CHICAGO — On a warm, late June morning at Truman College in Chicago's Uptown neighborhood, Mayor Brandon Johnson welcomed attendees to the first of several budget roundtables.

He hit on a familiar litany of positive developments, touting a drop in crime, expanded mental and behavioral health services, and youth employment opportunities.

“Let’s continue to expand and find innovative ways that we can bring true collaboration into the budgeting process to ensure that all of our residents are heard and that their needs are met,” Johnson said. “I’m truly honored that you are all here to help guide this budget process. It will not be easy, but nothing ever worth fighting for ever is.”

It was the only allusion Johnson made to the disorder in Chicago’s fiscal house that threatens the improvements and investments he’s fought for: a more than $1 billion anticipated deficit for 2026, a major pending union contract, a fractious City Council resistant to both new revenues and cuts, federal threats to cancel grants to local governments and a school district long overdue on a promised pension payback.

Two days after that roundtable, Johnson’s finance team would disclose the city ended 2024 with a $161 million deficit, emptying one of its key emergency funds. Adding to the bad tidings last week was a final $7 billion estimate for the cost of a state bill boosting benefits for police and fire pensioners through 2055.

That zeroed out “unallocated” reserve balance is even lower than the depths of the 2008 recession, when it held just $226,000, according to the city’s annual financial reports. It represents a serious financial alarm for the cash-strapped city, according to Justin Marlowe, the director of the Center for Municipal Finance at the University of Chicago

“I don’t think we can overstate how important that is,” Marlowe said. “It is the single most closely watched number in all of municipal finance.”

Given that the costs that drove that drawdown — the failure of Chicago Public Schools to pay back the city for a $175 million pension payment and a shortfall in state income tax revenues — were not surprises, that figure is likely to result in a rebuke or threat of a downgrade from ratings agencies, he predicted.

“It’s not crossing the Rubicon, but it definitely draws a lot of attention to just how little flexibility the city has,” Marlowe said.

City policy is to have enough money in reserves to cover at least two months of general operating expenses. In a statement, budget spokeswoman LaKesha Gage-Woodard said the city is “on track to rebuild fund balance levels” and adhere to its policy, thanks to overperforming revenues and lower expenditures so far this year.

Despite that inflexibility, shortly after revealing the deficit, Johnson expressed his staunch opposition to cuts that would detract from his stated mission to make Chicago the safest and most affordable big city in America. New regressive revenues or reductions to violence prevention efforts, he suggested, would be unacceptable.

Instead, the firm Ernst & Young is probing city procurement, benefits, real estate and fines and fees to find efficiencies, and Johnson convened a budget working group to make initial proposals by August.

But the mayor’s major options for finding new, significant money are limited without state approval, again raising the possibility of a property tax hike, this time even closer to reelection for him and the City Council that roundly rejected such an increase last fall.

Other possibilities also face political headwinds. Many aldermen are flatly opposed to replacing the outgoing state grocery tax with a city grocery tax as they pressure the mayor to instead make spending cuts.

Their unwillingness to vote to bring in more money ties Chicago’s hands in a critical moment, argued Ald. William Hall, 6th, tasked by Johnson with leading aldermen in identifying more revenue.

“What we’re facing is more difficult when you have obstructionists who don’t provide solutions,” Hall said. “The political headline budgeting is dangerous, because people are very desperate right now.”

Ald. Nicole Lee, 11th, said she is already preparing constituents for “what I believe is going to be a very, very difficult budget process” that “will likely include a property tax levy.”

“I don’t think any politician in their right mind would ever want to have to have to be in this position” this close to the 2027 election, said Lee, who voted against Johnson’s last budget and said she and colleagues might not be willing to raise the tax again. “But here we are, and this is the job. We don’t really have a choice in that matter. It’s got to be dealt with.”

Last week, the city also disclosed that one good piece of news from its 2024 year-end report — a slight boost in the funding levels of its four pension funds — would likely be short-lived.

