A fight broke out late one Saturday night, or, more accurately, early Sunday morning, at a bar on Chicago’s South Side. Someone called the police just after 4:30 am. But the police didn’t come. The fight soon moved outside; one man issued a threat, got into his car, and then plowed it into the crowd, just before five o’clock. Three people were killed. Still no police. An officer wasn’t dispatched until 5:20 and didn’t arrive until more than an hour after the original call.

Chicago faces a dire police shortage. (See “Can We Get Back to Tougher Policing?,”) Over half of high-priority 911 calls had no cops available to respond. One important reason is that the city is now allocating almost half of its budget to debt and pensions, leaving ever less for essential services, including public safety. The municipal government is acting more like a conduit channeling money from residents to check-collectors than a protector of its citizens’ rights and liberties.

Chicago has dominated America’s heartland since the late nineteenth century. As the City of the Big Shoulders, it has been a place whose self-reliance and drive allowed it to compete with coastal metros boasting more obvious advantages. Chicago’s landscape and weather may leave something to be desired, but the city’s combination of cosmopolitanism and localism, embodied in its diverse neighborhoods, has helped give it a distinctive American personality. Yet bad services, corrupt politics, and elevated crime have made life in Chicago increasingly unpleasant, all worsened by the city’s parlous finances.

An ever-mounting debt burden is the greatest threat to the city’s survival. As that problem worsens, more residents will question whether they want to stay in a windswept city paying down someone else’s pension—or decamp for places that don’t place such a millstone around their citizens’ necks.

According to the group Truth in Accounting, Chicago continues to live up to its moniker “Second City” in at least one respect: it has the second-worst debt load of any big city in America—about $43,000 per taxpayer, or almost $40 billion in total. The first is New York City, but Chicago residents also have to deal with Illinois’ debts, which total $42,000 per taxpayer, third worst in the nation. Thus, a family moving to Chicago suddenly becomes the inheritor of almost $85,000 in liabilities. By this metric, Chicago is no longer second but has by far the worst debt burden of any major city.

Chicago’s accumulating debt might be bearable if the city had low taxes and therefore room to raise them and pay down some of the liabilities. But taxes in the Windy City already rank among the nation’s harshest. According to a national study, Chicago’s combined city and state taxes would eat up over 12 percent of a U.S. median family income. The only large cities with higher proportionate taxes are Rust Belt towns with much smaller populations, such as Detroit and Newark. Chicago imposes the highest sales tax of any major city (10.25 percent) and punishing property taxes, too.

Chicago’s taxation is also brutal on businesses. A recent study of 53 cities found that Chicago’s tax on industrial properties was nearly double the average of other cities. Chicago’s commercial property-tax rate, at more than 4 percent per year, was by far the worst of any major city and more than twice the average.

High debt and taxes might be manageable if the city’s economic fundamentals were strong. They’re not. Chicago relied for years on commercial properties, especially downtown offices in the Loop, to power its economy and fund the city’s excesses. But those jobs are fleeing. Downtown Chicago’s office vacancy rate recently approached 24 percent, a record high. Boeing has moved its headquarters from the Loop to Northern Virginia. These white-collar firms will not pay the city’s higher taxes in the future; they won’t even pay their existing leases.

Despite the city’s crushing liabilities, Mayor Brandon Johnson has pledged to boost spending on progressive projects. (Vincent Alban/Chicago Tribune/Tribune News Service/Getty Images)

Making matters worse, Chicago’s population is shrinking. Chicago hit its peak population 70 years ago, and it has contracted further since the early 1990s, when many other big cities began to revive. At about 2.7 million people, it’s still, barely, America’s third-largest city, but it’s a quarter smaller than it was about a half-century ago. Even if Chicago gets its fiscal house in order, continued population loss means that every resident will be taking on ever more debt and taxes. The city can’t be saved by the area’s surrounding dynamism, either. Both the Chicagoland metropolitan region and the state of Illinois have fewer people than they did before the financial crisis 15 years ago.

If the beleaguered remaining Chicagoans were wealthy enough to help support the city’s debt and taxes, that might see Chicago through its troubles. Once again, no such luck. Despite a high cost of living relative to the rest of the nation, the city’s median household income lags the national average, and its poverty rate is about 50 percent higher. The city is also losing its most successful workers and business owners. Data from Allied Van Lines show that Chicago in 2021 saw the most outmigration of any U.S. metro area, and Illinois the most of any state. Government tax data show that those who left the state earned north of $100,000 on average, well above the level of those moving in. CBS Chicago interviewed a Chicago woman whose property taxes had almost doubled in the previous year, to over $7,100, and had gone up by more than 1,000 percent in 20 years, which made her wonder whether the city was actually trying to push homeowners out. The flight of Ken Griffin, the state’s richest man, and his hedge fund, Citadel, to Florida exemplifies the outmigration of well-off families and individuals who could otherwise help shoulder the debt and taxes.

