The myth of Chicago’s “shadow budget”

By Cate Long
April 9, 2014

EXCLUSIVE: Investigation shows @RahmEmanuel diverted pension/school money into secret slushfund enriching his donors http://t.co/mDttLsQ7MV

— David Sirota (@davidsirota) April 4, 2014

I’m not a big fan of tax increment financing (TIF) — property tax assessments that split off revenues derived from increases in property valuations and new construction in a geographically defined portion of a city. These revenues go into a separate pot that funds improvements to school buildings, sidewalk and curb construction and other infrastructure, away from a city’s general fund. I think splitting off revenue streams makes managing a city’s finances more complex, and reduces flexibility as the city’s fiscal priorities change.

Many cities, such as Boston and Pittsburgh, have TIF programs. Some are well-structured and monitored. Others — like the Redevelopment Agency (RDA) in San Bernardino, California (which the state dissolved in 2012) — tried to divert funds illegally. California is allowing bonds issued through the RDA program to mature, but is not issuing any new debt.

Detroit is using a TIF in a particularly egregious way, allocating over $200 million of TIF property taxes to the new Red Wings hockey arena — while general obligation bondholders are slated to receive 15 cents on the dollar in the city’s bankruptcy. Using TIF revenues in a bankrupt city for an entertainment venue is hard to rationalize.

Chicago’s TIF program began in 1984, with the goal of promoting business, industrial and residential development in areas of the city that struggled to attract or retain housing, jobs or commercial activity. The program is governed by a state law that allows municipalities to capture property tax revenues from the increased value of properties — above the base property valuation that existed before an area was designated as a TIF district. Chicago had 150 TIF districts in 2012 and closed 10 of them that year:

Now political activist-turned-blogger David Sirota has unleashed a storm of criticism about Chicago’s 150 TIFs — most of which is off the mark. Sirota claims that the property taxes siphoned off by the TIFs have caused the underfunding problem in the city’s six pension funds, and that TIF funds are being diverted to mayor Rahm Emanuel’s campaign contributors. Here is how Sirota sees it:

The new report, from the taxpayer watchdog group Good Jobs First, shows how Chicago’s roughly 150 “tax increment financing” (TIF) districts divert property taxes out of schools and public services and into what is now known as Chicago’s “shadow budget.” That’s a slightly nicer term for what is, in practice, Emanuel’s very own sovereign wealth fund.

“Shadow budget”? I guess it could be called that, although the level of transparency in Chicago’s TIF program is pretty astonishing. The city’s TIF website allows a user to look at specific private development and public infrastructure projects funded by TIF taxes, searchable by location and amount. In the following map, red circles identify private projects and yellow squares pinpoint public projects:

 

Sirota is a little blurry on the exact source and use of taxes that will support some of the TIF development projects. He writes:

Living up to his billing as “Mayor 1%,” Emanuel has used the [TIF] fund to (among other things) offer up $7 million of taxpayer cash for a new grocery store, $7.5 million for a proposed data center, $29 million for an office high rise and $55 million for a huge new hotel (and that latter project is on top of $75 million more in tax money Emanuel has offered up to build a private university a new basketball stadium).

For example, the $29 million worth of TIF funds Sirota cites for the office high rise actually pays for an adjacent mass transit tunnel and public park, according to the Chicago Tribune:

[T]he city will pay for part of the cost of a tunnel for Metra trains that pass to the east of the proposed tower and for a public riverfront park to be built on top of the underground structure. To come up with the $29.5 million for the work, the city will tap reserves from a downtown special property-tax district originally designed to promote development in blighted areas. The developer will pay an additional $30 million for the tunnel and park, according to mayoral spokesman Tom Alexander.

Emanuel said the investment makes sense because the park will be available for everybody. He also pointed out that River Point will bring in tax money and result in 1,000 construction jobs as the $300 million building goes up.

Sirota claims that $75 million in TIF funds will be used for Chicago’s new basketball stadium, yet according to the Chicago Tribune, the correct figure is $33 million. The stadium will be used by DePaul University, in addition to holding concerts and other public gatherings, according to the Chicago Tribune:

A $173 million, publicly owned 10,000-seat arena would be built to house DePaul men’s and women’s basketball and possibly team sports for a second university, as well as corporate and convention assemblies, concerts, and civic and school events. The facility would open for the 2016-17 season, bringing the team back to the city after a long run at Allstate Arena in Rosemont.

The plan is for $70 million to come from a McCormick Place bond fund supported by hotel taxes and $33.5 million to come from a city tax increment financing district, in which a portion of property tax revenue is set aside for economic development. DePaul would contribute $70 million.