A complete actuarial analysis of a new pension sweetener bill that passed the state legislature late last session found the change “would increase the City’s pension liabilities by more than $11 billion across the Police and Fire funds,” the city’s financial office said, dropping the funding levels of both down to less than 18%. Those funds had only 25% of the money necessary to pay out future retirees at the end of 2024, but were slowly improving.

That bill awaits Gov. JB Pritzker’s signature.

“Given the scale of the impact on the City’s long-term pension obligations, changes of this magnitude should have involved broader stakeholder engagement and a more transparent public process,” said Chief Financial Officer Jill Jaworski. The change, sponsored by state Sen. Rob Martwick, would add an extra $60 million to the $1.5 billion pension tab owed for those two funds in 2027, the city’s analysis found, and grow to more than $753 million for 2055.

It would represent a major setback to the city’s efforts to right its pension ship. The retirement funds for city workers are among the worst-funded in the country.

Under former Mayor Lori Lightfoot, the city in 2023 began setting aside reserve funds to make steady, supplemental payments into its four pension funds. Those payments helped cut billions from the city’s future liability, finance officials said, and convinced ratings agencies that Chicago’s leaders were serious about tackling debts.

In a statement, the city’s finance office said it had every intention of keeping that policy intact and expects the 2026 payment to be more modest. But with reserve funds back to pre-pandemic levels and underperforming casino revenues, the city will likely need to find supplemental pension money elsewhere in the budget.

Already, some aldermen are bristling at Johnson’s efforts to even maintain the relatively modest 1% grocery tax that the governor terminated in his 2025 budget. It was a progressive victory for Pritzker but also forced municipal leaders to either take up their own equivalent or lose out on a key revenue source.

The tax costs the average household $50 to $66 a year. Without it, the city would miss out on an estimated $80 million next year. Voting to keep it, Johnson’s team argues, would not equate to a tax hike. But many residents are unlikely to see a council vote to establish a city-level grocery tax as anything other than a new cost being foisted on them by City Hall.

The city must decide its fate by the end of September so that the state’s Department of Revenue can continue collecting and remitting it.

Chicago Firefighters Union Local 2 is also rounding out the fourth year of its battle for a new collective bargaining agreement, which is currently in arbitration. The delay means retroactive contract costs continue to pile up on top of likely raises and other costly union demands, including the addition of new ambulances to the Chicago Fire Department fleet to respond to medical emergencies.

Despite the city’s expectations, Chicago Public Schools didn’t make its once-promised $175 million payment to cover a share of nonteacher employees in the municipal pension fund, helping contribute to the city’s $161 million deficit at the end of 2024.

It seems the city will have to eat that cost. Interim CPS CEO Macqueline King tacked on the $175 million pension payment when announcing the district’s roughly $730 million deficit, suggesting that the district planned only one pension payment in this year’s CPS budget, which must be passed by the end of August. Gage-Woodard said the city “is actively working with CPS leadership on their budget needs.”

The fate of the CPS pension payment is just one more financial straw on the camel’s back as Johnson and aldermen head into the summer doldrums, then straight into the budget.

While he said he dreads every budget, Ald. Nick Sposato, 38th, said this year’s “seems to be the grimmest picture of all, looking forward.”

The dissension in the City Council will only the make the process of agreeing on solutions to close the gap — potential new taxes, fees, service cuts or furloughs — politically tougher.

“I’m not suggesting this, but if everybody supported the grocery tax, it would be like, ‘Well, I guess they had to do it,’” Sposato said. But if 30 supported it and 20 didn’t, “then it’s just like, ‘John Smith stood up (to the mayor) but Nick didn’t, he’s a jerk, we’ve got to vote him out.’ That’s how people think.”

“Somebody’s going to have to support something,” Sposato said. “Pick your poison.”

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(The Tribune’s Jake Sheridan contributed.)

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