Chicago will get a 2026 budget after mayor declines a veto

After Chicago's city council passed its so-called alternative budget over the weekend, Mayor Brandon Johnson faced a choice. He could veto the $16.6 billion 2026 budget, which eked through without a veto-proof majority and excluded the corporate head tax he favored in his own budget. Or the mayor could accept the work of alderpeople on what he and his team referred to as "the secret budget."

On Tuesday, Johnson said in a press conference he would not veto the budget, but he declined to sign it, either.

Absent the mayor's signature or veto, the budget will move forward as it is today, Alderman Scott Waguespack, a key player in the alternative budget, said by text message.

By Monday night, the alternative budget coalition believed it had gathered enough votes to override a veto, Waguespack said.

"We are working hard to maintain our 34 to override his veto and anything else he comes up with," Waguespack said.

On Tuesday, Waguespack disputed the mayor's claim in his press conference that "you had quite frankly significant donors who spent millions of dollars" to convince a handful of alders that it was better to protect corporations' interests.

"The head tax is a job killer and a disincentive for existing businesses to grow," Waguespack said. "Most aldermen know that and that is why they voted against it."

Mayor Johnson's finance office declined to comment Monday.

When it passed the alternative revenue plan on Friday ? restoring a full advance pension payment that was pared back in the mayor's budget proposal and legalizing video gambling, among other changes ? the City Council also approved a $1.8 billion general obligation bonding ordinance and a $1 billion GO or Sales Tax Securitization Corporation refunding bond ordinance, 39 yeas to 11 nays and 50 yeas to 0 nays, respectively.

Ald. Bill Conway had proposed a narrower GO bond measure, and on Friday he cautioned that the ordinance language being voted on could technically allow the mayor to build a new Bears stadium in Chicago.

"Our credit rating is approaching junk, the credit rating agencies have warned us clearly," he told the City Council. "For us, borrowing is expensive? My goal is to merely ask for better discipline and oversight on borrowing going forward."

Finance Committee Chair Pat Dowell defended the bonding authority and the alternative budget. "I think we have emerged today with a budget plan that protects vital programs for those most in need," she said.

On Saturday, the City Council passed the rest of the budget after a pitched debate that centered on the alternative budget's plan to sell debt owed to the city to debt collectors.

"The most important thing is that they get a budget," Municipal Market Analytics Chief Credit Officer and Managing Director Lisa Washburn told The Bond Buyer. "A shutdown almost certainly would be a trigger for the rating agencies."

Washburn said that while the alternative budget isn't perfect, it's an improvement over the budget the mayor proposed, which was going to cut the advance pension payment.

"The two key parts, getting a budget and not shorting that advance pension payment, are at least a baseline," she said. "I think without that? it would be a credit negative that could tip the rating agencies to act."

S&P Global Ratings assigns Chicago's general obligation bonds a BBB rating and revised its outlook to negative in November.

Fitch Ratings rates Chicago A-minus with an outlook it lowered to negative in May. Moody's Ratings assigns a Baa3 rating with a stable outlook it lowered from positive in August, and KBRA rates the city's GOs A-minus after a one-notch January downgrade with a negative outlook.

The recent City Council votes are "a little bit different in that they're going ahead with both the refinancings and continuing with the capital plan on schedule," said Justin Marlowe, research professor at the University of Chicago's Harris School of Public Policy and director of the Center for Municipal Finance.

"In addition to that, having the borrowing for the firefighter back pay and the police misconduct? I understand why certain City Council members are starting to push back," he said. "The question of borrowing for misconduct settlements and firefighter back pay could certainly be looked at as a credit negative. Those are knowable costs. They've been negotiating those for a long time."

While the fiscal policy represented by this budget "does not necessarily move the needle on Chicago's credit in and of itself," Marlowe said, investors would like to see a plan put forward as to how Chicago is going to avoid borrowing for costs like settlements and back pay in the future.

He noted that while a shutdown seemed unlikely, "not passing a budget would be crossing the Rubicon with respect to the city's credit." It would signal to rating agencies and investors that Chicago's policymakers are more interested in digging in than crafting a compromise to allow the city to advance, and it would be a real problem, said Marlowe.

There is another possibility that would raise its own governance questions.

"There is a concern now given some of the mayor's recent rhetoric? that the mayor and his staff will take it upon themselves to question every policy choice that they make to implement that budget," Marlowe said. "You could see multiple opportunities in fiscal 2026 to revisit the fiscal 2025 budget. And that kind of chipping away over time? will not inspire confidence."

The Center for Municipal Finance has looked into policies like the debt collection the city is now pursuing, and while to his knowledge, no city the size of Chicago has tried this before, Marlowe said there is a potential credit risk "if we start to hear stories of debt collectors engaging in really aggressive tactics," leading to more acrimony in City Council.

As for Chicago's credit, he said that while there have been no signals of further weakening in the past two weeks, "spreads certainly have widened compared to where they were six weeks ago."

He noted "the bleeding of the STSC credit into the city's overall credit" and said it undermines the point of the Sales Tax Securitization Corp.

"The STSC has been a win for Chicago taxpayers for a long time now," he said. "If you close the gap between those two credit profiles, (you start to lose that)... That will be something that a lot of people will be watching closely in 2026."

Washburn pointed back to the debt that Goldman Sachs (GS) had to take down in a recent deal, saying investors are finding it increasingly difficult to divorce the city's GO credit from its STSC credit.

"It's the nature of how integrated those two credits are," she said. "It gets harder to practically consider them legally separate if Chicago's credit were to continue to deteriorate. Will the rating agencies move on that? You've got different views among the rating agencies (on how strong that STSC credit is)."

Stressing the difference between lawyers' and investors' points of view, she added, "To say that the fundamental credit has no effect on the STSC credit? It may try to optically and legally separate itself, but practically, it's just a segregated part of the city."

What would be best for the city's credit is a structurally balanced budget where recurring revenues pay for recurring expenses, Mohammed Murad, head of municipal credit research for PT Asset Management, said by email.

"Using debt as part of any capital structure is welcome," he said, "but how it is used and for what purpose may be the market's focus, and whether this becomes a more permanent way of budgeting each year. There may be a limit to how many financially feasible and politically acceptable new revenue sources can be tapped to bridge a deficit."

The presence of large corporations in Chicago is one of the bright spots to the city's underlying fundamentals, he added, and a tax on them seems to be a path the City Council is unwilling to take for now.

While there's no head tax in the budget that passed, Chicago is "still doing things that would be structurally imbalanced or objectionable," like tax increment financing sweeps and debt for settlements and firefighter back pay, said Howard Cure, partner and director of municipal bond research at Evercore Wealth Management.

"It's pretty speculative, it's not like there's a big track record on this, and they're counting on those monies," he said of the debt collection maneuver. "It's not a great way to balance the budget because it's a one-time revenue."

The head tax would have been a relatively stable source of recurring revenue, Cure acknowledged. He pointed to a Civic Federation update last week that called the alternative budget's passage "a hollow victory."

The Civic Federation said that while the alternative budget represented "an extraordinary effort," it "does not move Chicago appreciably toward long-term fiscal stability." Both the mayor's budget and the alternative budget borrow for operating costs and rely on one-time revenues, the nonprofit said, cautioning that Chicago is "bleeding (its TIF accounts) dry" with a record TIF sweep.

"There doesn't seem to be any pressure on the labor unions about any kind of pay freezes or pay cuts or furloughs," Cure said. "It's more relying on one-time gimmicks."

In Chicago, "the mayor really has the upper hand in these negotiations; there's very little staff for the City Council, so they're operating at a disadvantage to begin with," he said.