Chicago expects to lose $500 million this year from coronavirus
Chicago expects to lose more than $500 million in tax revenue this year because of the COVID-19 pandemic.
“We know that the size of this problem is going to be large and it's something we are going to need all of our resources and tools to be able to address,” the city’s chief financial officer, Jennie Huang Bennett, told aldermen Monday during an online meeting of the Finance Committee meeting.
The revenue hit in the current budget is estimated at “hundreds of millions…probably in excess of $500 million,” Bennett said.
Chicago, like the rest of the country, is dealing with the aftermath of actions needed to limit spread of the new coronavirus. With many businesses closed or at limited capacity, and effectively zero tourism and discretionary business travel, unemployment is up and tax revenues are down.
A larger figure on the costs and tax losses for the year and beyond is still unclear although Mayor Lori Lightfoot has warned that the problem will be measured in billions of dollars and told Crain’s Chicago Business recently she expects the city will have to solve a $1 billion deficit headed into the next budget.
Bennett said the city continues to analyze data and economic projections based on scenarios that consider how long the shutdown remains in place and what happens afterward. “It’s really the expected time frame for economic recovery which will impact how much this COVID crisis will cost us,” Bennett said.
Long before the pandemic, city officials had warned of potential $1.19 billion and $1.16 billion budget gaps in 2021 and 2022, respectively, on a baseline forecast that didn’t account for revenue or expense changes in 2020 or a recession.
The city is operating on an $11.65 billion all-funds budget that includes a $4.5 billion corporate fund and has liquidity in the form of $2 billion of available cash.
Lightfoot and Gov. J.B. Pritzker have outlined reopening targets based on case-and-testing related data that pave the way for the shutdown restrictions to ease at the end of the month but the speed and strength of the city’s recovery remain guesswork. Of the 96,485 identified Illinois COVID-19 cases, Chicago accounted for 37,381 as of Monday. There have been 1,681 COVID-19 deaths in the city.
“We don’t know the exact timing of how we are going to come out of this crisis and ultimately what that cost will be to the broader economy,” Bennett said. “We are working on getting a precise number.”
Whether Congress will act on a new relief package that provides aid to local governments to cover tax losses is the big question, Bennett said. Senate GOP leadership signaled opposition to the $3 trillion package approved by House Democrats Friday that would have assisted local governments.
“That will be a key puzzle piece to how manage through this," Bennett said.
On the expense side, the city received $470 million from March's Coronavirus Aid, Relief and Economic Security Act to help cover coronavirus-related costs and is receiving other federal disaster and grant related federal aid.
Chicago has some breathing room for the current fiscal year from an additional $100 million in savings achieved with its debt refinancing earlier this year and has a cushion in an unassigned fund balance. Bennett said she doesn’t believe at this point the city will “have to come back to City Council to redo anything.” The city's fiscal year matches the calendar year.
Lightfoot has warned hard decisions lay ahead. The budget is unveiled in October. Local tax revenues make up about $1.8 billion of the city’s corporate fund and include transportation taxes, recreation taxes, sales, and hotel taxes. About $427 million comes from state income taxes including a portion shared by the state from income taxes and from the personal property replacement tax on corporate income, some of which is also vulnerable to potential state actions.
Lightfoot has previously said the city won’t dip into asset reserves or push off a pension funding ramp to compensate for the COVID-19 economic hit because the city doesn’t want to damage its long fiscal position. Lightfoot also wants to avoid layoffs or furloughs and considers a property tax hike a last resort although she has said those options must remain on the table for 2021.
The city in 2022 is scheduled to move to actuarially based payments to its municipal and laborers pension funds that will result in an estimated $300 million payment spike. The city made the ARC this year for its police and fire funds, requiring a $270 million jump in contributions over the previous year. Market turmoil could drive those contributions even higher; the city's retirement systems carry a $30 billion unfunded liability tab and are just 23% funded.
Lightfoot has resisted sounding fiscal alarms and initially stressed that the city was well positioned to manage the strains, saying economically sensitive taxes don’t make up more than 25% of the city’s corporate fund. The mayor, who marked her first anniversary in office this month, no longer stresses those points. She declined to provide a budgetary update when asked during a public appearance Monday.
The city’s property tax is a fairly stable source of revenue but it primarily goes to cover the city’s debt and pension payments. Much less stable are taxes on sales, transactions, transportation, recreation and income taxes which S&P Global Ratings puts at 35% of the corporate fund. S&P last month moved its outlook to negative on its BBB-plus rating.
“The sharp economic decline and expected revenue deterioration, along with pressures related to the pandemic, will make the city's path to structural balance more challenging,” analyst Jane Ridley wrote.
Risk abounds, also, in efforts at the state legislative level to raise new revenue. “Two of the city's new proposed revenues remain in the mix — the Real Estate Transfer Tax and a tax on expanded casino gambling — but even if they are implemented, the recession could cause collections to be lower than was anticipated pre-recession,” S&P warned.
State lawmakers have not held in-person sessions since Pritzker issued a stay-at-home order in March, but they are returning for a brief session Wednesday to Friday to take up a fiscal 2021 budget. Lawmakers have not listed changes to the city’s casino tax structure — required to attract a developer — or changes to the city’s property sale tax as priorities.
The city hopes the casino would eventually produce $200 million in new revenue for pensions and the property transfer tax $100 million.
The city is rated BBB-minus by Fitch Ratings, A by Kroll Bond Rating Agency, and speculative-grade Ba1 by Moody’s Investors Service. All but S&P assign stable outlooks.
The city has $7 billion of GO debt and has issued about $3.7 billion of senior and junior lien Sales Tax Securitization Corp. bonds. Chicago secondary-market widened sharply when liquidity-driven outflows rocked the market in March; the secondary has been especially hard on lower-rated credits such as Chicago.
Bennett’s appearance before the Finance Committee with budget director Susie Park was to outline a request to spend $100 million on a short-term capital program to tackle immediate capital needs and capitalize on the summer construction season. The program will also serve as a job creating vehicle to aid in the city’s recovery, Bennett said.
The city will tap a credit line to fund the projects and will eventually roll that borrowing into a general obligation bond sale. Bennett said discussions had begun earlier this year on longer term capital planning changes and they will continue later in the year.
“There are several important considerations in determining what a fulsome capital plan should look like both in normal times as well as post Covid" including equity of investments, affordability, and funding sources, Bennett said.