A New Path To Transforming Chicago's Financial Future

Executive Summary

Chicago is facing an $882.4M budget gap in 2027, and gaps of $943M in 2028 and more than $1B in 2029, with other municipalities across the state, like Aurora and Peoria facing similar challenges. Every year, Illinois municipalities are told they have two choices – cut their way out by "right-sizing" government, or keep leaning on fees, fines, property taxes and one-time fixes that land hardest on working families.

Both of those paths have been tried, and both have failed. The math on cuts doesn't work – after public safety, pensions and debt, there is roughly $1.25B left in the corporate fund to cover everything else the city does, and the gap is about 70% of that. The regressive path is what Chicago attempted in this past year’s cycle (FY2026) – and many of the revenue recommendations of that budget have already fallen through.

However, there is a third way – driving real efficiencies, while raising structural, recurring, progressive revenue.

The city can and should drive real efficiencies – starting with police overtime, procurement and shifting calls to the right responders – and legislators should be honest that the $1 billion in "efficiencies" being cited from the E&Y report is not $1 billion a year, nor is the underlying math supportive of that statement at all. On E&Y's own schedules, about $26 – 42M of true efficiency is available in year one, with almost half of the recommendations leading to service cuts or increases in fines, fees, and costs to working people.

The state should let Chicago, and every home rule community in Illinois, raise progressive revenue the way New York, Philadelphia, Columbus, Detroit and Seattle already do. Every year we do not, the state is holding the City of Chicago back from $2-3 billion in annual revenue that could change the quality of life of Chicago residents, decrease daily burden on its residents, and help grow the city. The Illinois Constitution doesn't need to be amended to do it – it needs an ordinary bill passed by a simple majority in Springfield. With it, the financial state of all municipalities in this city could transform – through a tax on the top 1% of earners, a tax on the income of larger corporations, a proven progressive payroll tax, and a data center tax. And these are not novel concepts for cities to employ – they’re employed by over 5,055 jurisdictions across the country – from New York City to Cincinnati. Aurora and Peoria could close their gaps, and fund efforts to grow the quality of life. Chicago could raise an incremental $2 – 3 billion a year to close the structural gap, pay down pension debt, and invest in the services that make this city a place people want to live, work and stay.

02 — How We Got Here

What Chicago did to itself

Pensions

Chicago faces a unique pension squeeze compared to other major cities in the state. For decades, administrations deliberately shorted pension payments, pushing a larger, and more interest-laden obligation onto future administrations.

The City of Chicago ended 2025 with a net pension liability across all 4 funds at $36.4B, with funded ratios for the 4 pensions at: Police – 25.5%, Fire – 25.2%, Municipal – 28.2%, Laborers – 44.1%, with 88% of pension contributions paying down past underfunding, not current workers’ benefits.

The reality is that during the Daley and Emanuel years, there was a historic level of deliberate pension underpayment that was supported by sitting members of council, as seen by their votes on those fiscal year budgets. These decisions have brought us to increased liability for today’s tax payers and residents. Relatedly, before 2016, the city paid a state formula that had nothing to do with what the funds needed, in budgets Council approved year after year. Since 2016, the city has paid every dollar state law requires – and still falls short of full funding, because Springfield’s schedule targets 90% by 2055 and pushes the biggest payments into the future.

In recent years, the largest contributions to Chicago's pension liability have been during the term of the Brandon Johnson Administration (2023 – to-date), followed by the term of the Lightfoot Administration (2019 – 2023) and were largely financed by federal surplus funds. The Rahm Emanuel Administrations footed the smallest bill of the three. This current administration's contributions have gone beyond using special revenue funds or federal funds, and now require a level of corporate fund contribution. On top of the payments required by law, the city has made more than $820M in supplemental pension payments since 2023 (FY23 from Lightfoot, beyond that from Johnson), and plans another $364M in 2027.

In current state, our pension contributions are $2.94B in 2027, including a $364M supplemental payment – and they keep climbing on the state-mandated ramp toward 90% funded by 2055. The police fund’s own actuary projects its required contribution alone will double, from about $1.04B in 2026 to $2.08B by 2055.

Debt and borrowing for operations

There was a historic pattern of a practice called 'scoop & toss' that was used heavily under Mayor Daley and into the Rahm Emanuel years. This practice was the idea of refinancing debt that was coming due by issuing new, longer-term debt – paying for today's bills with tomorrow's borrowing and pushing the principal further down the road, with more interest added on. Emanuel pledged in 2015 to end the practice by 2019 – scoop & toss refinancing fell from $225M in FY2015 to $62M in FY2017, but was used substantially during his terms as mayor.

This can often be confused with other debt deals – like borrowing to pay police misconduct settlements, or one-time costs like back pay for firefighters. They’re different in one important way, and the same in another. Scoop & toss was a routine budget tool: year after year, the city took the principal it owed on old debt and pushed it decades down the road – between 2014 and 2017 alone, nearly $1B of the city’s bond deals went to it. Borrowing for a settlement or for back pay pays a specific bill the city owes now. But to be clear – both are borrowing to cover operating costs, and both mean taxpayers pay more later. The 2026 budget authorized $283.3M in borrowing for police misconduct settlements, with about $52M in interest over five years, along with $166M for firefighter back pay. The city has kept making its supplemental pension payments – but the pattern is the same one rating agencies keep pointing to: without recurring revenue, the city reaches for borrowing to cover bills it knows are coming. Once again – in order to pull ourselves out of these financial challenges, we need recurring revenue.

