Fri 03/03/2023 12:06 PM
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On Tuesday, Feb. 28, Chicago Mayor Lori Lightfoot lost her reelection bid, becoming the first incumbent mayor in 40 years to do so. The top two vote-getters in the election, Paul Vallas and Brandon Johnson, will now face each other in a runoff election on April 4. Vallas served in the administration of former Mayor Richard M. Daley as budget director and, later, CEO of Chicago Public Schools. Johnson is a commissioner in Cook County Government, a former school teacher, and an organizer with the Chicago Teachers Union.

The winner of the runoff will inherit a city with several major issues of concern to voters. Public safety emerged as the linchpin issue for voters during the campaign. A new mayor will also inherit structural deficits in the city’s budget and underfunded municipal pensions. The platforms of Vallas and Johnson reveal markedly different approaches to these issues, and what it will mean for the future of Chicago’s fiscal advances in the municipal bond market.

Structural Budget Deficits

Lightfoot’s $16.4 billion fiscal 2023 city budget projected a $127.9 million shortfall, which the mayor touted as one of the lowest gaps in recent memory and a result of her administration’s financial strategies. Chicago’s Sales Tax Securitization Corp. sold $740.9 million in Series 2023 bonds to finance a general obligation tender and refinance existing debt, as previously reported.

A breakdown of funding sources for the city’s corporate fund is detailed below:

Johnson and Vallas each pledge to not raise property taxes if elected, as well as provide full transparency in their budget processes.

Vallas proposes right-sizing and aligning the budget based on need to ensure city services and regulatory protections are administered fairly, and for an independent budget office to score major legislative and budget proposals, issue impact statements on budgets and establish benchmarks for reporting requirements.

Johnson’s budget plan estimates the city has a $500 million structural deficit that will increase to $600 million in fiscal 2024. He proposes establishing a transparent budgeting process that maps out long-term budget projections covering the timeline needed to eliminate the city’s debt, include reports on debt payment costs and pension obligations in annual budgets, evaluate what government is spending on all operations, in particular, enterprise funds, and include full labor costs. If elected, he would launch a full-scale review of all government departments, which he estimates would eliminate $500 million in inefficiencies, and cut top administrative roles to achieve a 10:1 worker-to-supervisor ratio, saving $150 million.

Chicago spends nearly $500 million on employee health insurance plans, Johnson notes. His budget plan proposes a comprehensive insurance plan to reduce costs by $250 million without affecting employees’ costs or levels of care. Additionally, partnering with the Cook County Health system on expanded mental health services would generate $10 million in expense savings.

To generate more revenue, Johnson’s budget plan would reinstate a head tax on corporations, limiting it to large companies that perform more than 50% of their work within the city limits, at $4 per employee. He estimates this would generate $20 million in new revenue.

Additionally, Johnson’s plan calls for a “Chicago mansion tax” exclusively on high-end properties, which is estimated to generate $100 million, a tax on securities trades ranging between $1 and $2 on each individual trading contract generating $100 million, and a carbon offset tax on jet fuel used by airlines estimated to generate $98 million.

Johnson’s budget plan also calls for transferring surpluses in tax increment financing, or TIF, districts to the city’s corporate fund, resulting in $100 million in excess funds.

Underfunded Pensions

Despite the mayor’s historic loss, the Lightfoot administration has made tangible progress toward improving the city’s financial position, with Fitch and Moody’s providing recent credit rating upgrades and S&P Global Ratings improving its outlook to “positive” from ”stable.” The city’s fiscal 2023 budget also won the support of Chicago’s Civic Federation.

The administration ended the ”scoop-and-toss” borrowing practices of preceding administrations through which maturing debt is refinanced to push bond payments out into the future. The administration is also on track to reduce Chicago’s long term debt by $747 million during the current fiscal 2023 and created a new transit TIF district that will provide up to $959 million to support the Chicago Transit Authority’s $3.6 billion Red Line Extension, which officials have touted as “one of the most transformative investments” in CTA history.

