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The Making of Chicago's Fiscal Mess

Published: Mar 06 2023


“One City, 50 Wards: Does the City That Works Really Work?“, a joint series from Crain’s Chicago Business and the University of Chicago Center for Effective Government, explores the connections between how Chicago’s city government is designed, how it functions, and how it performs. You can learn more and read other articles from the series here.

By Steve Hendershot

As Chicago’s second Daley dynasty ended in May 2011, the departing regime left a gift for the new one: a pension-debt problem that had been quietly snowballing for a decade before exploding into view in the run-up to the election.

With nearly a third of the City Council following departing Mayor Richard M. Daley out the door, a bewildered cohort of freshmen council members scrambled to understand the mess they had inherited.

At the turn of the 21st century, the city’s four pension funds all were stable and funded at or near the levels of peer cities. Chicago wasn’t flush, but it was solvent. But in the late 1990s, the state of Illinois sweetened the pension packages and the city didn’t raise its contribution levels. Chicago began falling behind — slowly at first, during the market boom of the 2000s, and then sharply in the wake of the financial crisis of 2008. By the time Daley left office, the four pension funds were funded at only about half their levels in 2000. 

One of the new council members, 43rd Ward Ald. Michele Smith, dug into the city’s budget to better understand the issues. She felt up to the task, armed with 15 years of experience as general counsel to Lisle-based Navistar, a public company. Yet she encountered a document even more dense and inscrutable than anticipated.

“The budget is very difficult to get your arms around,” says Smith, who retired in November after serving 11 years on the City Council.

She also faced a budgetary process that seemed designed to minimize aldermanic input. Chicago’s budgets are crafted by City Hall staffers who report to the mayor, rather than to the City Council, and the city’s 50 aldermen don’t learn the contents of the mayor’s annual budget proposal until the same October day the public does, with less than a week to prepare for the hearings that council members rely on to inform their votes.

Those budget hearings aren’t just rushed; they also frequently veer off topic. The City Council lacks the authority to compel department heads to appear at its meetings — except for the legally mandated appearance at the annual budget hearings. Chicago Transit Authority leader Dorval Carter Jr., for example, declined a series of requests to appear before the council’s Transportation Committee last year, and only finally showed up for the CTA’s budget hearing in November.

The result?

“Our city budget hearings are really not budget hearings,” says Smith. “They're more like oversight hearings.”

Indeed, a comparative analysis of budget hearings in Chicago and Los Angeles by a team of University of Chicago graduate students found that budget hearings in Los Angeles are about 50% more likely than Chicago’s to focus on financial matters.

And Chicago’s finances have suffered from the lack of oversight — exacerbated by the fact that Chicago doesn’t have an elected controller, unlike peer cities such as New York, Los Angeles and Houston.

Chicago’s net position — the ratio of all of its assets relative to its liabilities — fell by $11.6 billion in the decade between 2012 and 2021. Not only is that the steepest decline among America’s 10 largest cities, but eight of the 10 (all but Chicago and New York) saw net increases over the same period.

Pensions are the main culprit, but not the only one. Chronic structural budget deficits have given rise to bad practices such as “scoop-and-toss” borrowing, in which expiring bonds are repackaged into additional bonds, pushing repayment dates into the future and adding billions of dollars in interest costs. Then there’s the city’s habit of using one-time revenues to cover operational expenses — a tradition that continues in the city’s 2023 budget, which relies on a $40 million casino prepayment to cover structural operating costs. 

The result is a fiscal mess. Chicago’s property taxes are among the highest in the nation, driven higher in part by rising pension contributions that now consume more than 20% of the city budget. The city’s BBB credit rating from Fitch Ratings is seven notches below the AA-and-above range where most cities reside. Philadelphia is the only other top-10 city with a rating below AA—and its A rating is still three notches higher than Chicago’s.

The upshot? Chicago is deep in debt and hard-pressed to find money to fund current priorities.

“With a city that is contending with so many legacy liabilities, there is that tension between current policy and programming versus paying down what are essentially incurred costs from the past,” says Ashlee Gabrysch, regional manager of Midwest tax-supported ratings at Fitch Ratings.

It’s a scenario that aldermen have seen coming for years, without doing much about it. Some wrestled with a sense of being boxed out of meaningful engagement with the budget process, while others accepted mayoral control of the budget with resignation.

“With the limited resources I had, I would try to focus on the city budget because that's the most important vote that aldermen take every year,” says former 49th Ward Ald. Joe Moore, who served on the council from 1991 to 2019. “But the reality is, information is power, and all the information resides” with the mayor’s team.

