Brandon Johnson will be sworn in as Chicago mayor next month with the municipal market's scrutiny fixed on whether he can sustain the city's momentum in dealing with chronic fiscal and public safety strains.
Johnson, a Cook County board commissioner and Chicago Teachers' Union organizer, beat Paul Vallas, a former city budget director who led Chicago Public Schools from 1995 to 2001, in Tuesday's runoff election. Johnson will replace Mayor Lori Lightfoot, who did not make the runoff, on May 15.
The city's violent crime struggles took center stage in the election, and they are a credit factor for the city as crime perceptions will impact the post-COVID future of its downtown in particular.
But market participants, from rating agency analysts to government watchdogs and investors, will be most closely watching the path Johnson takes on financial practices.
"What I believe the market wants is some consistency and some predictability," Johnson said after a City Club of Chicago address last week. "What I've offered is a plan that provides the type of consistency and stability that the market requires."
Johnson's opponent was the "tough on crime" candidate but the mayor-elect, who won narrowly with 51.4% of the vote in
"The Civic Federation sees getting still-high levels of violence under control and implementing a federal consent decree as high immediate priorities," said Sarah Wetmore, the Chicago Civic Federation's acting president.
"The city's own financial situation has improved, but it also faces a number of headwinds, including stressed downtown real estate and the lingering impacts of the pandemic on important sectors such as conventions and business travel, that will require significant attention," Wetmore said.
The city's pensions remain underfunded, and Chicago Public Schools and the Chicago Transit Authority have warned of punishing deficits by 2026 when their federal COVID relief runs out.
"The city's recent efforts to move toward structural balance and implement a new policy to fund supplemental pension payments have been welcomed by investors," Molly Shellhorn, senior research analyst for municipals at Nuveen, a major holder of Chicago debt, wrote in an email.
"We're hopeful mayor-elect Johnson will maintain fiscal discipline and continue on the path that earned the city several credit rating upgrades last year. Investors will be looking for additional detail on the potential impacts of some of Johnson's new tax proposals," she said.
"The situation demands quick action. Crime is the biggest point and has financial implications for the tax base, but there's pensions, downtown vitality, the CTA's problems, and schools," said Richard Ciccarone, president-emeritus of Merritt Research Services. "When you have a confluence of going on that's the danger and when you raise your risk level."
Johnson is unknown to the bond market, as was Lightfoot when she took office four years ago, and some market participants are worried over his tax proposals and deep ties to the Chicago Teachers' Union.
The mayor appoints school board members and key city finance officials.
The city's business community lined up behind Vallas providing financial backing for his campaign and many in the public finance business were preparing for a Vallas administration.
"There's going to be a waiting period and he's going to have to prove himself," Ciccarone said.
Johnson's financial plans include $800 million of tax proposals.
"If he thinks the solution is taxing the rich and commercial business there's a real danger that those with economic means — whether businesses or residents—might leave," Ciccarone said.
The CTU dug deep into its pockets to help fund Johnson's campaign and some market participants worry he will put the union's interests first in upcoming contract negotiations and school funding policies.
Johnson said during the City Club appearance that the relationship would pave the way for a more harmonious relationship — after two teachers' strikes under Lightfoot and her predecessor, Rahm Emanuel — but his "fiduciary responsibility" would be to all taxpayers.
The Lightfoot administration continued a major shift begun under Emanuel to tie city pension funding to actuarial calculations — at a high budget cost — and to implement a supplemental payments policy that helped the city win
Municipal market participants will watch closely to see if Johnson continues Lightfoot's pension funding initiatives.
They also urge the incoming administration to keep pushing towards structural balance, which means no reverting to one-shots budget solutions like scoop-and-toss debt restructuring during tough economic times.
"Mayor Lightfoot was fiscally responsible in increasing pension funding and being fiscally prudent but Chicago's problems haven't gone away," said Vikram Rai, head of municipal strategy at Citibank.
"The pension funds are going to be hurt because of the subpar performance of the equity markets and you have the problem of crime. That's the heart of the problem that hurts the tax base. If the new mayor can carry on the fiscal prudence and at the same time arrest rising crime that will be positive for the credit of Chicago," Rai said.
The mayor inherits a
The most burdensome strain weighing on the city is its $33.7 billion of net pension liabilities for its four funds that range in funded ratios from 21% to 46%.
The city in its January offering statement updated its three-year budget forecast to reflect an improving tax picture with a projected $300 million balance expected this year. The city trimmed $113 million off the previously projected $474 million gap next year and $76 million was cut from the projected 2025 $554 million gap.
Another update is expected in the coming weeks before Lightfoot departs, sources said.
The city enjoys healthy reserves of $1.1 billion and the city averted dipping into them, cutting services, or layoffs during the pandemic with the help of $1.9 billion from the federal American Rescue Plan Act.
Chief Financial Officer Jennie Huang Bennett plans to leave even if asked to remain after a tiring but rewarding four years, many public finance sources have said Bennett has told them.
Bennett, well respected by the public finance community, is a former investment banker who left her job managing CPS finances to take the city's top fiscal position, which gave the market some comfort given Lightfoot's lack of a political track record.
