Yesterday, Mayor Lori Lightfoot proposed her fiscal year 2022 budget for the city of Chicago. Thanks to the much anticipated federal aid, Lightfoot has proposed several shiny new programs while not increasing taxes. But the city was deep into debt long before the pandemic started.
Chicago's annual revenue is $11 billion but its pension credit card debt is $33 billion. The city received almost $2 billion in federal aid from the latest COVID-19 relief bill. Those are big numbers so let’s break this down to a personal level. A person making $11,000 a year has credit card debt of $33,000 but their Uncle Sam gave them $2,000 as a gift. A financial advisor would recommend they use that money to pay off their credit card debt and not use it to buy something new.
Although the federal aid came with specific instructions on how it can be used, wouldn’t it be smarter for the city to use it to pay down its enormous debt?
Chicago officials are making repeated financial mistakes that any personal financial advisor would advise against. At the end of fiscal year 2020, the city needed more than $43,000 from each city taxpayer to get out of debt. The majority of this debt is caused primarily by the city making pension and retiree health promises, but not properly funding them properly.
In order to catch up on just pension payments, Chicago would have to lay off all city workers, police officers, and firefighters for nearly eight years and put their salaries towards the pension plans.
How did it get so bad? The city is using political math to come up with its budget. This phony math is actually supported by the Governmental Accounting Standards Board (GASB), which sets the accounting rules for state and local governments.
Current accounting standards allow governments to claim balanced budgets while sliding further into debt because they follow cash-basis accounting. With cash-basis accounting, governments can show expenses only when money is paid, not when debt or future expenses are incurred. By only reporting cash spending, and not accumulated debt, this paints a much rosier – but far from accurate – picture of government finances. A recent Truth in Accounting analysis found that the city actually needs $38.7 billion to pay its bills.
Because of years of bad budgeting and accounting, Chicago was unprepared for the pandemic. To put the city’s finances on stronger footing Mayor Lightfoot should use the federal money to truly balance the city’s budget and make a down payment on getting out of its financial hole. Unfortunately, the federal aid comes with restrictions that prevent it from being used to pay down debt.