The myth of Chicago’s “shadow budget”

EXCLUSIVE: Investigation shows @RahmEmanuel diverted pension/school money into secret slushfund enriching his donors

— 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:

Don’t let Chicago’s crisis go to waste

Moody’s cracked the whip and downgraded the rating of Chicago’s general obligation bonds to Baa1 from A3 this week. It’s only a one-notch downgrade, but no American city should wear the scarlet letter of BBB. Chicago’s Mayor Rahm Emanuel is seemingly frozen in place and having a tough time addressing the city’s fiscal problems. His behavior belies his famous 2009 quip to never let a serious crisis go to waste.

Moody’s in its rating comment about the city’s $8.3 billion general obligation and sales tax debt seems to think Chicago is in pretty rough shape:

The negative outlook reflects our expectation that, absent a commitment to significantly increase revenue and/or materially restructure accrued pension liabilities to reduce costs, the city’s credit quality will likely weaken. The formidable legal and political barriers to these actions are incorporated in the outlook.

Chicago firemen pensions is a 90 year-old problem


Chicago is drowning in unfunded pension liabilities. Last month, Illinois passed pension reform for state pensions, but did not take up Chicago’s pensions. Illinois governor Pat Quinn says the city’s pension will be taken up in the spring. Chicago’s pensions are deeply underfunded and have unique problems. The Chicago Tribune wrote:

The much-discussed government worker pension debt in Chicago now has a price tag: $18,596 for every man, woman and child living in the city.

That per-person figure is the highest among the nation’s 25 largest cities. It’s nearly double that of New York, the city with the second-largest tab. And it’s more than five times the median for locales included in the new study done by a major investment research company.

Emanuel should fix Chicago’s pensions now

According to Moody’s latest report on local government pensions, Chicago’s adjusted pension and debt burden (relative to its tax base) is the largest in the nation. The city is now putting about 8 percent of its revenues toward its pension funds. But the pensions are so underfunded that if the city made the full annual pension payment it would amount to 28 percent of revenues. The city has seriously neglected funding its pension plans.

The problem is complicated by the fact that Chicago must work through the Illinois General Assembly to enact changes to pension contributions and benefits. There is little discretion at the local level on these issues. Chicago Mayor Rahm Emanuel should go to Springfield and twist arms in the General Assembly before credit rating agencies whack the city with more downgrades. Instead, Emanuel intends to push the issue off for several years and do nothing. The Chicago Tribune reports:

Faced with the prospect of a major tax hike or severe service cuts just as he stands for re-election a year from now, Mayor Rahm Emanuel told the Tribune Wednesday that his formula for fixing the financially out-of-whack government worker pension system requires ‘reform, revenue and time.’

What happened to Chicago’s bonds?

Last week, on August 23rd, an unlimited tax general obligation bond for Chicago  had a disastrous performance.

The bond (Cusip 167486PS), was issued in 2012 and matures in 2032. The original offering was for $594 million. The piece in discussion was $1.65 million (big bond offerings are usually chopped up into smaller pieces with different characteristics and maturities). The yield on the bond (rated A+ by Standard & Poor’s and AA- by Fitch) was 5.94 percent on August 23, or over 10 percent on a fully taxable equivalent basis. Is Chicago really this risky? What is going on?

I pulled the average yield for comparable New York City bonds. The bonds, which are rated Aa2 by Moody’s and AA by Standard & Poor’s (approximately two notches higher than Chicago’s bonds), were yielding 4.66 percent for 2032 maturities on the same day. This is a 1.28 percent difference (128 basis points in bondtalk). Chicago bonds are selling pretty cheap.

Chicago’s fiscal headache

Chicago has nearly identical fiscal challenges to its home state of Illinois: pension underfunding, massive school deficits and recurring deficits. But unlike the state, many of the decisions that need to be made in Chicago are out of the control of leaders, especially related to pensions. These decisions are made in the state legislature. Chicago Mayor Rahm Emanuel seems to have had little success lobbying for the city’s interest. Chicago political writer Greg Hinz described it in Crain’s Chicago Business last year:

In a rare mayoral visit to Springfield, Rahm Emanuel today told lawmakers that they need to act now on pension reform for government workers, and he laid out some specifics as to what he wants.

Testifying before a House committee, Mr. Emanuel called for a 10-year holiday on paying cost-of-living increases in Chicago’s four pension funds and other government retirement systems around the state. That freeze would apply to both current workers and those who already have retired.

