Chicago sees progress in cutting projected 2027 deficit

Bloomberg News

Chicago's projected fiscal year 2027 deficit declined $283.9 million from last year's estimate in the budget forecast released Thursday, and the city plans to make the second half of its advance pension payment in mid-September.

In a statement the administration blamed rising costs and lost revenues due to "key elements of the city council's alternative budget failing to materialize" for the $882.4 million FY2027 deficit, an improvement from the $1.2 billion shortfall estimated in last year's forecast.

Mayor Brandon Johnson said his administration will release his executive budget proposal "in the coming weeks" and pledged to "learn from the lessons of 2026."

Budget choices "have real consequences for Chicago's financial future," Johnson said at a press briefing. "It also shows that our progressive revenue approach is most certainly working.

"Where you have seen progressive revenue structural changes to our budget, it's where we are overperforming," Johnson told reporters. "Putting forward speculative revenue streams is clearly irresponsible. In the coming weeks, I will formulate an entire package that holds to our values." 

"It's a little overstated to say the mayor's revenue policies are working and that the city council's are not," said Justin Marlowe, research professor at the University of Chicago's Harris School of Public Policy and director of the Center for Municipal Finance. "There's no question that the slow-walking of the debt sale (and) some of the components of other taxes (had an impact). ... It's too soon to say that what the city council had proposed can't work or won't work."

Marlowe added, some of the mayor's revenue proposals are outperforming estimates for reasons that had little to do with their design.

For example, the cloud computing tax's success is "just a function of what is happening in the economy at large," he said. "Chicago happened to be in the right place at the right time with that tax."

The social media tax is another example of a tax that happened to align with economic trends in a timely way, he said.

Marlowe predicted the 2027 shortfall will shrink further as digital taxes continue to outperform estimates and actual tax-increment financing surplus and intergovernmental revenues numbers come in higher than the administration's conservative estimates. Misconduct settlements may also come in lower than the forecast's number, which "is a bit larger than anyone was expecting," he said.

The actual gap will probably be between $500 million and $600 million, Marlowe said.

The Budget Accountability Coalition, composed of councilmembers who supported the alternative budget, released a statement on Thursday saying the Johnson administration is "taking credit for outcomes they had nothing to do with: a [personal property lease transaction tax] revenue stream they didn't execute, a budget the mayor refused to sign and a pension payment the city council forced them to make."

Johnson declined to directly answer questions about a property tax increase or head tax, but suggested in his remarks that higher taxes on corporations or the wealthy were not off the table. 

"My administration's values have not changed," he said. "We will not balance this budget on the backs of working people. We will continue to fight for progressive, equitable revenues that ask those who can afford to contribute more to actually do more."

Chicago CFO Ashlee Gabrysch said after this year's bond sales Chicago's debt service is projected to grow by $70 million.

"We will be making that second half of the supplemental pension payment by the end of this month," Gabrysch added. "We are targeting mid-month."

She said Cook County, which has seen significant delays around property tax bills, issued its second installment property tax revenues on Tuesday. Chicago "will be making the payment before that money actually hits our accounts," but "we were committed to making that payment and we now have the means to do so and the assurance from the county that that money will be coming in shortly," she said.

Acting Budget Director Jonathan Ernst said the administration plans to close the $85.1 million deficit for FY2026 — which was driven partly by underperformance in fines, forfeitures and penalties revenue — primarily by refinancing Sales Tax Securitization Corp. debt.

"I'd be curious about the structure of the refunding of debt," said Howard Cure, partner and director of municipal bond research at Evercore Wealth Management. "I assume they're going to be taking all the savings up front … but I don't know."

Cure said he's "always been a little dubious" about the STSC credit. "It doesn't trade as well as it's rated," he said.

The STSC bonds might maintain their higher rating even if the city struggled, but the spreads on that credit would still widen, Cure said.

With distressed credits, including Puerto Rico and Detroit, investors have gotten burned, he noted.

"Can they keep refinancing city general obligation debt through that mechanism, or are there limits?" Cure asked. "I know they swear up and down that this is somehow separate, bankruptcy remote … (but) if Chicago were ever to be in bankruptcy court, there'd be questions about just how bankruptcy remote these bonds are."

Cure said he's more focused on the 2027 shortfall.

"On the revenue side, the expiration of one-time solutions in 2026 creates a material shortfall entering 2027," the Johnson administration noted in a presentation shared with reporters. "While recurring local tax revenues are projected to remain resilient, the availability of TIF surplus and loss of one-time revenues, including the sale of city debt that did not come to fruition in 2026, significantly reduces available resources."

Chicago declared a record $1 billion tax increment financing surplus in its 2026 budget, of which $228 million went to the city and over $553 million went to Chicago Public Schools. 

Earlier, the city also let certain TIF districts expire to help fund its sale of $1.25 billion of bonds for affordable housing and economic development projects. 

"It's important to remember that we had a lot of … TIFs that were allowed to expire, and that incremental revenue was then added to the property tax base, and that is what allowed us to issue those housing and economic development bonds, because we did have that expanded property tax base, and we didn't have to then increase property taxes for individuals," Gabrysch told reporters. "So that plays into the availability of TIF surplus."

On the expenditures side, higher financial costs are fueling growth. Those costs stem mainly from bond payments and settlement and judgment costs and are on track to grow by $334.6 million to $609.3 million in 2027, according to the presentation.

Johnson spoke passionately about the police misconduct settlement costs that are now saddling the city, saying, "If you look at what we pay out in settlements with police misconduct, it's quite severe," and if the city did not have the twin burdens of misconduct settlement payments and underfunded pensions, "we'd have a much different forecast."

The mayor vowed "to have a real robust conversation with the people of Chicago. If there are three things that the people of Chicago are fully aware of in terms of city budgets, they know how bad the parking meter deal was and is; how irresponsible it was to sell off the Skyway; and then third, how much we pay out in misconduct settlements."

Cure noted that whatever the mayor proposes in his 2027 budget, the city council has cultivated an independent streak that shows no signs of abating.

"It did not work well last year," he said. "You really need cooperation from both sides. There's definitely a budget gap; they need to work together."

"The question mark right now is what the acting budget director and new CFO can do, if they're able to act as a bridge to the city council," Marlowe said. "The council is fully prepared to do exactly what it did last year."