Market participants are urging the incoming administration to continue to issue an annual budget forecast with three-year projections and to hold an annual investors conference — both launched under Emanuel and continued by Bennett and her finance team.
"The big financial challenge is maintaining
"All have improved investor sentiment toward the city. Some of this has also helped investor sentiment toward CPS. The new mayor will need to maintain that momentum, albeit without the federal money and against a backdrop of increasing spending demands for pensions, public safety, neighborhood revitalization, etc.," Marlowe said.
Platform
Johnson, 47, labeled in the campaign as a left-leaning progressive, was elected to the county board in 2018.
Johnson said he backs reversing the Lightfoot-backed inflation-related annual increase in property taxes approved in 2021. He has committed to maintaining statutory pension contributions even in the face of fiscal downturn.
"We need to keep paying down out outstanding indebtedness and making advance payments the pension underfunding in order to further improve our bond rating, thereby reducing our costs of borrowing, and thus further improving our fiscal situation," Johnson said in a
Johnson, like Illinois Gov. J.B. Pritzker, opposes asking voters to approve a constitutional amendment lifting the ban on pension cuts.
He has since dropped the commuter tax from his agenda.
Johnson also wants to impose a transaction tax on securities trades. Critics warn that city's commodities and derivatives exchanges would relocate.
Johnson said his tax plan along with management efficiencies totaling $2 billion would eliminate the city's structural deficit and allow for new investments without raising property taxes.
"The city needs revenue, the question is who pays," he said at the City Club. "I do believe the wealthy should pay their fair share."
Some would require either City Council, state, or federal approval. When questioned on the viability of the tax proposals, Johnson said he was open to other ideas.
Johnson does not support public subsidies in a bid to keep the Chicago Bears at Soldier Field as the team plots a stadium in the suburbs.
On CPS, he opposes closing schools, expanding charters or implementing voucher programs, and believes the city should remain financially helpful to CPS after the shift to an elected school board, according to a
Johnson struggled to shake Vallas' attacks over his past comments on "defunding the police" as a political goal. He told the City Club crowd that he would not cut the police budget and said he would take a "holistic approach" to public safety that addresses the root causes of violent crime.
Rating agencies
Chicago's ratings reaped the rewards of its fiscal momentum, most notably with Moody's Investors Service's November upgrade that lifted the city out from junk to Baa3 after the City Council passed Lightfoot's budget with the $242 million supplemental pension contribution.
"Continued adherence to the city's new pension funding policy, which is designed to prevent growth in pension debt, will be a key credit consideration," Moody's Chicago analyst David Levett said in an email this week.
S&P Global Ratings also in November revised its outlook to positive from stable on the city's BBB-plus rating.
"We will be watching to see if the new mayoral administration keeps on the same track in terms of positive financial progress," said S&P analyst Jane Ridley. "A key part of that will be advanced pension funding so that the funding level doesn't backslide. The relationship between the new mayor, the state of Illinois, and the Chicago Public Schools could also inform the credit's trajectory."
Gov. J.B. Pritzker did not make an endorsement in the mayoral contest.
Fitch Ratings raised Chicago to BBB from BBB-minus in October and offered more hope for further momentum by assigning a positive outlook.
"We will be looking for early governing decisions that could indicate that the new administration has an appetite for continuing to build upon the city's fiscal progress or whether we are likely to see an erosion of the strides made by city over the last few years by going back to a reliance on non-recurring budgeting measures and/or reneging on the city's commitment to actuarially fund pensions and preserve fund balance," said Fitch analyst Ashlee Gabrysch.
Kroll Bond Rating Agency rates Chicago GOs A and revised its outlook to positive from stable in November.
"We plan on discussing management priorities and new initiatives, as well as the philosophy regarding budgeting and long-range planning with the new management team," said Kroll analyst Harvey Zachem. "Funding plans for the City's four severely underfunded pension funds going forward will also be of interest to us."
Sister agencies
The mayor influences several sister and city/state agencies through board appointments including CPS, CTA, the Chicago Park District, Chicago City Colleges, the Illinois Sports Facilities Authority, and the Metropolitan Pier & Exposition Authority.
The new mayor will be the last with power to appoint a full seven-member board of education. The board shifts to a hybrid of elected and appointed members in 2025 before a fully elected 21-member board is installed in 2027.
The district has warned of a looming $600 million 2026 gap when its exhausts its $2.8 billion of federal COVID-19 relief, must negotiate a new teachers' contract in 2024, and the city must decide
The pandemic sunk hotel taxes and a 2021 shortage was covered through a $19 million
Other issues
State legislation has resurfaced that would bring the cost-of-living adjustments for all police in the city's older tier one benefit scheme up to a simple 3% annual increase regardless of birth date. It mirrors firefighters' legislation that Pritzker signed in 2021. The firefighter cost adds $16 million to $17 million in additional annual costs. Changing the police fund would add an annual burden of up to $90 million, according to the city.
The mayor-elect will also face a more independent incoming City Council. The current 50-member council last week approved expanding the number of committees to 28 from 19 and installed committee chairs, a task that has long belonged to the mayor.