Other priorities are crowding Chicago teachers out of the budget

Chicago public school teachers went on strike after attempts to reach an agreement with public school negotiators failed on Sunday. There are many issues at stake for Chicago, but the struggle is basically about job security and control of hiring decisions by school principals. As school reform is being further implemented in Chicago, teachers are bearing the brunt of tightening fiscal priorities. Reuters reports:

In Chicago, last-minute contract talks broke down not over pay, but over the reform agenda, both sides said Sunday. The union would not agree to Emanuel’s proposal that teacher evaluations be based in large measure on student test scores.

Nor would the union accept his push to give principals more autonomy over hiring, weakening the seniority system that has long protected veteran teachers. Already, the demographics of the teaching profession in Chicago have notably shifted, as the private managers who run charter schools tend to favor rookie teachers who are younger and far less likely to be minorities, studies have shown.

Chicago teachers could strike over longer school days

Big trouble is brewing in Chicago, the nation’s second-largest school district, as negotiations between the city and teacher representatives moves closer to a strike deadline on September 10. Chicago teachers have filed a strike notice that, if acted on, would be their first strike since 1987. The main disagreement between the teachers and the city is Chicago Mayor Rahm Emanuel’s plan to lengthen both the school day and the year. The district is offering teachers an eight percent raise over four years, and it wants to form a committee to create a new pay system.

Chicago teachers, the second highest-paid teachers nationally after New York City, say the fight is not about compensation, but rather that the mayor is actively withholding resources from the Chicago Public Schools system. The rhetoric has become inflammatory. Teachers’ union president Karen Lewis called Emanuel “a liar and a bully” while exhorting a union crowd at a Labor Day rally.

The political ramifications of the Chicago feud stretch far beyond the shores of Lake Michigan. Emanuel was previously President Barack Obama’s chief of staff. He is still a leading Democratic figure representing an important voting block in Illinois. The opposition he has created with Chicago teachers, an important base of the Democratic party, could not have come at a worse time as the incumbent president and Democratic-controlled Senate fight to stay in office. There is more at stake with a teacher’s strike than whether Chicago school children will miss a few days of school.

President Obama, the Ricketts family and Wrigley Field

Is the Ricketts family of Chicago bipolar? The patriarch, billionaire and Chicago Cubs owner Joe Ricketts, blasted onto the national stage yesterday, when the New York Times reported that his super PAC considered running an ad campaign entitled “The Defeat of Barack Hussein Obama: The Ricketts Plan to End His Spending for Good.” His super PAC, the Ending Spending Action Fund, also lobbies against excessive federal spending and special-interest earmarks.

Meanwhile Ricketts’s son Tom, the general chairman of the Cubs, has been lobbying Rahm Emanuel, the mayor of Chicago and President Obama’s former chief of staff, for $150 million in tax revenues to renovate Wrigley Field, the home of his family’s Major League Baseball team. The irony of Joe Ricketts blasting the president for special-interest spending while his son grovels for taxpayer support to renovate his baseball stadium is enormous. The Ricketts family needs to meet around their kitchen table and get this matter worked out, because it makes both the father and son look clueless.

Greg Hinz of Crain’s Chicago Business has the local scoop:

Did the Ricketts family just knee-cap its own plan to rebuild Wrigley Field with a healthy dose of Chicago taxpayer cash?

Boston funds publicly, while Chicago goes private

Two major American cities are embarking on large capital programs, but in very different ways. Boston Mayor Thomas Menino has a $1.8 billion, five-year plan that he will fund with municipal bonds, while Chicago Mayor Rahm Emanuel is trying to push a $7 billion plan, which will be paid for by private investors, through the city council. It would be hard to find to two more dissimilar approaches to rebuilding America’s urban infrastructure or two more different lists of who will reap the monetary benefit of the improvements.

Boston approaches its infrastructure needs with a rolling five-year schedule of projects that is updated on an annual basis. This allows for more controlled expensing and planning. In contrast, Chicago’s Emanuel announced his infrastructure privatization plan in January with very few details and buy-in only from the private investors who will benefit from their involvement. The Chicago proposal gives control of infrastructure decisions to a panel of four private citizens and one city council member with no ability for the city council to have oversight on projects and contracts. Chicago has a terrible history of leaving taxpayer money on the table in its privatization efforts. In 2008 the city’s parking meters were leased out to private investors for a tiny sum:

Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008.

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