As the city of Chicago grappled with a $300 million budget shortfall, we proposed three potential changes to Mayor Daley's sprawling tax increment financing (TIF) system that could free up some much-needed funds for cash-starved local taxing bodies.
Earlier this month, Chicago Mayor Richard Daley released the latest round of alarming budget numbers, this time projecting a $300 million shortfall over the coming year. The deficit led City Hall to send out 1,500 pink slips to Chicago city workers, cuts which the Chicago Federation of Labor is still working to avert. In response to the news, Crain’s columnist Greg Hinz noted that the layoffs — if finalized — would only fill “about 10% of [the] hole in the city budget.” He went on to ask: “So, where’s the city going to get that kind of cash?”
Good question. During Ald. Manny Flores’ appearance on Fox Chicago Sunday two weekends ago, one possible source of additional revenue came up: Daley’s sprawling tax increment financing (TIF) system. (Want to get up to speed on TIF? Check out this 2007 Reader article.)
“How much TIF money does the mayor have at his disposal?” co-host Dane Placko asked Flores, who has emerged as one ot the City Council’s TIF reform champions. In response, the First Ward alderman emphasized the need for more transparency regarding the city’s finances. (Watch the segment here.)
It’s great to see reporters asking questions about the TIF system in the context of the budget negotiations. For years, the Reader’s Ben Joravsky was a lone voice in the local media calling attention to this mayoral slush fund. In the meantime, the property tax revenue being siphoned away from local taxing bodies through TIF has more than doubled over the past six years — from $216 million in 2002 to $570 million in 2008.
It seems ridiculous to be redirecting so much money away from the general tax base at the same time that revenues are sharply declining. Indeed, with a little creative thinking and flexibility on the part of city officials, there are several adjustments to the TIF system that could provide some relief for cash-starved taxing bodies in Chicago. In this post, we’ll examine three potential modifications: redistributing surplus funds, terminating "elderly" TIF districts, and adjusting the TIF tax base for inflation.
FREEING THE SURPLUS
As we recently pointed out, a document released by the city last month shows that Daley’s 150-plus TIF districts ended 2008 with $1 billion in aggregate unspent funds. According to the Department of Community Development, $478 million to $643 million of that amount is earmarked for new projects in 2009. At the same time, the network of TIF districts will likely collect several hundred million more in “incremental property tax revenue” this year. So it’s entirely possible that the surplus at the end of 2009 could climb towards $1 billion yet again.
These taxpayer dollars don’t have to remain in reserve, however. For instance, Oak Forest recently released surplus TIF funds, as the SouthtownStar reported:
Taxing bodies within the city, including Bremen Community School District 228, Arbor Park School District 145, Oak Forest Park District and Acorn Library, soon will receive tax funds from improved property within the city’s TIF district along 159th Street and Central Avenue.
Aldermen approved paying out $142,769, the amount of incremental increase in property taxes received for 2007.
City finance director Colleen Julian said the city will issue a check in that amount and pay it to Cook County, which will then distribute it to the taxing bodies within the district. Julian said the taxing bodies will receive funds from the TIF district each year for the remainder of the TIF.
In Chicago’s case, how would these surplus funds be divvied up if similarly released back into the general tax base? Here’s a graph from the city’s FY 2009 budget document showing how property tax revenues are distributed:
There are some starving taxing bodies in that pie chart, most notably the city itself (facing a $300 million shortfall) and the Board of Education (trying to plug a $475 million deficit).
The state legislature could also prevent the hoarding of tax dollars exhibited by Daley. For instance, State Sen. Mike Noland (D-Springfield) attempted to add a “use-it-or-lose-it” amendment to the TIF code (SB 1990) this spring. The bill would force municipalities to spend the surpluses or turn it back over for public services. However, it never moved out of the Senate Revenue Committee.
Under Illinois law, TIF districts have a lifespan of 23 years and individual municipalities can extend them up to 35 years if they wish. But did you know that they can also be dissolved ahead of time? Back in 2007, Oak Park officials considered putting their three TIF district into early retirement to alleviate the chronic underfunding of local schools. More recently, downstate Chesterfield dissolved a district ten years ahead of schedule. Here’s how the resulting boost in annual property tax revenue was distributed:
[T]he Rockwood School District will see $6.6 million annually in additional funds, and St. Louis County will get $3.3 million more a year. The Monarch Fire Protection District will see an increase of $1.5 million a year, and the Special School District, $913,000.
If Chesterfield can do it, why not Chicago, where there are currently 14 TIF districts scheduled to sunset by 2015? Below is the amount of property revenue siphoned off by each of these “elderly” TIFs in 2007, via the City Clerk’s office (PDF):
When taken with the other proposals on this list, $80 million is nothing to sneeze at.
INDEXING THE TAX BASE
When then-Cook County Commissioner Mike Quigley released his “Tale of Two Cities” TIF reform report (PDF) back in 2007, he highlighted a way for the affected taxing bodies to bring in millions more each year without altering a single TIF district: simply index the tax base to inflation.
The TIF laws on the books in both California and Massachusetts require municipalities to do just that. By contrast, in Illinois, the tax base is frozen when a TIF district is formed and stays at that level despite the fact that the value is eroding over time.
Examining a 19-year period, Quigley estimated how much more revenue local taxing bodies would have received if our system was indexed to the Consumer Price Index:
From 1986 through 2005, TIFs in Cook County took in a total of more than $4.5 billion in tax increment revenues. If inflation on the base had accrued to the overlapping taxing districts rather than to the TIFs, the TIFs would have earned just over $3.8 billion, leaving $700 million in tax revenue to the local governments. Almost $300 million was lost to TIFs in Chicago.
The graph below (from the Quigley report) shows the amount of annual funds taxing bodies could have gained over this period if the base was adjusted for inflation -- $60 million in 2005 alone. That number has surely grown in the years since.
Last year, State Rep. Elizabeth Hernandez (D-Cicero) took a crack at amending the state’s TIF statute to address this issue. But as with Noland’s bill, her measure never made it out of committee.
Due to the lack of up-to-date information on the TIF system, we've refrained from trying to estimate the exact cost-savings associated with these three ideas. Instead, we view them as conversation-starters.
Taken together, would they plug the current city and school district deficits? Of course not. But they would be a step in the right direction and certainly alleviate fiscal pressure in future years.
The bottom line is this: It’s going to take some creativity — not to mention serious political pressure — to force the mayor to stop treating the TIF system like his personal piggy bank. Together, state lawmakers and members of the City Council should step up and demand he consider solutions that don't involve mass layoffs or quick sell-offs.