There was an extra tax on every restaurant bill, higher fees for solo ride-share trips and a property tax hike to keep public libraries open on Sundays.
These were just a few of the measures newly-elected Chicago Mayor Lori Lightfoot took to close the city’s $838 million deficit for this year.
Then came COVID-19.
Restaurants closed. Rush hour vanished. Public libraries are closed every day of the week. Lightfoot’s best-laid plans had, in fact, gone awry.
The pandemic is wreaking havoc on government budgets across the country as tax revenues plummet. But it will be weeks, months — even years — before Chicago taxpayers know the full impact of the coronavirus crisis on public services — and on their pocketbooks.
Chicago is in line for about $1.6 billion in federal stimulus money from the federal CARES Act, but with a $10 billion budget to balance, City Hall officials will have a big task ahead of them. Here’s what we know so far about how Lightfoot’s budget is holding up during the pandemic.
Even before coronavirus, Chicago faced a tough 2021 budget.
Before the pandemic hit, city officials had already projected budget shortfalls beyond 2020’s historic budget gap. Assuming a stable economy and little to no changes in revenues and expenses, budget documents predicted a $1.187 billion deficit for 2021 — one of the largest in city history.
“There wasn't revenue to cover [2021 expenses] before coronavirus,” said Ralph Martire, executive director of the nonpartisan Center for Tax and Budget Accountability, which analyzes government finances.
The mayor’s budget forecast includes a negative outlook that would increase the gap to $1.6 billion. City budget officials have yet not said if they’re in this “worst case scenario” — or whether next year’s project deficit could be even bigger than that.
“There is no doubt that the pandemic will have an impact on the city’s economy, but we can’t know to what extent until we come out of this health crisis,” said Kristen Cabanban, Lightfoot’s budget spokeswoman.
Lightfoot has been asked repeatedly about how COVID-19 might hit the city’s finances, and she frequently returns to the same refrain: Chicago does not overly rely on any single revenue stream, which diversifies the city’s risk. That is true.
But what happens if all or most of them decline?
With concerts canceled, Netflix could help.
Under the city budget, there’s a whole section of revenue labeled “recreation taxes” that include extra charges on liquor, cigarettes, boating and concerts. The biggest money maker in the category is the “amusement tax.”
That’s a catch-all phrase for the tax the city charges on a diverse set of amusements, from concerts to baseball games to Netflix.
In 2020, the amusement tax was expected to bring in $193.9 million. It had grown the previous year after former Mayor Rahm Emanuel increased the tax to 9% for large venues, like concerts at the United Center, football games at Soldier Field and baseball games at Wrigley. He did away with the tax for smaller venues.
But nobody is gathering right now in groups of more than 10 people, much less groups of 10,000. And such large events aren’t expected to return until the final phase of Illinois Gov. J.B. Pritzker’s reopening plan, which could take months. The Chicago Symphony Orchestra already canceled shows through June 9, and Pitchfork called off its music festival scheduled for July.
But there is a silver lining in the giant, dark cloud that is 2020’s amusement tax collections: Streaming services.
“Our amusement tax — 30% of it is from streaming fees. And a lot more folks are saying, ‘Oh, I'm streaming more Netflix,’ ” Martire said, noting that about $81 million was expected to come from streaming fees this year.
What’s a restaurant tax worth when all dining rooms are closed?
Chicago planned to rake in an additional $20 million this year from an increase to the city’s restaurant tax. It amounted to an extra $0.25 on a $100 bill. That tax is on top of the sales tax collected at restaurants.
Before the COVID-19 outbreak, revenues were in line with expectations, Cabanban said. But with restaurants and bars closed under the stay-at-home order, the expectation of anemic tax revenue for March, April and May will likely dash any hopes of having this stream of money help bail out the city. The restaurant tax does not apply to delivery and takeout orders, which have been allowed to continue during Illinois’ stay-at-home order.
Cabanban said the city does not yet have reliable numbers for a lot of its tax revenue – including from restaurants – because it’s given businesses until June 30 to actually send in the taxes they’ve collected.
As downtown congestion evaporates, so could potential tax revenue.
Money from the city’s ground transportation tax had already grown significantly under Emanuel, who first imposed extra fees on rideshares, like Uber and Lyft, to bring in some extra cash.
Lightfoot took it to the next level in 2020 when she added surcharges for trips downtown and during rush hour to reduce congestion. The moves were estimated to bring in an additional $43 million for an expected total of $190.5 million in 2020. And as of the end of March, revenues were at about $48.5 million, up from $28.9 million during the same period last year, according to the city budget spokeswoman.
“As soon as this [pandemic] started to hit, people started moving more to ride-share than they had before, so that’s actually a number that’s up,” Lightfoot said on a conference call in early April.
Still, the global pandemic is reducing congestion more than any tax increase could have. Cell phone data provided by the city shows Chicagoans have been staying close to home since the stay-at-home order went into effect. That means fewer people are commuting downtown.
One glimmer of hope: There is a new charge on solo rideshare trips, which could help the city’s bottom line, considering nobody is taking group rides with strangers. (Rideshare apps Uber and Lyft aren’t even offering shared rides right now.) But, like restaurants, rideshare companies and taxi drivers have until June 30 to send in the taxes they’ve collected, so the full impact on Chicago’s budget still isn’t clear.
Property tax is still largest revenue stream, but stability is in question.
Property taxes make up the city’s largest revenue stream and are traditionally the most stable. They help fund basic government services, schools and public safety.
However, as businesses shut down, unemployment rises and people struggle to pay their rent or mortgages, even property taxes could be shaky. Because property taxes are collected by the county and are one year behind, the pandemic’s impact on property tax revenue won’t show up immediately.
The Cook County Assessor recently announced he would be reviewing assessments for every single piece of property in the county as COVID-19 takes its toll on the economy. This move could provide relief to property owners, but it will impact how much local governments can collect.
Is there a steeper pension cliff ahead?
While the city has a litany of taxes to generate a couple hundred million here or a few million there, it all feels like small potatoes next to the city’s expenses. One of the largest line items is the annual payment made to the four retirement funds for city workers — pensions that were in deep trouble long before the pandemic.
If you have a retirement account and haven’t looked at it in the last two months, don’t.
“Now, my retirement age has been pushed out to 137 years old,” Martire joked when first asked about the city’s pension obligations.
According to Martire, the same market downturn that might have you sweating about your own retirement is also hitting the city’s pensions. According to the most recent projections available, the city is required to pay about $1.8 billion into the retirement funds of city workers in 2021.
The $1.8 billion number isn’t going to change much since it will be based on investment performance from 2019, before the COVID-19 pandemic hit. But when it comes time to recalculate the required payments due in 2022, it’s going to be ugly.
The city’s required pension contribution is already scheduled to increase significantly then, as the city starts kicking in a lot more money each year to all of its pension funds in order to get them on a path to solvency. The most recent projections for 2022 put the total due at more than $2.2 billion. But there’s a good chance that number will rise significantly, as the city has to shell out more money to make up for the funds’ investment losses caused by COVID-19.
In other words, the pension cliff Chicago was already due to see in 2022 just got a lot taller.
“The return on investment assumptions for the next few years are going to be wrong,” Martire said.
He added that now might be a good time for Lightfoot’s administration to turn to borrowing in order to help meet its pension future pension payments.
“This kind of refinancing makes perfect sense,” Martire said. “It's the right thing to do. It is a structural reform, and it may be the only way really if you believe in a principle we call ‘math’ for the city to be able to deal with this problem.”