The rising cost of debt is a challenge that the city has continued to face, and Chicago's is heavier than its peers. The city's long-term liabilities are about 430% of revenue, against a range of 107–241% for peer cities. That has a spiral effect, when not paired with recurring revenue. As noted by the credit rating agencies – one of the largest challenges is the lack of recurring revenue to help balance our books and demonstrate continued revenue sources to fulfill our obligations. When it downgraded the city in February 2026, KBRA wrote that "the City's capacity to address its growing structural deficit through new recurring revenues and meaningful expenditure reforms is increasingly constrained." Today, S&P rates the city BBB, and Fitch and KBRA rate it BBB+. This is a core reason why it’s imperative that this city does not take away options around recurring revenue to build more financial stability.

Police misconduct

The payments for sins of the past also lie in this City's police misconduct settlements. Every individual harmed by the state, and in this case, the Chicago Police Department, deserves payment by those that inflicted the harm. Over the last 3.5 years alone, this city has issued out $665M in police misconduct. That is at least $74M in 2023, $107.5M in 2024, $259M in 2025 – while the city budgeted about $82.5M a year. In the first 6 months of 2026 there have been at least $225M paid out.

The primary way to ensure that we are decreasing police misconduct settlements has been stated time and time again – shifting calls away from police officers that they themselves have called to be changed due to it placing them in compromising situations, and/or situations where their expertise is not needed. Shifting call volume to civilian-led response units supports the city financially in two ways – (i) it decreases the average cost of response, and (ii) it decreases the longer-term liability of police misconduct and harm. The Albuquerque Police Chief Medina said "During the first year [of non-police crisis response] we saw [a] 53% reduction in use of force. Why? Because we sent a better response to help people in crisis – and we better understood that it doesn't always take a badge, it doesn't always take a gun and that people can get help in a variety of ways." Chief Medina credits Albuquerque Community Safety (ACS) for being a big part of the reason Albuquerque is no longer under a consent decree – federal oversight of the Albuquerque Police Department ended in May 2025.

"During the first year [of non-police crisis response] we saw [a] 53% reduction in use of force. Why? Because we sent a better response to help people in crisis – and we better understood that it doesn't always take a badge, it doesn't always take a gun and that people can get help in a variety of ways."

— Albuquerque Police Chief Harold Medina

Chief Medina credits Albuquerque Community Safety (ACS) for being a big part of the reason Albuquerque is no longer under a consent decree – federal oversight of the Albuquerque Police Department ended in May 2025.

These are common sense solutions to decreasing the city’s long-term liability, rather than continuing the same practices that brought us into this financial crisis.

What Springfield did to Chicago

Unfunded state mandates

The State of Illinois is also a contributor to our current financial challenges – usually in the form of unfunded mandates. As recently as August 2025, HB3657 was signed into law, raising Tier 2 police and fire benefits. The City projects it will add about $11 billion in liabilities to the police and fire pension funds through 2055, and raise required contributions by about $60 million a year starting in 2027 – roughly $200 million a year once supplemental payments are counted. It passed both chambers without a single "no" vote. This was added to the costs of the city, without any additional tools to raise revenue – as the city's own forecast put it, "pension reforms at the state level, without any new tools to raise progressive revenue at the city level, have added significant costs". When these happen – cities need to decide on how they fund these mandates with the tools at their disposal: do they increase progressive revenue where legally possible, do they increase regressive revenue, and/or do they hollow out other services to make room?

From 1982 to 2017, the state has passed down 266 unfunded mandates onto municipalities, with 44 on counties and municipalities in 2025 alone. There is no official tally of what these mandates have cost Chicago, but recent examples alone run into the billions: the 2025 Tier 2 enhancement ($11B by 2055), a 2021 law expanding firefighter pension increases ($850M), and the state's repeal of its grocery tax, which costs Chicago $60–80M a year starting in 2026, given their non-renewal of the policy.

Taking back shared revenue

At the same time that the state is adding to costs for municipalities it has been taking away revenue sources that municipalities rely on. The LGDF (Local Government Distributive Fund) is a fund from the state that redirects a portion of income tax revenue back to the localities. Localities were given 10% of the revenue prior to 2011, as time has progressed, cities have received less and less of that share – it was cut in 2011 and sits at 6.47% today – resulting in municipalities missing out on about $10.3Bn in revenue over the last decade. For Chicago, each percentage point is worth about $80M a year, and the mayor's task force put full restoration at about $235M a year. The state has also been diverting the Personal Property Replacement Tax that is meant for local governments – more than $407M in the FY2027 state budget.

Federal cuts that increase cost pressure on the city and state

The downstream effects of cuts to SNAP and Medicaid are significant, and will be borne both directly and indirectly by our local governments. The 2025 federal budget law (H.R. 1) will cost Illinois about $2.8B a year in federal Medicaid support by FY2031. Starting October 1, 2026, the state's share of SNAP administrative costs rose from 50% to as much as 75% (about $80M a year), and starting in October 2027 Illinois could owe up to $705M a year toward SNAP benefits themselves. Every dollar the state has to backfill is a dollar that won't come back to cities through shared revenue – and when families lose coverage and food assistance, the need shows up at city clinics, shelters and emergency rooms.