What Chicago’s City Budget is Shaping Up to Be

In the middle of August 2021, the City of Chicago released its Fiscal Year (FY) 2022 Budget Forecast. The budget forecast precedes the release of Mayor Lightfoot’s Recommended Budget and sets up the expectations of what the upcoming fiscal year may encounter.

In discussing the FY 2022 Budget Forecast for the City of Chicago, it is wise not only to look at the current fiscal year — 2021 — but to look back at the prior fiscal year — 2020 — before looking forward to FY 2022. These three budget cycles — 2020, 2021, and 2022 — are too entangled by the impact of the COVID-19 pandemic for any of the fiscal years to be excluded from the following analysis.

The Past — FY 2020

According to the City of Chicago’s FY 2021 and FY 2022 Budget Forecasts, the City projected a Corporate Fund revenue shortfall of $798.8 million in FY 2020, as seen in Figure 1.

To address this shortfall, the City borrowed $450 million in short-term borrowing that must be paid back in FY 2021. Additionally, the City used CARES Act funding to replace revenue lost and applied “cost savings” to reduce expenditures, as seen in Figure 2.

Even with the increase in expected revenue in FY 2020 of over $500 million, coupled with the decrease of $200 million in expenditures the City proposed in FY 2020, FY 2020 end-of-year estimates of expenditures still exceeded the estimated revenue resulting in a shortfall of $72.8 million, as seen in Figure 3.

As of the time of publication, the City of Chicago has not yet released an Annual Financial Analysis (“AFA”) for FY 2020. In fact, the last AFA published dates back to FY 2019, which analyzed FY 2018. While the City has released budget forecasts each fiscal year, those forecasts do include final end-of-year numbers for the fiscal year, but rather estimates. Therefore FY 2020 end-of-year final numbers have not been confirmed.

The Present — FY 2021

Moving forward to the current fiscal year, FY 2021 initially shows a surplus of $210.1 million, as displayed in Figure 4.

However, amended changes to revenue estimates, the short-term borrowing in FY 2020 which is required to be paid back in FY 2021, and the increase in city contract costs meant that changes were made during the fiscal year that changed the enacted budget projections, as seen in Figure 5.

Given that the City has experienced better than expected revenue collection in FY 2021 over the enacted budget projections, along with expenditures that have remained in line with initial projections, the surplus in the end-of-year estimates offset some of the total amended obligations. However, it still leaves $1,014.2 million in obligations in which funding is presently unavailable, as seen in Figure 6.

The good news is that the City has proposed methods for how to address the outstanding obligations. With the passage of the American Rescue Plan Act, the City is proposing canceling the refinancing of $500 million in debt to cover lost revenue. Additionally, while the contract with the Fraternal Order of Police is estimated to be $274.3 million in FY 2021 ($103.3 million was already included in the FY 2021 budget), the City plans to cover $42.3 million through the Corporate Fund, with $232 million being appropriated from “planned refunding.” Details of the “planned refunding” are not yet available. The City then intends to use $782.2 million in American Rescue Plan funding to replace revenue on eligible expenses (personnel and contractual services), which thereby allows for a shifting of Corporate Fund appropriations for other uses.

The Future — FY 2022

The FY 2022 forecast estimates a budget shortfall of $733 million compared to FY 2021, as displayed in Figure 7.

FY 2022 revenue is expected to grow by $2.1 million or five-hundredths of one percent compared to FY 2021. However, FY 2022 expenditures are expected to grow by $945.3 million — or 23.6% — over FY 2021 primarily due to an increase in pension costs, financial costs, and personnel services.

The pension costs — which are aiding in the large increase in expenditures forecasted in FY 2022— are driven by the increase in contributions to the Municipal and Laborers Pension Funds. The contribution in FY 2022 will be equal to the actuarially calculated contribution suggested for the first time. This fiscally responsible move will increase pension costs by $253.9 million — from $85.5 million in FY 2021 to $339.4 million in FY 2022. Without adequate revenue to cover the increase in pension contributions, it is only exacerbating the shortfall between revenue and expenditures that already exists.

Financial costs are expected to increase by $417.3 million in FY 2022 over FY 2021, which is primarily driven by the increase in debt service used to offset the loss of tax revenue.

While the City repeatedly finds ways to close the shortfall gaps, the underlying issues remain. Revenue for the city is not growing at the same rate as expenditures. Once the remaining American Rescue Plan funding runs out and no further federal assistance is available, the City will need to determine how to increase revenue or make substantial reductions to expenditures, a scenario that is less than ideal.