking meter leases in 2009 had been invested in a plain-vanilla US stock market index, I estimate it would be worth more than $5 billion today. If the city had invested in the larger Skyway lease ($1.83 billion) and the downtown parking garage lease ($563 million), the combined investment return would have been more than $15 billion. Imagine the health of pension systems today if that money had been deposited into those funds.

Financial inefficiencies extend beyond asset sales. Consider tax-increment financing, with annual variances exceeding $1 billion in property tax revenues. TIF revenues produced more than $1 billion in combined surplus over the past three years. Imagine if the city had invested that surplus in its pension fund. What if the city secured equity shares in companies and developments that received TIF subsidies? Today, Chicago would be one of the largest investment funds in the country.

Look at the use of the nearly $2 billion COVID-19 windfall given to cities and schools. Lightfoot promised that she would not waste money on asset leases like her predecessors, yet she did just that. The city increased its budget by 60% from 2019 to 2022.

What should the city do?

Major American cities have moved away from mayor-centered governance models, and Chicago should follow suit. This starts with real transparency and accountability in finance and program management. The City Council has the power to enact changes. It should establish an independent Council Budget Office that would expand its reach to provide oversight to all mayor-controlled agencies, particularly Chicago Public Schools.

The Truth in Budgeting Ordinance should mandate public disclosure of the methodology and data behind budget estimates. The city inspector general must have true independence, having authority over all mayor-controlled or subsidized agencies and their respective inspectors general. The ordinance allowing the mayor’s office to suppress certain details in the Inspector General report should be repealed, and all investigations should be made public.

The City Council should emerge as a coequal branch, and these and other measures should be made permanent through public referendum creating a city charter, Chicago’s version of a constitution. It can provide enforceable standards for good governance, transparency and accountability. This will keep the city safe from short-term political objectives and corruption.

To address the immediate budget crisis the city needs to adopt a comprehensive long-term investment approach with every budget controlled by the mayor’s office, including the school district’s $9.4 billion budget that includes spending of about $30,000 per student. Is. While the city’s 2023 budget is more than $16 billion, the mayor’s office controls spending of more than $28 billion, excluding major capital projects. The school district’s budget alone accounted for more than 50% of all property taxes in 2021.

The city should direct the school district to make its own pension contributions, freeing up a pension levy for the city’s employee retirement fund. This could be partially offset by declaring large annual TIF surpluses, of which more than 50% goes to schools. The city announced more than $1 billion in TIF surplus over the past three years. This creates a windfall for taxing districts in that they do not lose money when property taxes are shifted to TIF districts as tax rates increase to meet their tax levy requests.

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Future revenues from the expiring TIF can be used to finance pension obligation bonds when the market is favorable. This will allow the city to take advantage of TIF windfalls in the future. Although this would improve the health of all city funds, more than half of revenue income should be deposited into the Chicago Teachers Pension Fund, reducing its unfunded liability, making it easier for the school district to assume employee pension contributions. Will go.

These measures can help balance the budget. Meanwhile, Chicago elected officials and union supporters should pressure the state to restore full revenue sharing with local governments by ending the corporate personal property replacement tax revenue diversion and restoring the old state income tax revenue-sharing formula.

Additionally, state funding equity for Chicago teachers must be a priority. Chicago Teachers Union President Stacey Davis Gates’s political muscle is better spent achieving pension funding equity than trying to eliminate the state’s small private school scholarship program, Invest in Kids.

In conclusion, Chicago is on the brink of financial disaster, and only radical change can prevent the city from falling into financial abyss.

The City Council must establish itself as a co-equal branch of government, and shift the city’s budget philosophy toward long-term investment. With financial acumen, fiscal discipline, and political courage, Chicago can forge a path to lasting financial stability and a brighter future.

Paul Vallas is an advisor to the Illinois Policy Institute. He ran for Chicago mayor this year and in 2019 and was previously the city’s budget director and CEO of Chicago Public Schools.

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