But the biggest gap in Sirota’s criticism is that the majority of TIF revenues are used directly for infrastructure spending on schools and public improvements. Page 75 of the 2013 Chicago Annual Report states over 70 percent of TIF expenditures were on public infrastructure projects and the debt issued to finance those projects (emphasis mine):

During this period, approximately 36 percent of the City’s TIF spending, or $1.22 billion, was for public improvements, and approximately 35 percent, or $1.13 billion, was for debt service, largely to finance public improvements. Approximately $1.27 billion was dedicated to projects undertaken in collaboration with private developers. Such development projects include hospitals, affordable housing, retail and grocery stores, and the preservation of historic buildings. The City estimates that private developers spend approximately five dollars for each TIF dollar provided by the City.

Sirota has previously argued that tax breaks and grants to corporations are the cause of the nation’s public pension underfunding problems. I agree that in some instances, state and local governments have given corporations incentives that don’t deliver public benefits equal to their cost. Every government needs to look more critically at these possible “giveaways.”

But even if all state and local government corporate giveaways were uneconomic, public monies directed to corporate subsidies does not come close to what is needed to adequately fund public pensions across the nation. That’s especially true in Chicago, where the fire and police pension funds have about 25 percent of the assets necessary to fulfill their promises, and the Chicago teachers’ retirement fund has about 56 percent of the necessary assets.

I excoriated Chicago mayor Emanuel over his proposal to establish his Infrastructure Trust, but I question Sirota’s claim that Emanuel diverts pension/school money into a secret slush fund to enrich his donors. Chicago’s fiscal and pension problems are deep-rooted and complex. The Chicago TIF program is far from being a “secret slush fund.” Chicago’s problems won’t be untangled by wild claims of mayoral wrongdoing.

5 comments

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Yes, it is transparent. The city did not contribute to the pension funds of which they were obligated by contract, and the mayor is openly lining the pockets of his contributors. Right out there for all to see.

Posted by chrisbr | Report as abusive

Fitch Ratings-New York-09 April 2014: The Chicago pension reform plan, approved by the Illinois State Legislature Tuesday, would eliminate the threat of pension insolvency facing two of the city’s four plans. However, long-term pension fund sustainability is many years away, according to Fitch Ratings. Illinois affords particularly strong legal protection to pension benefits and Fitch expects these changes will face protracted litigation.
Chicago’s (‘A-’/Outlook Negative) combined unfunded liability for all four plans totals $19 billion, yielding a funded ratio of 35%. Fitch considers pension funding levels below 70% to be weak. The proposal seeks to improve two pension systems by trimming future growth of the liability with changes to the cost of living adjustments (COLA), while providing increased contributions from both employer and employees. The plan redefines the city’s annual required contribution (ARC) to an amount that would be sufficient to produce 90% funding in 40 years, similar to the weak funding standard used by the state’s plans prior to its recent pension reform.

The closed amortization period is a positive, but given the four- to six-year ramp up before reaching the weaker ARC level, combined with the long amortization period, Fitch believes it will be many years before meaningful reduction in the unfunded liability is evident.

Officials expect a property tax increase will cover half of the increased costs with budget savings, such as the elimination of most retiree healthcare benefits and reallocation of pension costs to the water and aviation enterprise funds, to make up the balance.

Increasing pension costs are a recurring theme among Chicago area governments and funding these increases will likely place a considerable stacked burden on the area’s resource base. The city plans to gradually increase its property tax levy by $50 million (approximately 6%) annually for five years before reaching the target increment of $250 million in the fifth year.

These increases will occur in the context of other steeply rising costs, including a statutorily required $600 million increase in contributions for the city’s other two pension systems (police and fire) in 2016. The city has not said how the $600 million increase for police and fire will be accommodated, but media reports indicate that future legislation may allow for a ramping up of the funding obligation.

Posted by Cate_Long | Report as abusive

No one is concerned that firefighters do not receive medicare benefits, presumably because they have the benefits through their pension. Personally, if I were a firefighter without decent healthcare to look forward to, that I was promised at hire, I would no longer be so quick to run into those fires.

Posted by chrisbr | Report as abusive

Ms. Long, as usual great discussion.

I wanted to as about this particular sentence:

“…while general obligation bondholders are slated to receive 15 cents on the dollar in the city’s bankruptcy. Using TIF revenues in a bankrupt city for an entertainment venue is hard to rationalize.

Didn’t the settlement between Detroit and the monolines state something to the effect that GO (unl+lt) bondholders will received an estimated 76% recovery rate?

I may be comparing apples to oranges in asking if your estimate and the estimate quoted in the BondBuyer article from yesterday are reference the same thing so I thought I’d ask.

Posted by tmnolte | Report as abusive

Hi tmnolte:

You are 100% right. This piece was written before Detroit had their UTGO settlement for 74 cents on the $ (City had offered UTGO bondholders 15 cents on the $).

Although the UTGO & TIF revenue streams in Detroit are separate I still believe funding the new Detroit Red Wings hockey arena with tax monies is not right. Bondholders were impaired and the fiscal needs of Detroit and its school district are massive.

Posted by Cate_Long | Report as abusive