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Chicago Will Need a Miracle to Escape Its Debt Burden

You know, the WSJ has always had it in for Chicago, just because we're a little f-cked up. Besides, I do believe in miracles. What a hot City!

Chicago Will Need a Miracle to Escape Its Debt Burden

The city got a pandemic lifeline from the feds and did nothing to shore up its finances for the long term.

By Judge Glock, WSJ

May 10, 2024

The Chicago skyline rises above the Chicago River, Nov. 13, 2023. PHOTO: GETTY IMAGES

Chicago continues to live up to its moniker “Second City” in at least one respect: It has the second-worst debt load of any large city in America—about $43,000 per taxpayer, or almost $40 billion in total. First place goes to New York City, but Chicago residents also have to deal with Illinois’s particularly high debts, which total $42,000 per taxpayer. Thus, a family moving to Chicago suddenly inherits about $85,000 in liabilities. By this measure, Chicago has by far the worst debt burden of any major city.

Chicago’s accumulating debt might be bearable if the city had low taxes. That would give it room to raise revenue and pay down some of its liabilities. But taxes in the Windy City already rank among the nation’s harshest. Chicago’s combined city and state taxes would eat up more than 12% of a U.S. median family’s income. Chicago’s taxation is also brutal on businesses. Chicago’s tax on industrial properties is nearly double the average of other cities. The property tax on office buildings, at more than 4% a year, is 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 aren’t. 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 hit 25.1%, a record high. Boeing has moved its headquarters from the Loop to Northern Virginia. These white-collar companies won’t pay the city’s taxes anymore.

Making matters worse, the population is shrinking. Even if Chicago gets its fiscal house in order, 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.

Unprecedented debt and punishing tax rates, a declining business sector, and a shrinking, poorer population—it’s no recipe for long-term success. Unfortunately, even if Mayor Brandon Johnson wanted to constrain spending and corral expenses—which he doesn’t—he’d have few options. In the past three years, 40% to 44% of all local budgets 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 31% going to fixed costs.

The lion’s share of Chicago’s burden is its pension debt, totaling $34 billion, with another $2 billion for retiree health benefits. Unlike most other places in the U.S., Chicago has barely pretended to fund its four major pension plans; it has assets for only about 25% of its pension obligations and nothing set aside for healthcare. 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 in 2014, but two years later the Illinois Supreme Court decreed any reductions in 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 punished Moody’s by no longer sending it business.

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 obscure bodies like the Forest Reserve District and the Metropolitan Water Reclamation District. These government entities add another 50% to the local debt facing Chicago taxpayers.

The basic tenet of long-term municipal debt is that it should be issued only to create long-term capital improvements, such as roads and bridges. The Chicago Tribune found in 2013 that $3 billion of the $10 billion in general obligation bonds issued by the city since 2000 went to such things as legal expenses and maintenance—often in contravention of Internal Revenue Service rules. In one case, the city used tax-exempt bonds to provide back pay to police officers.

Like many large cities, Chicago got lucky during the pandemic. President Biden’s American Rescue Plan dispensed funds using a formula that gave preference to older, and generally more Democratic, cities. Chicago was a major beneficiary, receiving about $2 billion in federal aid. The support allowed the city to run a surplus in 2022 of more than $300 million. For the first time, Chicago 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 couldn’t pay current retirees. In September 2023, Mayor Johnson’s office projected 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.

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 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.

Mr. Glock is director of research at the Manhattan Institute. This piece is adapted from the spring 2024 issue of City Journal.

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