September 16, 2025
The City of Chicago faces one of its largest operating budget gaps in history, with a massive $1.15 billion shortfall projected for FY2026. Mayor Johnson’s proposed budget must close that gap by the time of introduction in October. Since the Mayor convened a working group to address the City’s structural budget gaps via executive order in April 2025, City stakeholders have been waiting to see what the working group would propose as ways to streamline operations, improve service delivery, and generate additional revenue. Now with the public release of the working group’s interim report, Chicago has a glimpse into the ideas identified to address the immediate FY2026 budget deficit.
The report includes a total of 89 options, including 45 “efficiencies” and 39 “revenues”, estimated to generate between $1.04 billion and $2.15 billion in total earnings and savings. Despite this impressive tally—seemingly large enough to nearly close the FY2026 budget gap—the report reveals that there are few easy answers, many hard political decisions ahead, and much more work to do. While all the options presented in the report could be worth consideration, many are not viable short-term options for addressing the immediate FY2026 budget crisis, and many of these have not been accompanied by the analysis that will be needed for the City Council.
Timing and Feasibility of Revenues
The 39 total revenue options listed in the report are estimated to generate a combined $630 million on the low end. This includes increasing existing taxes and fees, instituting some new taxes, and declaring a TIF surplus of the same size as the now-concluding fiscal year. However, several of the revenue sources require State authorization through legislative changes and cannot be implemented under the City’s home rule authority, including:
- A sales tax on services;
- An increase to the share of the State’s Local Government Redistributive Fund (LGDF);
- A road usage charge;
- An update to the application of amusement tax to include online ticket resellers;
- A 911 surcharge on digital prepaid wireless plans; and
- An increase in the retail service charge.
Together, these state-dependent revenue estimates total just over $167.2 million as a low-end estimate, ranging up to $636.5 million on the high end. Due to the legislative efforts required, these options are unlikely to be viable solutions for the FY2026 budget but might be pursued as out-year, long-term revenue sources. Add to that list an estimated $35.4 million for water taxis, freight, and drones, all new, as well as $80 million grocery tax. In order to generate a full $80 million in grocery tax revenue, City Council would need to adopt a replacement for the state-imposed grocery tax by October 1st to start collecting revenue at the beginning of the City’s fiscal year. In total, at least $242 million ($713 million on the high end) of the identified revenue options are not likely to materialize in time for FY26.
Taxes pegged in the report as future options include the head tax, internet gaming tax, and payments in lieu of taxes, totaling $18.7 million on the low end and $94.6 million on the high end. Some of these revenue sources, such as Payments in Lieu of Taxes (PILOTs), in which the City would aim to recoup revenue from nonprofit entities that don’t pay property taxes, such as universities and hospitals, would require much more analysis and stakeholder engagement.
Tying Revenue Increases to Inflation
A theme throughout many of the revenue options included in the report is indexing revenue sources to grow with the rate of inflation. The report makes a blanket recommendation to index all value or unit-based fees and fines to the consumer price index. Several tax sources are identified for inflation-indexed increases, including the property tax. This would foster some stability and predictability to the current trauma-inducing shocks. Under such an approach, revenues keep pace with the cost of providing public services, taxpayers can plan ahead, and government can avoid sudden budget crises. This would help address the structural budget deficit in Chicago, where growth in expenditures outpaces growth in revenues.
The problem with this approach, however, is that it absolves the City Council of accountability, so a good guardrail to put in place would be to require approval of each inflation-based adjustment and accompany that with analysis of need and ongoing benchmarking to peer cities.
Efficiencies
The largest ticket items are all personnel-related, but they stop short of eliminating personnel altogether. The report estimates that, in FY2026:
- A hiring freeze, by not filling all vacant positions, could save $143.7 million if 20% of positions deemed critical were filled or up to $161.7 million if 10% of critical positions were filled.
- Furlough days would save an estimated $9.4 million per furlough day if both union and non-union workers take the furlough. Union personnel represent the vast majority—$8.7 million—of that estimate.
- The City could reduce overtime by $52 million on the low end (15% reduction in overtime) and $69.5 million on the high end (20% reduction). Whether that would constitute one-time versus structured savings depends on the mode of implementation.
- The City could streamline hiring and prioritize revenue-generating roles to save (i.e., generate) $25 million.
- Higher employee pension or healthcare contributions could save $41.6 million to $52.2 million, although it’s unclear how and when this could be implemented.