Unprecedented debt and punishing tax rates, a declining business sector, and a shrinking, poorer population: it’s no recipe for long-term success. Unfortunately, newly elected Chicago mayor Brandon Johnson will aggravate all these problems. A former member of the Chicago Teachers Union, he has made it clear that he wants to expand spending. When asked about the dire state of Chicago’s schools, he said that he would evaluate them not by their outcomes but by how much money they spent—the more, the better. His transition team advocated for a “Green New Deal,” including, more specifically, a “Green New Deal for Schools” and a “Green New Deal for Water.” He wants to spend up to $160 million a year on permanent housing and services for the homeless. And he has promised to keep Chicago a “sanctuary city” for immigrants, even as 10,000 migrants sat in city shelters and the city spent well over $130 million providing for them in 2023 alone.

Johnson admitted that property taxes were “painfully high” and in his campaign said that he wouldn’t raise them, instead vowing to “make the suburbs, airlines & ultra-rich pay their fair share.” He wanted to quadruple the transfer levy on expensive property, what he called a “mansion tax,” and impose a transaction tax on Chicago’s tottering finance industry. Much of Johnson’s tax plan either is impossible under existing law or serves more of a punitive than a fund-raising purpose. Illinois governor J. B. Pritzker, no anti-taxer, already said that he would block the financial transfer tax, and voters soundly rejected Johnson’s mansion tax.

Ironically for someone so interested in soaking well-off taxpayers, Johnson had been unwilling to pay off his own charges to the city. Despite previously earning a comfortable six-figure income, Johnson reportedly owed over $10,000 to the city in unpaid traffic tickets, unpaid water and sewer charges, and late fees and penalties. Only the public revelations, and a law preventing someone in debt to the city from taking office, forced him to pay down his bill.

Unfortunately for Johnson, even if he wanted to constrain spending and corral expenses, he has few options. In the past three years, 40 percent to 44 percent of all local budget went to the “fixed costs” of bond interest charges and pensions. Chicago is in a league of its own here. The next closest big-city competitor was Dallas, with just over 30 percent going to fixed costs.

Cutting spending is made still harder because about half of Chicago’s general government expenditures goes to public safety, a necessity in a city facing one of the nation’s worst murder rates. While Johnson once embraced “defund the police” rhetoric, he later pledged not to cut “one penny” from the police budget. His budget still eliminated hundreds of vacant and unfilled police positions—despite the fact that all the cuts to city payroll in recent years have been to the police force. The mayor also cited costs as a reason for canceling the city’s contract to deploy “ShotSpotter” gunshot-detection technology—despite the mayor’s own police superintendent praising the system and evidence showing that it allowed police to respond to shooting incidents quicker and helped them give hundreds of people lifesaving medical attention.

Chicago lacks much wiggle room to reduce salaries or benefits for its workforce. These obligations result from collective bargaining agreements with the city’s powerful municipal unions, of which Johnson is an inveterate friend. Chicago projected that its generous policies would swell unionized employees’ salaries and benefits by more than $200 million in 2024. The increase is the most important reason for the city’s deteriorating budget situation this year.

Nothing is simple about Chicago’s debt, so it is perhaps not surprising that traditional municipal bonds issued by the city are not the main source of its woes. The lion’s share of Chicago’s burden is its pension debt, totaling $34 billion, with another $2 billion for retiree health benefits. That is up from just over $20 billion in 2013. Unlike most other places in the United States, Chicago has barely pretended to fund its four major pension plans; it has assets for only about 25 percent of its pension obligations and nothing set aside for health care. It carries the most pension debt of any American city and more than the vast majority of states.

Both Illinois and Chicago tried to reform their pensions beginning in 2014, but two years later, the state supreme court decreed any reductions in vested pensions unconstitutional. This ruling left Chicago with little room for maneuver and led Moody’s to push Chicago’s debt into junk-bond status. The city, in turn, punished Moody’s by no longer sending it business.

In growing cities, large pension obligations can have limited effects, since new workers can help fund payments for longer-serving ones. But Chicago is not a growing city, making its pension debt doubly onerous. Its four major pension funds have 1.5 times more retirees and inactive members than current employees.

The debts and pensions of the city proper are only one part of the problem, since Chicago has one of the more confused governance structures in the nation. Residents need to worry not only about the liabilities of the city and the state but also those of the Chicago School District, the Chicago Park District, Cook County, and more obscure bodies like the Forest Reserve District and the Metropolitan Water Reclamation district.

