Quick Hit Ellyn Fortino Friday April 11th, 2014, 6:36pm

Report: TIFs Play A Role In Chicago's Pension Crisis

With the media and public spotlight on Chicago's pension crisis, the non-partisan research center Good Jobs First is turning the attention to the city's controversial tax increment financing, or TIF, program.

In its recent "Putting Municipal Pension Costs Into Context: Chicago" report, the Washington, D.C.-based group asserts that the TIF program has played a part in the underfunding of pensions in the city.

"It's really hard to ignore the evidence that TIF has had some sort of impact on pensions," said Tommy Cafcas, research analyst at Good Jobs First, which works to promote corporate and government accountability.

"We know that TIF costs grew, and they started growing really quickly after 2000. We know that general fund revenues declined ... and we know that the city addressed its budget gap in part by making inadequate contributions to public pensions, so it seems reasonable that TIF plays a role in how the city thinks about addressing the pension issue."

According to the report, property tax revenues funneled into Chicago's economic development program have eclipsed the city's annual cost of funding its main administered public pension systems every year from 2007 to 2012. Those were the years Good Jobs First could find readily-available data. 

In 2012, the city’s pension costs, referred to as “employer normal cost,” were nearly $386 million. That same year, the TIF program collected a little more than $457 million in property tax revenues, the analysis showed. Back in 2007, the city’s pension costs came in at about $369 million, while the TIF program pulled in a whopping $555 million in revenue.

TIF money comes from a portion of property taxes within a TIF district that are diverted from local units of government, including public school districts, and used as a subsidy for community development projects in the defined area.

The report did not break down how much of the annual TIF revenue would have otherwise gone to, say, Cook County or the school district. Therefore, TIF expert David Merriman with the University of Illinois’ Institute of Government and Public Affairs said the revenue cited in the report is a bit exaggerated, as not all of it would had gone to the city of Chicago if the TIF program did not exist.

"The basic fundamental point they're making I think is an important point for people to be aware of," he added. "This is a very, very large sum of money that doesn't get the scrutiny that other dollars do."

TIF is a popular subsidy tool used in municipalities across the country. In Chicago, the city sets up TIF districts in areas that are considered blighted. TIF critics, however, say the term blighted has been used too loosely, as TIF districts have been created in both the Loop and downtown areas. The program is also controversial because the city has doled out millions of dollars for projects downtown, while some truly blighted areas have seen few benefits. The program's skeptics have also called into question the city’s practice of handing fat TIF subsidies to big companies.

"TIF in Chicago makes critical infrastructure investments, but we also know it makes enormous subsidies to companies," Cafcas noted. "The recent discussion of TIF subsidies for various hotel deals or basketball stadiums or other things at a time when every dollar counts in the city budget, it makes us question whether reform is really on the table here."

The Good Jobs First report comes as Gov. Pat Quinn mulls over legislation by Chicago Mayor Rahm Emanuel that is designed to overhaul two of the city's pension funds. 

The Illinois House and Senate on Tuesday approved the pension reform measure, SB 1922, and Quinn has not yet stated whether or not he will sign it.

The legislation initially included language for a $250 million property-tax increase over a five-year period as a means to shore up Chicago's municipal and laborers pension systems, which together have a $9.4 billion shortfall and serve about 57,000 workers and retirees. But House Speaker Michael Madigan (D-Chicago) dropped the property-tax hike language from the bill Monday after the governor stated that it was a "No can do."  

Now that the property-tax language has been removed, it would be up to the Chicago City Council to approve a tax increase. 

Under the contentious measure, city employees covered by the municipal and laborers pension funds would see their pension contribution rise from 8.5 percent to 11.5 percent by 2019. The workers' 3 percent compounded annual cost-of-living adjustments would be slashed to a basic 3 percent or half of inflation, depending on which option is less. 

All four pension systems directly backed by the city, which also include the funds for firefighters and police, are underfunded. Next year, the city is required to make a $600 million contribution to its police and firefighter pension systems, absent any Chicago pension reform in Springfield. The Chicago teachers pension program, which is part of the Chicago Public Schools budget, also has a massive unfunded liability to the tune of $7 billion. In January, Quinn signed legislation meant to address the Chicago Park District's pension program, which is $971 million in the red.

The pension crisis in Chicago is the worst out of all other major U.S. cities. 

"The discussion [in Chicago] really seems to be talking about breaking pension obligations, and we think that if one out of every 10 property tax dollars is being diverted into TIF accounts, it just seems reasonable that (TIF) spending should be considered," Cafcas stressed.

Chicago's TIF program, started in 1986 under former Mayor Harold Washington, was greatly expanded under Richard M. Daley's administration. Chicago’s TIF program grew aggressively in the early 2000s, which is "the same time period over which the city has made inadequate contributions to its employees’ pensions," the report noted.

In 2000, the TIF program diverted a little more than $100 million in property tax revenue. TIF revenue continued to climb every year after that, hitting a high of more than $555 million in 2007.

"The run up in the TIF revenues in the 2000s closely follows the real estate bubble," Merriman noted. "It went down in 2008, but the explosion of TIF revenues is because we were getting very rapid appreciation of real estate, so you got a big increment, so you got a lot of TIF revenue."

Chicago's police, firefighters, municipal and laborers pension systems began to see financial troubles appear after 2000 mostly due to "inadequate contributions" and the "effects of benefit increases, most notably early retirement programs," according to a 2010 report issued by former Mayor Daley's "Commission to Strengthen Chicago’s Pension Funds."

"It really seems from the media record that there wasn't much understood [in the early 2000s] about how TIF was affecting the city's budget overall, and it was rather a pretty secretive account," Cafcas said. 

Since taking office in 2011, Emanuel has worked to bring more transparency to the TIF program. He convened a TIF reform task force and implemented various recommendations made by the group, such as an online TIF database.

But there is still room for improvement, Cafcas said.

"The reform commission doesn't really address the extent to which (TIF) seems to impact the city's budget and undermine critical revenues for public services," he explained.

Good Jobs First maintains that scaling back Chicago's TIF program would help to improve the city’s fiscal picture, but it stopped short of calling for its abolishment. 

Rather, Cafcas encouraged city policymakers to take a look at what California has done. About 12 percent of the state's overall property tax revenue was being diverted into TIF accounts. After TIF reform efforts in California failed, the state ended the use of the special funding tool back in February 2012.

"In the long run, local jurisdictions are going to see a 10 to 15 percent increase in property tax revenues over what they would have had with TIF still in effect," Cafcas said. 

"We're certainly not suggesting that TIF should just merely be abolished and go away, but the California example seems to strike a lot of similarities to Chicago."


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