When it comes to sustainably funding public services, doing the right thing is not only difficult, but it can really make people angry. For proof, look no further than Mayor Brandon Johnson’s latest budget speech. Chicago faced an estimated $982 million shortfall in its enterprise fund next year. This is a problem because this fund constitutes the general operating budget of the city. This means it funds basic services like police and fire protection, streets and sanitation, and social services.

As a reminder, the projected deficit for fiscal year 2025 is the second-worst deficit Chicago has faced in the last 15 years. In fact, the only larger shortfall in corporate funds, which totaled some $1.2 billion, was realized in fiscal 2021, during the pandemic. This once-in-a-century crisis has destroyed public sector finances nationwide, leading to a massive federal bailout. Chicago’s current financial challenges are due to structural flaws in its tax system, meaning the federal government won’t come forward with much money to help Chicago make ends meet.

Which means it’s up to the city to tackle this mess. But here’s the challenge: To eliminate structural budget problems, you must first identify what actually caused them. In Chicago’s case, its structural fiscal difficulties exist because the city’s long-term revenue growth has generally not been sufficient over time to finance the inflationary growth in the cost of providing basic public services. year after year and to pay debt service. that Springfield imposed on the city to cover its unfunded pension obligations.

For example, corporate fund revenue is expected to be just $5.179 billion in fiscal 2025, a year-over-year decline of $600 million, or 10%. . To be clear, the decline in revenue is no goodespecially when the economy is growing.

To remedy this situation, three things must happen. First, Chicago will need to generate more recurring revenue. Second, the pension debt repayment schedule must be reamortized. Third, Springfield must help do both.

To remedy the imminent deficit, Johnson has just put a number of proposals on the table. These include everything: cost savings by eliminating 743 vacant positions; to generate one-time revenue by declaring a record $570 million tax increment funding surplus — of which the city’s share is $132 million; to offer various new sources of recurring income. The largest of these new revenue streams would be a $300 million increase in property taxes, which would make no one happy. Generating new recurring revenue is never popular, but in this case it was necessary.

More revenue, more city-state cooperation

The problem is that the mayor’s proposal still relies on large one-time budget corrections, meaning Chicago’s fiscal problems will continue unless the state steps in and helps.

Illinois state lawmakers can start by creating a legislative framework that will allow Chicago to pay down its pension debt – which has jumped by $22.6 billion over the past 18 years – without having to increase taxes. taxes or reduce spending on services. Most people think that overly generous benefits are the main cause of this increase, but they are wrong. The real culprit was a state-created statutory contribution plan that allowed Chicago to underfund its pensions for decades. This irresponsible contribution scheme accounted for 59%, or $13.33 billion, of the $22.6 billion increase.

Worse, the state has imposed a repayment schedule on the city’s pension debt that calls for payments that increase every year through 2055, to levels Chicago cannot afford. These debt payments can be reamortized in a rational manner, which will not only ensure the financial health of Chicago’s retirement system, but will also save some $11 billion in debt service, significantly improving the city ​​finances and reducing costs for taxpayers. But this cannot happen without state action.

Springfield can also help generate more recurring revenue for the city. The state currently shares its tax revenue with local governments through the aptly named “Local Government Distribution Fund.” A few years ago, when the state raised its income tax rates, it chose not to share any of its new revenue with local governments by reducing the pay-as-you-go fund. Restoring this fund to its former level would increase Chicago’s revenues by $235 million a year, without raising anyone’s taxes.

From a broader perspective, Illinois taxes the modern economy less with its sales tax than any other state. This is because Illinois sales tax applies primarily to transactions involving goods rather than services. This doesn’t work because the sale of services accounts for more than 70 percent of all economic activity in Illinois, while the sale of goods accounts for only 17 percent. Simply expanding Illinois’ sales tax base to include consumer services – like our neighboring states Iowa and Wisconsin – would generate recurring revenue that would help every Illinois municipality and would also address some of the state’s budget shortcomings.

The truth is that Chicago’s financial challenges cannot be solved through window dressing. It will take new revenue and a new era of cooperation between Springfield and Chicago to get the job done.

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a nonpartisan tax policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University. Contact him at [email protected]

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