The biggest debt culprit besides the city is the Chicago School District, which is about $18 billion in the hole, most of that for pension and health-care obligations. Cook County, of which Chicago makes up more than half, has another $15 billion in net liabilities. One could add the Chicago Transit Authority’s $1 billion-plus in net liabilities as well. These other government entities alone add more than half again to the local debt facing Chicago taxpayers.

Chicago has made something of an art form of creating overlapping governments. Inside the city itself lurk other government bodies with boards that it appoints but that carry debt that it struggles to distinguish from its own—the Chicago Public Building Commission, the Chicago Housing Authority, and the local Community College district all have their own budgets and liabilities.

Chicago is also infamous for its TIFs, or tax-increment financing districts, which pile on more owed money. TIFs issue bonds and make investments in infrastructure or real estate, and then pay off the bonds with property-tax revenue, which otherwise would go to the city budget or schools. The original goal of TIFs was to revive “blighted” areas. But now, about 125 TIF districts cover about a third of Chicago, with some running budgets comparable with those of cities and debts almost as large.

Chicago has faced debt crises before. Usually, the city found some outside savior or engaged in various maneuvers to find a way out. In the Great Depression, Chicago’s industries got hit harder than other places. By February 1932, the city government had stopped making payroll, and its emergency funds for hungry citizens were exhausted. Only the solicitude of the federal government and some loans to city banks and the city itself from the federal Reconstruction Finance Corporation (conveniently led for a time by a Chicago banker) averted a worse disaster.

Many of the city’s current debt problems originate with reckless spending by Mayor Richard M. Daley (son of the legendary Mayor Richard J. Daley) in the early part of this century. The basic tenet of long-term municipal debt is that it should be issued only to create long-term capital improvements, such as roads or bridges. Yet the Chicago Tribune analyzed $10 billion of general obligation bonds issued during the younger Daley’s tenure and found that $3 billion went to such things as legal expenses and maintenance—often in contravention of IRS rules that prohibit using tax-exempt bonds for such short-term expenditures. In one case, the city used tax-exempt bonds to provide back pay to police officers. It was using bonds not to pay future or even present costs, but past ones.

To save itself from its own profligacy, Chicago privatized some of its biggest assets. In 2004, it signed a 99-year lease for the Chicago Skyway Toll Bridge. Two years later, it signed another century-long lease for several parking garages. In 2008, it inked a 75-year deal to lease out its parking meters. In total, the city reaped $2.5 billion from the privatization deals. While privatization of assets has brought immense benefits to most cities that have engaged in it, providing steady funding while improving efficiency, Chicago quickly squandered most of the windfall. Though the parking-meter deal was supposed to create long-term stabilization funds, the city spent 85 percent of the money within two years.

The city’s debt problem swelled again after the financial crisis, when it kept pushing liabilities onto future citizens. Its net position, or all its assets minus its obligations, ballooned by almost $12 billion in the decade through 2021, largely because of soaring pension debt. Chicago saw the greatest increase in debt of any of the ten largest cities in the U.S.

Given this enormous burden, one would think that Chicago would try to get the best deals on selling or financing it. Yet in a strange inversion, the city has instead leveraged the size of its debt to force others to accept its progressive social causes. As the trade journal The Bond Buyer noted: “Chicago has long linked municipal bonds and social issues—with mixed results.”

In 2002, the city passed a disclosure ordinance requiring private firms that work with the city, including bond underwriters, to reveal whether they or any predecessor companies benefited from slavery. The now-defunct Lehman Brothers had to acknowledge the well-known fact that its namesakes purchased a slave—though it also found no evidence that the firm itself benefited from slavery—in order to secure a $1.5 billion bond deal for O’Hare Airport. City aldermen almost scuttled the contract to require further investigation. The chair of the council’s Subcommittee on Reparations recently complained that the city had not made previous slavery disclosure reports available to the council. How Chicago’s current residents will benefit from research about slavery ownership in the South over a century ago remains mysterious.

The city has also tried to push Environmental, Social, and Governance, or ESG, goals on banks. In 2018, then-mayor Rahm Emanuel proposed an ordinance that would prohibit banks from working with the city unless they signed an affidavit stating that they would endeavor to ban certain gun and ammunition sales. The proposed cost was so high that the city eventually scotched it.