The Lightfoot administration also addressed the city’s pension funding challenges and the financial challenges posed by the Covid-19 pandemic. The city kept pace with a $1 billion increase in its annual pension obligation while paying the actuarially calculated pension contributions for all four of its pension funds. The city’s annual contribution stepped up to $2.3 billion in fiscal 2023 from $1.2 billion in fiscal 2019 and is projected to increase by about 2% per year. The 2023 budget appropriates $242 million for an additional pension payment on top of the statutorily required contribution of nearly $2.4 billion, which officials estimated could save up to $2.4 billion over the next 30 years. The city also made an additional pension payment of $200 million during fiscal 2022.

One of Lightfoot’s achievements was getting a long-planned Chicago casino approved. In May 2022, the City Council approved the selection of Bally’s Corp. to receive the city’s only casino license and develop a $1.7 billion casino and entertainment center on the site of Tribune Publishing Center. City officials anticipate the casino will provide $200 million in annual revenue to fund future pension obligations. After the vote, Bally’s paid the city $40 million upfront toward the casino’s development. The administration also won approval to allow in-person sports betting at five city sports facilities, which could raise an additional $1.5 million annually.

Vallas’ plan to address the underfunded pension systems involves placing the systems under the direction of independent investment managers, working with the Illinois General Assembly to protect the city’s share of any increase in the state income tax and true up the state’s employee contributions to the public school system into historical and forward-looking parity with similar contributions to other school districts. Current city officials also say they need more cooperation from state political leaders to address Chicago’s long-term pension funding challenges. In 2021, the state enacted legislation sweetening firefighter pension benefits that the city says will result in added costs to the city of $823 million by 2055.

If this happens, Vallas’ proposal estimates an additional $500 million in payment parity, which would be used to fund the city’s four pension systems. He also calls for leveraging TIF funds to fund pension obligation bonds, serviced through dedicated revenues.

Vallas’ economic development plan proposes using casino revenue as a component of a “fair share investment” plan that, along with developer fees and TIFs, would fund investments on the city’s South and West Sides.

Johnson, in his budget plan, notes that $250 million in general and pension debt service is required above currently budgeted amounts in order to keep the debt from increasing. He posits that his budget plan will set aside up to $1 billion annually to return the city’s budget and pension systems to solvency.

Public Safety

Major crime rates have increased significantly during Lightfoot’s tenure as mayor, as detailed in the table below:

Public safety is one issue where the runoff candidates offer widely differing plans. Both Vallas and Johnson promised to fire Chicago Police Superintendent David Brown if elected, a move that was made moot on Wednesday, March 1, when Brown announced his resignation, effective March 16.

Vallas has made public safety the centerpiece of his campaign, promising to rebuild officer staffing to 13,500 sworn officers when he was Daley’s budget director 30 years ago. Chicago Police Department’s current staffing level stands at 11,700 officers. He also proposes to rebuild detective ranks to 10% of overall staffing, as well as end overtime initiatives that have placed a strain on city finances. CPD spent $150 million on police overtime in 2021, and was on pace to exceed its 2022 overtime budget by $65 million.

Additionally, Vallas vows to eliminate private contracts for security services on CTA trains and buses, which he estimates would save the city $100 million, and reallocate those funds to hire up to 300 more police officers and increase CTA police levels to 500 officers.

Johnson’s public safety plan does not call for increasing or decreasing police staffing levels. His plan focuses on “Treatment Not Trauma,” a campaign proposed by a coalition of community groups, City Council members and social workers to establish a citywide public care network and response program that dispatches trained mental health professionals and emergency medical technicians, or EMTs, in response to nonviolent emergency calls involving mental health episodes.

Additionally, Johnson proposes reopening 12 mental clinics across the city shuttered by former Mayor Rahm Emanuel. Lightfoot also promised this in her 2019 campaign, but never followed through.

Johnson proposes adding 200 new detectives recruited from current rank-and-file officers, streamlining non-sergeant supervisory positions such as public relations and graphic designers to save over $100 million and redeploying those funds to supporting beat police. He also calls for an audit of CPD processes and controls to eliminate duplicate reporting and reduce paper processing costs, and to utilize retired CPD employees on a temporary or part-time basis to minimize training and benefits costs.
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