Chicago’s dire finances hold it back in competition among cities

Chicago native Warren Baker started buying and converting apartment buildings into student housing in the city’s Hyde Park neighborhood in 1985. His once-scrappy company went on to forge multi-million-dollar deals for shopping centers, car showrooms and high-rises across the third-largest U.S. city.

Now, though, with surging property taxes and a stagnant population in his hometown, he sees more opportunity elsewhere: Many of Baker’s recent projects — warehouses, factories and cold storage facilities — are near the desert boomtown of Phoenix.

Baker has drifted from a city where the obstacles to economic growth and competitiveness have rarely looked so numerous and intractable.

Like many U.S. cities, Chicago’s downtown office buildings haven’t fully refilled since the pandemic, affordable housing is short and fears about crime endure even as its rate is now declining. It also faces the prospect of deeper holes in its budget now that President Donald Trump has promised federal cuts and threatened to pull back funding for municipalities that oppose his policies.

But Chicago faces a singular disadvantage in confronting those challenges: its deeply strained finances. The city has the lowest credit rating of large U.S. peers and among the highest borrowing costs. Massive debt and pension liabilities are gobbling up almost half its tax revenue.

That leaves less for economic development initiatives or services that might help in the global competition for residents, businesses, workers and investment — a race in which its pace lags peers. Its economic and job growth has fallen behind other major cities, according to the Brookings Institution.

Mayor Brandon Johnson, whose favorability has plunged as low as the single digits according to one poll, has put forth proposals to grow revenue. His plan to hike property taxes was rejected unanimously by city council and a so-called mansion tax failed at the ballot box. Vendors balked at his request for a 3% discount on existing contracts.

The setbacks show a first-term mayor struggling to build political coalitions, and a city council disinclined to rubber stamp his ideas.

The pastor’s son and former social studies teacher, who quotes scripture and pitches himself as a champion of working people, has few easy choices to keep up with Chicago’s long habit of costs overrunning revenue.

“Why is this time different?” said Joe Ferguson, president of the Civic Federation, a fiscal watchdog. “It’s because we have no more runway left.”

Harsh Reality

Over the decades, Chicago’s debt has reached $29 billion, which sits on top of the more than $37 billion in unfunded pension liabilities.

Jill Jaworski, the city’s chief financial officer, told investors recently that Chicago is constrained by its legacy liabilities but the Johnson administration “does not have a pay later culture.”

Chicago’s credit is rated investment grade by the three largest rating firms and had been on an upswing until recently. The city had shed its one junk rating from Moody's Ratings toward the end of former Mayor Lori Lightfoot's term in November 2022.

In January, Johnson asked for authorization to sell up to $830 million in bonds for infrastructure such as roads and bridges a day after S&P Global Ratings lowered the grade on the city’s debt by one notch.

The city council narrowly approved it, but the initial structure putting off principal payments for two decades drew a stinging rebuke at the time from Alderman Bill Conway, the finance committee vice chair who voted against the bond. Conway is among alders who have expressed frustration at the Johnson administration’s borrowing plans, the S&P rating downgrade and most recently Fitch Ratings lowering its outlook to negative from stable.

“Chicago can’t afford this kind of financial mismanagement,” Conway said in a statement on May 28.

It belies a harsh reality: That’s how Chicago has long done it.

As city council finance committee chairwoman Pat Dowell said in an op-ed about the $830 million bond authorization, “The repayment of this particular bond is in line with the standard payment schedule for capital bonds, and mirrors how the city has paid off these types of bonds in years past.”

The city included a portion of that authorization in its plans as part of a debt sale that priced this week.

Amid the challenges, Johnson in April unveiled a fresh effort to shore up Chicago’s finances: A working group of business leaders, elected officials and community members to review city operations and revenue options as well as benchmark the city against peers. It has hired Ernst & Young LLP to conduct this analysis for a tab that could reach $6.9 million, according to an agreement seen by Bloomberg News.

One EY point person named in the agreement is Adam Chepenik, a Washington-based principal in the firm’s public sector restructuring practice. Chepenik previously worked with the federal government, playing what EY’s website describes as “a key role” in developing the response to Puerto Rico’s financial crisis and helping Congress draft the law overseeing the restructuring of the island’s debt and liabilities.

“What we have inherited has absolutely been a mess, but what we do in this moment to be innovative is going to be critical,” Johnson said.

