Chicago takes drastic steps to reduce deficit

Perhaps fittingly, Chicago is known as the “Windy City,” as its government faces significant headwinds when it comes to the city’s budget deficit. Now, the city is taking steps to reduce that deficit, which is expected to reach nearly $1 billion by 2025.

Chicago Mayor Brandon Johnson told reporters that the looming deficit “will require decisions that are consistent with our collective, overarching desire to build an economy that works for working people,” adding that “sacrifices will be made.” The city has now outlined many of those sacrifices, but questions remain about the impact they might have on Chicago’s budget — as well as questions about what financial lessons can be learned.

What is Chicago doing to reduce its deficit?

Chicago is “taking immediate steps to mitigate the projected fiscal year 2024 budget deficit and address the projected fiscal year 2025 budget gap,” city Budget Director Annette Guzman said in a statement. That includes a series of budgetary restrictions such as “a citywide hiring freeze and strict restrictions on non-essential travel and overtime spending outside of public safety operations.” Guzman noted that the 2025 budget deficit — projected at $982.4 million — is “largely driven by rising employee, pension and contract costs, along with ongoing revenue challenges.”

Notably, at the time of the budget shortfall announcement, the mayor “did not say exactly how he plans to close the gap, including raising property taxes, allowing legal video gaming in the city or approving slot machines at the city’s airports as ways to raise new revenue,” CBS News reported. The issues surrounding the additional taxes are relevant because “a large portion of the deficit comes from shortfalls in the Personal Property Replacement Tax (PPRT), which the state collects and distributes to local governments,” Axios said. PPRT funds to Chicago are expected to fall “by $169 million in 2024 and fall further next year when the law allows some businesses to significantly reduce their tax burdens.”

Not everyone in the city seems to be happy with these ideas, especially any tax increases. “It’s important that the city looks to all the resources to ensure that we balance the budget without sacrificing important city services, especially not burdening working-class families,” Chicago City Councilman Byron Sigcho Lopez told CBS.

What is the bigger picture?

Mayor Johnson is “trying to deliver on his progressive social and economic campaign promises while grappling with the city’s fiscal challenges,” Bloomberg said, and is set to set the city’s full budget in the coming months. He “faces issues similar to those faced by his predecessor, Lori Lightfoot, who implemented a hiring freeze as she addressed cascading deficits caused by jumps in the city’s mandatory pension payments early in her term.”

But Chicago isn’t the first city to face these challenges and can learn from other cities in similar situations. In 2022, Milwaukee was “on the verge of financial collapse,” with a huge deficit and “potential bankruptcy looming,” according to consulting firm EY-Parthenon. The city was “able to document the local actions it was exploring and could demonstrate to Wisconsin Assembly members that the mayor was taking steps to fix the situation.”

“Comparing Milwaukee to other cities and systematically accounting for the cost-cutting initiatives the city government has already taken helped demonstrate to lawmakers, the business community, and the public that the politically difficult decision to raise taxes was likely inevitable,” says EY Parthenon. That could be a similar path as Chicago works to emerge from its fiscal deficit.