Even with rising crime, all the cuts to city payroll in recent years have been to the police force. (© Kyle Mazza/SOPA Images/ZUMA Press Wire/Alamy Stock Photo)

Chicago is also trying to use the meager funds that it has saved in pensions for political projects. Johnson wants to invest the city’s woefully underfunded plans in “Chicago real estate developments with the mandate of hiring local residents from under-resourced and underserved communities”—an objectively bad bet, relative to other options. Recently, the Chicago City Council and the Chicago Teachers’ Pension Fund promised to divest from fossil fuels.

Struggling to fund its debt and pensions, Chicago has embraced gimmicks. As City Journal’s Nicole Gelinas explained, in 2017 the city sequestered its sales-tax revenue to issue specially protected bonds, a financial-engineering project of questionable validity. (See “Chicago’s Debt Dereliction,” Autumn 2017.) Since that sale, a similarly engineered bond scheme in Puerto Rico faltered, and the territory has gone bankrupt. Investors began treating even Chicago’s sales-tax bonds as the equivalent of junk.

The city is trying to tap explicitly political investors. It issued over $150 million in “Chicago Social Bonds” to support various progressive causes, including “affordable housing” and addressing “the root causes of violence in the city”—a description that covers almost anything except insufficient policing. Chicago made a show of offering the bonds directly to city residents first and declared the effort a success when Chicagoans accounted for 8 percent of the purchases. Eleven ESG-focused investment funds bought the majority of the bonds, however, making it clear that the intent all along had been to dress up traditional spending as something worthy of ESG attention.

The largest holder of Chicago debt is Nuveen, a subsidiary of TIAA, the global private retirement behemoth. Nuveen and other bondholders are making a risky bet that the city will fund the bondholders as well as the pension recipients in a crisis. Yet we saw in Detroit’s bankruptcy that the U.S. political and judicial system pays little attention to bondholders when faced with needy pensioners. Still more concerning, Illinois does not allow large cities to file for bankruptcy. A serious municipal debt crisis in Chicago will have to be solved on the fly and will be unbelievably messy.

Like many large cities, Chicago got lucky during the pandemic. President Joe Biden’s American Rescue Plan dispensed funds to cities by a formula that gave preference to older, and generally more Democratic, municipalities. Chicago was a major beneficiary, receiving about $2 billion in federal aid. Thanks to the support, in 2022, the city ran a $300 million surplus and, for the first time, put in the required contribution for all four of its major pension funds. This led Moody’s to remove Chicago’s junk-bond status.

But Chicago retains by far the worst debt rating of any of the largest American cities, and it has done nothing to reform its bad habits. In 2022, the city saw a delay in property-tax receipts, and, despite the flush times, money proved so tight that the pension funds could not pay current retirees. The city had to provide an advance of over $500 million just to get the checks out the door. In September 2023, Mayor Johnson’s office announced a $538 million budget hole for the next year, almost three times what the previous mayor had expected, and a potential $1 billion deficit for 2025.

The latest gambit to boost revenue is a massive Bally’s Casino by the Chicago River, which the city expects to create billions of dollars in local investments and hundreds of millions in annual tax revenue. But the cost of the project and Bally’s debt have accelerated so rapidly that they have threatened the company itself. The irony is that an attempt to save Chicago from a debt spiral may cause another one. Meantime, the tax revenues from Bally’s rather forlorn-looking temporary casino north of the convention center came to less than a quarter of what the city expected last year.

Instead of buying down the debt with its recent fiscal gains, the city wants to inflate it. Since the pandemic, the mayor’s office has sought over $3 billion in general obligation bond sales for its Chicago Works program. Though nominally about repairing infrastructure, the bonds are another political log-rolling program. The mayor’s office noted that the investment would “place the highest priority on the utilization of minority, women-owned, and disadvantaged businesses and on the diversity of the workforce on City projects.” The Chicago Works bonds offering for 2024 promised hundreds of millions on “Aldermanic Menu” programs—meaning that the aldermen would get millions in slush funds to distribute as they saw fit.

Chicago has been bailed out by miracles before, but its current problems are structural and seem to have no clear solution. That doesn’t mean that the city will necessarily suffer Detroit’s fate and find itself in bankruptcy. The dangers of insolvency are real, but, just as with the exploding federal debt, too much focus has been put on the possibility of a single disaster and too little on the more obvious cost: deepening decline. Chicago could keep paying off its bondholders and retirees by bleeding public services, hiking taxes, and driving out still more residents, but it would become a shell of its former self. A debt-ridden Chicago wouldn’t be the first, or last, great American city to become a byword for lost possibilities.

Top Photo: Chicago is America’s Second City when it comes to debt, averaging about $43,000 per taxpayer, or almost $40 billion in total. (Felix Lipov / Alamy Stock Photo)


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