Still, shortsighted mayoral budgets only pass if the City Council signs off on them. Alderman can vote “no” or “not voting” if they are opposed or unprepared to vote on any piece of legislation. Yet in each of the five years from 2000 to 2004 when the city began its pension-debt slide, Daley’s budgets were approved with unanimous 50-0 votes from aldermen.

There wasn’t a single vote in five years against budgets that steered Chicago straight toward a financial cliff. That sort of record takes more than being boxed out — it also requires a thorough disinterest in rebounding.

“Our budget process is a reflection of the way in which the City Council has approached governance for the past 50 years: As an alderperson, you put your blinders on when it comes to citywide issues, and you focus on the things that are impacting your ward and that you can unilaterally control,” says 35th Ward Ald. Carlos Ramirez-Rosa. “Then when it comes to big citywide policy, you defer to the mayor.”

A culture of ward-level myopia is partly to blame. So is the practice of horse-trading, in which mayors support ward-level aldermanic pet projects in exchange for budget votes. Mayor Lori Lightfoot leaned into that longstanding tradition in 2020 when she warned the council’s Black Caucus not to expect future City Hall cooperation on ward-level issues if they voted against her budget. 

Yet in 2011, when Smith took office and the pension problem dominated the headlines, that sort of deference wasn’t as universally appealing as it had been throughout much of the Daley administration. So along with two fellow aldermen, second-term 3rd Ward Ald. Pat Dowell and fellow freshman Ameya Pawar from the 47th Ward, Smith decided to create an independent financial office that would equip the council to more thoughtfully participate in the city’s budget process.

She modeled the office on a similar one in San Diego, and Chicago’s City Council voted to create the City Council Office of Financial Analysis, or COFA, in 2013.

Ten years later, it still exists.

But it barely resembles its counterpart in San Diego.

And Chicago’s pension problem has grown into a monster, with the funding levels for the city’s four pension funds now sharply lower than when Smith was elected. The largest of those funds, which serves the city’s municipal employees, kept falling during the 2010s and was funded at just 21.9% at the end of 2021, according to an actuarial report issued by the fund in May 2022. For comparison, the average funded level of America’s 100 largest public pension funds is 72.8%, according to Seattle-based actuarial firm Milliman.

To make up for years of underfunding, Chicago now has to contribute increasing amounts to pensions every year. Since 2015, required annual contributions to city pension funds have climbed nearly fivefold to $2.4 billion, representing 20.1% of Chicago's 2023 budget.

Chicago’s fixed costs as a percentage of overall expenditures is the highest of any of America’s 20 largest cities, according to an S&P Global Ratings report issued last fall. In fact, it’s not close: 43.4% of Chicago’s costs were fixed, according to S&P, and the next closest city was Dallas, at 30.6%.

And Chicago’s budgetary process remains largely the same, including aldermen who feel sped-up, under-resourced and ill-informed prior to the annual vote.

COFA: A shell of its San Diego counterpart

In San Diego, the mayor releases a budget proposal by April 15 each year, a document that is based not only on proposals from city department heads, but also on the City Council’s budget priorities. Once the proposed budget is released, the city’s 11-person Office of the Independent Budget Analyst fires into action, working 80-hour weeks to parse the budget, examine the city’s back-end financial systems and interview department heads so that it can send its 200-page budget analysis to council members in advance of the first budget hearings in May, leading up to a mid-June vote. Last July, Fitch affirmed San Diego’s AA credit rating.

New York City has a similar system. Its mayor releases a preliminary budget each year by Jan. 16, kicking off a nearly five-month process that includes multiple budget proposals and two rounds of budget hearings, with the city’s Independent Budget Office — which features more than 30 staffers — producing a series of analyses and issue briefings around topics such as police overtime spending and potential sources of savings and revenues. Last month, Fitch upgraded New York City’s credit rating to AA.

An informed, unbiased take on the mayor’s budget is crucial because “if a council is relying entirely and exclusively on information that is given to it by another political office, it handicaps its ability to operate independently,” says Charles Modica, San Diego’s independent budget analyst.

In Chicago, COFA is designed to serve a similar function. But when the budget drops and it’s time to spring into action, COFA’s process looks far different.

For one thing, Chicago’s budget hearings begin just a couple of days after the mayor releases the budget proposal. In 2022, for example, Lightfoot introduced her budget on a Monday and the first budget hearing followed on Thursday.

Then there’s COFA’s size: two employees.

“I don't know how two people alone could go through all that,” Modica says. A team of two could formulate “a kind of comprehensive, overarching view, or get very detailed about a smaller segment of the budget. But trying to do it all, that's a lot.”

