Chicago City Council rejects property tax hike

The Chicago City Council delivered a strong rebuke of Mayor Brandon Johnson’s fiscal 2025 budget on Thursday, voting down a proposed $300 million property tax increase that Johnson had called for to help bridge a $982 million budget gap.

There was no debate at the special meeting Thursday afternoon, just a quick and unanimous vote against the property tax hike by itself.

The vote came two days after Kroll Bond Rating Agency placed Chicago’s A general obligation bond rating on Watch Downgrade.

Senior Director Linda Vanderperre told The Bond Buyer that the rating agency will “be looking for consensus between the administration and City Council regarding alternative solutions to balance the city’s budget by the statutorily required date of December 31, 2024.”

KBRA expects to resolve the watch for downgrade by early January.

“The mayor was pretty clear previously that he wasn’t going to raise property taxes, and now he’s doing it,” Howard Cure, director of municipal bond research at Evercore Wealth Management, said before the vote. “It’s a question of just how much political capital he has to twist arms… The City Council has to realize that they need to balance the budget, as well, and how are they going to do that if not through an increase in the property tax?”

But Cure said the focus on the property tax increase may be misplaced, as far as bond ratings go.

“There are a lot of issues that are threatening the ratings; governments shouldn’t necessarily be dictated by the ratings, but there are a lot of issues,” he said. “I think that what they decide to do about pension payments — because that’s the biggest knock on the city, are those fixed costs — there’s supposed to be an advance pension payment. If they’re going to cut that… I think that’s a bigger trigger than what they decide to do on the property tax.”

The city’s move toward making actuarially based payments to its underfunded public pensions —
at a high annual cost — has bolstered its bond ratings.

In its release on the watch for downgrade, KBRA said its decision reflects “mounting fiscal challenges” including reliance on one-time rather than structural gap-closing solutions — the mayor’s 2025 budget includes a mix of 80% structural solutions and 20% one-time fixes — and continued reliance on economically sensitive revenue sources, as well as an increased fixed cost burden from pension obligations and a delayed start to the annual budget process.

KBRA affirmed its long-term rating of A on the city’s outstanding GOs and assigned the same rating to the city’s forthcoming Series 2024B and 2024C refunding bonds. 

Fitch Ratings assigns the city an A-minus rating with a stable outlook. Moody’s Ratings affirmed its Baa3 rating on Chicago early this year, with a positive outlook. And S&P Global Ratings rates the city BBB-plus with a stable outlook.

The Johnson administration has faced questions about its supplemental pension payments policy, which is looked on favorably by credit rating agencies but which may be under pressure now that the property tax hike revenue is off the table.

In a report released last month, the Civic Federation of Chicago, a nonprofit fiscal watchdog group, listed more than a dozen revenue suggestions besides a property tax hike, saying the latter should be “a last resort.”

The long-term revenue suggestions — many of which would require changes to state law — include a tax on services, a citywide income tax, a commuter tax, a financial transaction tax and a graduated real estate transfer tax.

Short-term revenue fix options include raising the garbage collection fee, legalizing video gambling, cutting fire department staffing, raising the liquor tax, increasing the rideshare tax, clawing back the portion of the checkout bag tax that retailers keep, increasing the gasoline tax, raising the city sticker tax, imposing a city grocery tax, congestion pricing, raising the restaurant tax, raising the amusement tax, raising the hotel or vacation rentals taxes and reimposing the employer’s expense tax on headcount. 

“The City Council needs to have some kind of alternative solutions to what the mayor is proposing,” Cure said, noting that property tax “is a pretty stable revenue stream – you’re not going to have fluctuations.”

He pointed to personnel cuts (the mayor’s proposed budget included no layoffs) or hiring freezes as steps that must be taken with care given the potential effects on services. In public health, he noted, Chicago has 280 vacancies right now, and it’s difficult for the city to compete for healthcare professionals against the private sector. 

The city’s police force is also under a federal consent decree, and Illinois Attorney General Kwame Raoul this week warned the Johnson administration that it should reconsider proposed cuts to staff necessary for the reform of the Chicago Police Department.

Another concern, Cure said, is that the administration wants to spend remaining federal pandemic relief funds on certain programs. They will have to act fast on that given the upcoming change in control of Washington, D.C., he said: the federal government may try to claw back any unspent money.

Then there is the $3 billion budget deficit for the state government, which has already prompted calls from minority Republicans in the state legislature for Gov. JB Pritzker, a Democrat, to swear off any and all tax increases.

“What does that mean for cities, including Chicago?” Cure asked. “Does the state balance its budget on the backs of cities? … How helpful is the state going to be when they have their own budget deficit to deal with?

“And then there’s the whole battle with the school board,” he added. “A lot of decisions have to be made; you can’t look at the city in isolation. That just makes the budget negotiations that much more complicated.”