Rising Chicago deficit forecast raises eyebrows in muni market
4 min read
Chicago released a budget forecast last week projecting that its corporate fund deficit will grow in upcoming years, jumping to $982.4 million in 2025 from $222.9 million at the end of 2024.
The budget
Chicago’s fiscal picture had improved in recent years, with pandemic relief funding and the city’s choice to increase pension contributions bringing a
Bloomberg News
But the new forecast may give investors, and bond raters, pause.
The large deficit “will test the resilience of market demand for city bonds,” Municipal Market Analytics said in its Weekly Outlook report Tuesday.
“The city has the capability to close a budget gap of that size, but it’s very large,” said Matt Fabian, a partner at MMA. “It would be made easier with state help, like the creation of a new tax or two. The problem here is really that the economy has backslid and that the mayor’s office maybe didn’t fully realize the extent of the weakness, and has pushed on with new spending.”
Fabian added that the city faces persistent problems that need recurring solutions, not one-time fixes. At the same time, the city and the state have to be careful about raising taxes that could weaken the economy.
The city’s forecast noted that state changes in how corporations net their operating losses, or State Personal Property Replacement Tax revenue, and reimbursement for pension payments made on behalf of Chicago Public Schools, were the driving factors behind the revenue gap this year. In future years, the projected gap is driven both by revenue and spending factors.
“It’s still a diverse, robust economy,” said Howard Cure, partner and director of municipal bond research at Evercore, a New York-based wealth management firm, pointing to a U.S. Defense Department research lab expansion, the addition of a major corporate tenant for the quantum computing campus, the expansion of the United Center and the modernization of O’Hare Airport, among other things.
Cure said one thing the muni market will be watching is what kind of declines Chicago sees in office building values. There are also the budget problems of Chicago Public Schools and the Chicago Transit Authority: “With the CTA, will the city be willing to give up some control in exchange for more money, like higher tollway tolls and service taxes?” he said.
CPS has the same tax base, and budget problems ranging from unsettled teachers’ contracts to increasing costs of operations, Cure noted.
“What I’m really concerned about is how they’re going to be operating in 2027 as a
The migrant crisis is also an issue: in 2024, the city was under budget by about $70 million on migrant costs, Cure said. And while the flow of buses from Texas has slowed recently, it could ramp back up as the election nears and political tensions rise.
As for solutions, “they’re talking about a hiring freeze, and what concerns me about that is, I’m not sure if this is going to be an across-the-board hiring freeze or whether the city is going to do an analysis of the effectiveness of different departments… and which ones can withstand a change in the number of personnel,” Cure said.
The market will also be looking to see how the city handles pensions: will it continue funding above the tread-water mark? Will the city fall back on the scoop-and-toss restructurings that recent administrations worked so hard to leave behind? And what about property taxes?
“The levy this year has gone up to $1.77 billion, so the city has endured a pretty big increase already,” Cure said. “That brings us to valuations of office buildings and working from home post-COVID and vacancy rates. What’s going to happen to the values of the office buildings? Are they going to be shifting more of the burden onto residential? People have endured a lot of property taxes on the residential side already.”
Various attempts to raise revenue by taxing the wealthy have all faced withering ad campaigns and have been voted down, he noted.
“I think we need to get more specifics about just how the city is going to be balancing its budget,” Cure said.
The impact of the budget forecast on the city’s bonds remains to be seen, but the city’s recent general obligation deal was 1.8x oversubscribed, according to the city’s finance team.
“The city will be able to find a price and a structure that works for it,” MMA’s Fabian said. “So it’s a matter of spread, and seeing where the city will be able to borrow vis-a-vis other issuers.”
He noted that Mayor Brandon Johnson spoke on the campaign trail about the importance of recurring budget solutions.
“There’s no one solution,” Fabian added. “Of all major cities in the U.S., Chicago has made the most use of non-recurring solutions. It’s a real test for the city now.”