Indeed, Chicago’s nonprofit Civic Federation produces its own budget analysis each year, with a team of five devoting about a month to the project—the organization aims to publish its report just before the City Council’s final vote, rather than for the start of hearings. Civic Federation acting President Sarah Wetmore says her organization’s report “still has to take a fairly high-level view of the budget, looking mostly at top-level trends.”

COFA seems to agree that it’s understaffed and pressed for time. In 2021, for example, it punted on its budget analysis, arguably its single most important report of each year, saying it “was unable to produce a robust report” given staffing levels and the tight time frame between the budget’s release and the beginning of hearings. (COFA didn’t respond to multiple interview requests.)

The following year it produced an 11-page budget analysis — again, San Diego’s comparable report typically exceeds 200 pages. COFA called out some of Chicago’s budget tactics such as the “purportedly improved revenue projections” that enabled the city to produce its legally mandated balanced budget, but lacked detail.

Part of the idea behind an independent budget office is to meaningfully interrogate the city’s revenue projections on behalf of the council. Cook County, for example, has an Independent Revenue Forecasting Commission that provides a second opinion on the county’s own projections. COFA, however, appears limited to snarky skepticism.

And staff size isn’t the office’s only problem. COFA’s 2023 budget analysis — expanded to 32 pages — laments a lack of access to city data regarding prior-year expenditures. That’s noteworthy because the municipal-code statute that governs COFA provides for access to any financial information its director deems necessary.

Smith knows COFA isn’t yet fulfilling her vision for producing “the kind of analysis that would give City Council a much more robust tool for making decisions.” Still, she holds out hope that in time, COFA will mature into a more useful part of the budgetary process.

“You have to hammer away at reform,” she says.

An expanded role

Beyond a beefed-up, empowered COFA and an elongated budget timeline, what else could be done to enhance the City Council’s participation in the budget process?

One idea is to involve aldermen earlier in the process, when “their input can be used to shape the budget instead of waiting until the statutorily mandated budget hearing when most of the important decisions have already been made,” says Shayne Kavanagh, senior manager of research at the Chicago-based Government Financial Officers Association, or GFOA.

Then there’s added clarity. The GFOA certifies the presentation of both city budgets and annual financial reports for meeting usefulness standards. All 10 of America’s largest cities have GFOA-certified annual reports, while eight of the 10 also have GFOA-certified budgets granted based on criteria such as clarity and comprehensiveness. Chicago and New York City are the only two top-10 cities not to receive the certification.

The GFOA doesn’t publicly share the reasons why cities don’t receive its certification. But there may be clues elsewhere, such as in the Civic Federation’s recommendations for Chicago’s budget process. Wetmore says the organization would like to see greater detail regarding why the city believes its various revenue sources will produce the amounts projected within the budget.

Another possibility is a midyear check-in. “Once the City Council votes on the budget, they leave it alone until the next year—and that's probably a mistake,” says Dick Simpson, a retired professor of political science at the University of Illinois Chicago and a former alderman. He says those midyear reviews would allow the council “to get a better handle on what's happening, and to be better prepared for what might be needed in the next year's budget.”

That education is key because, if aldermen are to be more involved, well, you want them to constructively involved. For example, the city has made recent fiscal progress under current CFO Jennie Huang Bennett and Budget Director Susie Park, impressing ratings analysts by showing transparency and moving away from sketchy tactics such as scoop-and-toss and toward smarter ones such as actuarily defined pension contributions, according to Michael Rinaldi, senior director in Fitch Ratings’ public finance group.

There’s no guarantee that those gains continue under, say, a different mayoral administration, nor are aldermen guaranteed to advocate for smart fiscal policy.

Fitch’s brightened outlook on Chicago’s finances — the agency bumped the city’s credit rating up a notch last year, to BBB from BBB- — is based on “the trend rather than the absolute placement,” Rinaldi says. “We do have a positive outlook, but that hinges on the ability of the city” to continue along a wise fiscal path.

Under Lightfoot, Chicago’s annual budget votes are no longer the rubber-stamp affairs they were under Daley or even Rahm Emanuel. That speaks more to a fractious relationship between the mayor and council than a healthy budget process, according to Ramirez-Rosa, the 35th Ward alderman.

“That overarching structure is still very much in place. You still have a majority of alderpeople who would prefer to just cede their vote to the mayor, and then ask behind the scenes for the things that they would like,” Ramirez-Rosa says.

What’s his proposed fix?

“I think that what's most needed are structures that enable good governance. And right now, that minimum foundation isn't there.”