Economic Engine

Chicago remains the economic engine of the Midwest. Its universities produce legions of science and technology workers, and the city is poised to benefit from growth of nascent industries such as quantum computing, said Albert Saiz, professor of urban economics and real estate at the Massachusetts Institute of Technology.

Its population had declined over decades and more recently has oscillated at around 2.7 million residents. Meanwhile, smaller cities such as Houston are growing and challenging its position.

Chicago is home to the third-largest number of Fortune 500 companies among U.S. cities and the mayor often cites data that puts the region at the top of rankings for corporate relocation and investment. Still, Chicago has lost headquarters of marquee companies such as Boeing Co. It ranks among the top 10 globally for millionaires but lost billionaire Ken Griffin to Miami.

Its fiscal problems — along with petty political squabbling and concerns about its public safety and education systems — feed outsiders’ negative perceptions, Saiz said. That is unhelpful to attracting companies and workers, especially when other cities build roads, bridges and high-speed rail to lure businesses and investments.

“Financial discipline across all city entities, including the city core budget, is essential to have a positive perception as an attractive place for business,” said Michael Fassnacht, who is Clayco's chief growth officer and previously headed the quasi governmental organization World Business Chicago.

Meanwhile, the rising costs of pensions for retired police officers, firefighters and other municipal workers are one of the biggest long-term financial weights for Chicago, which is also among the largest employers within the city.

‘Focus on Growth’

Morningstar Inc. Chief Executive Officer Kunal Kapoor, who calls himself a booster for the city where his company is based, said he sees focus on the “expense side of the ledger” in Chicago and wants to see more indicators of expansion, such as cranes, that he says he sees in other cities.

“I want to grow Morningstar, and if Morningstar grows, chances are our presence in Chicago grows,” he said.

Kapoor’s investment research firm currently employs more than 1,600 people in the Chicago area, and he sees opportunity for the city to lean more into what he perceives as its advantages: A comparatively moderate cost of living, high quality of life and deep talent pool.

“As a leader here, I would love to see more focus on growth and growth for all,” Kapoor said. “If you grow revenue, you solve a lot of other problems.”

Morningstar Founder Joe Mansueto is planning to build a new stadium for his Chicago soccer team, personally putting in funds toward a $650 million stadium set to open in 2028.

Other American cities face fiscal quagmires of their own, but Chicago’s financial metrics often make it an outlier. While New York City’s budget has increased less than 30% since 2019 and Los Angeles’ has grown by about 20%, Chicago’s has ballooned by almost 60%.

New York City Mayor Eric Adams in May proposed a revised budget that adds $1.4 billion in spending but the city also took in $1.7 billion more in tax revenue than anticipated in the year through June. With Los Angeles reeling in the wake of the most destructive fires in the city’s history, the city proposed laying off roughly 700 workers to close a nearly $800 million shortfall.

Johnson, however, has refused to lay off or furlough workers.

Some aldermen want more financial support from the state, but Illinois has its own fiscal crunch. The state is seen as more vulnerable than others to changes in federal funding and economic slowdown, according to Moody’s Ratings.

‘Plenty of Blame’

Chicago hasn’t had a “conventionally balanced budget” since the 1990s, said Forrest Claypool, who held positions in the administrations of mayors Richard M. Daley and Rahm Emanuel before exiting as head of the city’s schools amid a controversy. “There’s plenty of blame to go around.”

The concern now is at what cost will the city be able to tap capital markets going forward, said Dana Levenson, chief financial officer under Daley from 2004 through 2007.

Johnson said in an interview that the city is reducing crime, which has been a key concern of the business community, and attracting new businesses and investment such as the quantum industry — but with an eye toward the needs of working people, he said.

“It does nothing to have all of that growth and development if my family cannot afford to live here,” said Johnson, who often notes that he lives in one of the city’s most challenged neighborhoods.

Crime in Chicago overall has fallen year-to-date compared to the same period in 2024, according to Chicago Police Department data, including a decrease in murders, robberies and carjackings.

Business owners such as Baker, the developer who now spends only part of the year in Chicago and works near Phoenix, caution that property taxes, cumbersome regulations, diminishing trust in government and lackluster growth are leading them elsewhere. Still, Baker maintains a fondness for his hometown and expresses frustration that even the National Football League’s Chicago Bears might leave the city’s iconic Soldier Field for the suburbs.

“You have choices,” Baker said. “I want Chicago to become a better place. I want Chicago to be what it could — one of the greatest cities in the world.”