LESS IN THE RED, BUT DREAD AHEAD?
Pre-election budget shortfall comes in $561M less than expected, but report sets off alarm bells
Mayor Lori Lightfoot’s pre-election budget includes a revised, $305.7 million shortfall — $561 million below earlier estimates — thanks to held-over federal relief funds and an improving economy, top mayoral aides said Wednesday.
The three women who ride herd over city finances delivered their quarterly report to the City Council’s Committee on Budget and Government Operations, as required by a 2021 ordinance championed by downtown Ald. Brendan Reilly (42nd). The ordinance also mandates monthly reports on anticipated revenues.
The latest report sets off alarm bells, despite including signs that Chicago’s economy is recovering from the pandemic.
On the glass-half-full side of the equation is the fact that the city expects to close the books on 2021 with revenues $250 million higher than anticipated.
The primary drivers are:
◆ A booming real estate market driven by record-low interest rates (until recent hikes engineered by the Federal Reserve). The result is transaction and lease taxes $201.3 million over budget estimates.
◆ An improving labor market that has income tax receipts $57.5 million higher than anticipated.
◆ Increased consumer spending tied to federal stimulus checks that has pushed sales tax collections up $14 million — 22% over budget estimates.
◆ And “increased corporate earnings” tied, in part, to a legislative “change in the timing of payments” that has pushed revenues from the city’s personal property replacement tax $170.7 million above anticipated levels.
Even so, Chicago’s economic outlook is not nearly as rosy as the portrait Lightfoot painted during a recent speech to the City Club of Chicago, in which she attempted to lay the groundwork for her re-election campaign.
Transportation taxes are $53 million below budgeted levels, in part because a huge chunk of the downtown workforce has continued to work remotely at least a few days a week.
Although hotel tax revenues have “begun to recover,” they’re still “not fully recovered to pre-pandemic” levels, according to Chief Financial Officer Jennie Huang Bennett.
Conventions, overall business travel and tourism haven’t fully returned. The perception and reality of downtown crime hasn’t helped.
Ald. Tom Tunney (44th), owner of Ann Sather Restaurants, was quick to point out, “as one who lives it every day,” that inflation is a factor in those higher business tax revenues.
“What we’re seeing is people going out and spending more money — not because they’re dining out more, but because it’s more expensive. That concerns me,” Tunney said.
“That’s inflation, which should help — unless it’s out of control.”
Ald. George Cardenas (12th), the mayor’s deputy floor leader, added: “I know we’re resilient. But I’m also very concerned” about Chicago’s economy and its ability to bounce back.
“Given the fact that we have inflation and the Fed acting now to control that, we may see a dead stop in a lot of real estate activity,” Cardenas said.
“There’s a lot of unknowns . ... I don’t know that we’re prepared for another crisis that may occur . ... There’s factors beyond our control.”
Bennett openly acknowledged that although certain key revenues are “seeing excesses compared to budget” estimates, other economic sectors are still recovering.
“Hotel, restaurant and tourism revenue is still not there,” she said.
The CFO further noted the impact of inflation and of the federal relief funds that Lightfoot set aside to balance her pre-election budget are “one-time in nature.”
“In no way do we see this increase as consistent,” Bennett said.
Budget Director Susie Park agreed “some of these overages” in transaction, personal property replacement and income tax revenues will not last.
“These are one-time bumps. We are very aware. It’s good for where we landed in 2021. But we are looking at it as such,” Park said.
Nearly a year ago, the three-year financial analysis that doubles as Chicago’s preliminary budget projected an $866.8 million shortfall for 2023.
Factoring in $152.4 million in held-over federal stimulus funds and $250 million in higher-than-anticipated tax revenue produces that revised $305.7 million shortfall estimate.
Park also warned that figure remains “very preliminary” and easily could rise.
“There’s gonna be a lot of discussion between now and … when we come out with the actual gap for 2023,” Park said.
“With our departments, some of our consumables — our materials and supplies with inflation — are gonna go up in cost.”