The largest possible savings would come from one-time fixes, including a hiring freeze, instituting furlough days, and reducing overtime, which, based on the report’s low and high-end estimates, could save between $205 and $250 million. Many of these ideas are light on detail: How specifically would the city reduce overtime, streamline hiring, or achieve savings from higher employee contributions?
The report calls for a blanket freeze on hiring for vacant positions, but does not take into consideration other factors at play that would provide important context. For example, the Chicago Police Department has been undergoing a staffing analysis that has yet to be made public. This and other similar analyses could be a useful guide in determining exactly which positions to freeze and others that are essential to the functioning of departments.
The report recommends instituting a minimum of one to two flexible furlough days for non-union employees and exploring the possibility of furlough days for union employees. Furloughs can be an effective way to control personnel costs in the short term while spreading the burden across departments, but the one-to-two-day margin should be a starting point, rather than a ceiling. Two furlough days would provide a relatively small amount of savings at $18.8 million. The City must identify the maximum number of furlough days needed to achieve the necessary financial savings without negatively impacting service delivery.
Finally, many items listed as efficiencies are actually revenue-generating cost recovery initiatives. For example, the public safety options present a potential $9.6-$11.5 million in efficiencies related to cost recovery through various fees and fines related to the police and fire departments. Likewise, the City estimates it can recover $21 million, or 65%, of the cost of hosting special events compared to the $7.4 million it currently recovers.
CPS Entanglements
Given the recent tension in the Chicago Public Schools (CPS) budget cycle regarding which entity should assume responsibility for the $175 million annual Municipal Employees' Annuity and Benefit Fund (MEABF) payment, the report does little to lay out a plan for future resolution. The report reads that “the state should facilitate the making of the payment and make any changes necessary to state law”. This lacks specificity as an implementable goal, is not reflective of how the City should actually proceed, and looks past the current near-antagonistic relationship the City appears to have with the State, which itself is facing budget constraints that are being amplified by federal funding cuts. Given the governance changes at CPS and the need to disentangle from the City, Chicago should work with CPS and the state to reach an agreement about how much of the share of the MEABF contribution CPS will take on and ensure that the entity responsible for making the payment is provided with ongoing levy authority commensurate with raising revenues to make the payment.
Reintroduction of Controversial Pension Obligation Bonds (POBs)
The report recommends the City explore the feasibility of pension debt re-amortization through, among other things, pension obligation bonds (POBs). The use of POBs is risky, controversial, and comes with the legacy of poor outcomes for Illinois. The Federation encourages the City to heed the warning of the State’s failed 2003 attempt to address budget and pension deficits through POBs, which had the effect of increasing the State’s unfunded liability and adding to its overall bonded debt.
As the report recommends, the issuance of POBs should not take place without an extensive actuarial analysis. If the City Council is to comprehensively address Chicago’s underfunded pensions, it will most definitely need access to this information once developed. As part of any forthcoming effort that may take place, the Council should also consider a requirement that any potential proceeds from future POBs be dedicated and “lock-boxed”, i.e. used only to pay pension costs and preclude their use for Corporate Fund expenses or as one-time revenues to close budget gaps.
The other two pension recommendations in the report—extending the City’s policy to make advance pension payments beyond 2028 and shifting the timing of pension contributions to the beginning of the year rather than the end to allow assets more time to grow—could both help improve the City’s dire pension situation.
A Starting Point
The Mayoral administration deserves credit for convening the fiscal working group and the working group deserves thanks for stepping into a challenging moment and providing a foundation for the difficult discussions that will follow over the course of the fall budget season and beyond.
Overall, the report contributes to and spurs critical conversations needed in the fall budget season, but does not provide long-term solutions to the City’s structural budget problems. These deficits understandably cannot be fixed in a single year, and this report identifies some low-hanging fruit to ease short-term burdens. However, many of these recommendations are in the adolescent phase of development and represent starting points to long-term solutions. There will need to be ongoing, consistent planning to further develop these recommendations and build the research and relationships necessary to bring them to fruition. The working group is expected to continue meeting through the next year and deliver a final report with longer-term recommendations to the Mayor by May 31, 2026.
As all stakeholders and City Council head into the budget process this fall, we reiterate the budget principles that the Civic Federation and partners recently put forward as a framework for decision-making. We look forward to continuing the conversation this year.