November 13, 2020
Chicago Mayor Lori Lightfoot’s proposed budget for the fiscal year starting January 1, 2021 includes a property tax increase of $93.9 million for a total property tax levy of $1.6 billion. This blog post will explore the three component parts of the increase.
The City of Chicago, as a home rule unit of government, is not subject to the Property Tax Extension Limitation Law (PTELL) but does have its own self-imposed property tax limitation that is modeled on PTELL. Local governments that are subject to PTELL are limited in the size of their annual property tax extension to 5% or the increase in the Consumer Price Index (CPI), whichever is less, with some exceptions.
The three portions of the proposed property tax increase are:
- $16 million from capturing expiring tax increment financing (TIF) increment and new property;
- $35.4 million from increasing the levy by the amount of the consumer price index increase used for PTELL calculations of 2.3%; and
- $42.5 million to make up for projected property tax collection shortfalls for its pension fund contributions.
The first amount takes advantage: a) of PTELL rules that allow governments to increase their revenue beyond what normally would be allowed under the law by applying their tax rate to the increased value of property in expiring TIF districts and; b) by applying the tax rate to new property. For a detailed explanation of how levying for expiring TIF increment works, read this Civic Federation blog post. Both of these are methods to increase property tax revenue that the City has used fairly often because taxing expiring TIF increment does not effectively raise an owner’s property taxes since they had previously paid property taxes into the TIF and subsequently pay the same portion to the government levying for the expired increment. And a levy on new property only affects those taxpayers with new or improved property.
The second part is more unusual for the City but quite often used by governments that are actually subject to PTELL. As noted above, while the City is not subject to PTELL, it has its own self-imposed cap based on PTELL. The City’s self-imposed property tax cap is intended to limit the dollar amount of property tax revenue that Chicago may receive by limiting the rate of growth in the levy to the lesser of 5% or the growth in CPI. It is important to note here that the City’s tax cap does not completely limit the total extension because some funds (like bond funds and pension funds) and some of the tax base (like expiring TIF increment and new property) are excluded from the calculation. While local governments subject to PTELL such as the Chicago Public Schools usually increase their levies annually to the cap, the City of Chicago has generally not chosen to do this. However, it has recently increased its levy by more than CPI to pay for pensions. With the FY2021 budget, the City would increase its levy “to the cap” and proposes to do the same annually going forward.
The third portion is described by the City as being the consequence of litigation the City lost to its pension funds in 2019. But to understand why that litigation is important, one must first understand loss in collections. The state statutes governing tax extension (35 ILCS 200/18-45) require county clerks to determine the tax rate that will yield the amount levied (subject to rate limits and tax caps if applicable). However, while collection rates for property taxes are typically very high, there is always a small fraction of taxes that remains unpaid. In order to comply with the statute and set rates that will produce the amount levied, county clerks typically add an amount for “loss in collection” to the levy amount. The Cook County standard loss amount is an additional 3% for most funds and 5% for bond and interest funds. However, governments are not required to add an amount for the anticipated loss in collection to all of their funds.
Another part of the issue to understand is that State law allows the City’s pension funds to request the State Comptroller to intercept State funding to the City in order to make up for shortfalls in City pension contributions. The Fire fund requested such an intercept in 2018 to compensate for delays in collection of the pension levy for the 2016 and 2017 contributions, and the Comptroller complied. The Fire fund also filed a lawsuit to require the City to pay the amounts lost in collection, with their reading of the statute being that the fund was entitled to the full amount in statute, not just what is collected. The City argued the opposite, that the statute did not require the City to cover loss in collection of the pension levy. In October 2019 the Circuit Court ruled in favor of the Fire fund and the City was required to make up any shortfall for all of the funds. The proposed FY2021 budget includes the $42.5 million increase to Chicago’s property taxes to make up for anticipated loss in collection of the pension levies. Put another way, the extra $42.5 million is an amount the city is including in its levy on top of the amount required for its pension contributions so that when there is a loss in collection, it will still have enough property tax revenue to make its full pension contribution.
The Civic Federation is still working on its analysis of the proposed FY2021 budget and has not yet taken a position on the budget or the property tax proposal.