In the time it takes a Brown Line train to circle the Loop, dozens of secret deals can be made in Chicago. Some walk a blurry legal line, many are done with the common good in mind, and all of them benefit somebody. In the past few years, Tax Increment Financing (TIF) has come to epitomize this universal yet very Chicago practice.
The weight of TIFs’ complexity starts with the very term the acronym stands for. “Tax Increment Financing” sounds like the title of a chapter you’d be tempted to skip in an economics textbook, or the focus of an especially sleepy Ben Stein lecture. But the term stands for a process so hotly controversial – in part for its impact on schools – it’s already become a topic for debate in the 2015 Chicago mayoral election.
TIF is a process by which funding is diverted away from public education and into a network of government-controlled bank accounts, which now hold a combined $1.7 billion while school budgets continue to dwindle. It’s a system that raises public money in some parts of the city to fund private mega-projects in others. It’s an issue at the intersection of income inequality, education reform and government transparency. And it’s a phenomenon seen in Cook County on a scale incomparable to anywhere else in the United States.
What’s a TIF?
Understanding TIFs begins with property taxes. For each occupied building in Chicago, that property’s owner has to pay taxes to the local government. More than half those taxes go directly to the Chicago Board of Education (BOE), while the rest are divided between Cook County and the city of Chicago for public works projects, city college endowments and public park management.
But the Chicago City Council can vote to create areas within the city, called TIF districts, where some of that money is set aside for new construction projects outside those basic categories. TIF districts are meant to help revitalize neglected or depopulated neighborhoods by funding projects aimed to bring new economic development into the area. By design, this would attract jobs and raise property values in the long run.
As of this writing, 153 TIF districts exist in Chicago. Some span entire neighborhoods, while others comprise just a few city blocks. In total, they cover about 32 percent of the city’s geographic area.
How do TIFs work?
As property values rise over time, property taxes rise with them. But inside a Chicago TIF district, property tax revenues are frozen in place for a period of 23 years. So year after year the same amount of money is going toward the city and BOE, while the money from each new tax increase goes into TIF accounts.
This rising value is the “I” in “TIF”: each incremental tax jump means more TIF dollars generated. And TIF money, unlike public property tax money, is more-or-less spent at the discretion of the mayor and City Council.
In order for a TIF district to be created, though, state law requires that the area be “blighted”—that is, its properties must be largely old, vacant or in poor condition. This is essential to TIF’s ultimate goal of bringing economic success to struggling neighborhoods.
But a large question hanging over the practice is whether or not this part of the law is actually followed, as some TIFs have popped up in seemingly well-to-do areas.
What’s the benefit of TIFs?
TIFs give the city the ability to raise revenue for major projects without the political burden of raising taxes. Earthshaking developments like building a Whole Foods in Englewood, for example, simply could not happen without TIFs.
The system can also create money for massive public works initiatives, like the total reconstruction and renovation of the Howard CTA station in 2006.
By the most basic rules of urban economics, projects like these make surrounding properties more valuable and boost economic growth.
This is exactly how the upper levels of city government defend the system: in his most recent annual budget report, Emanuel has said TIFs are “promoting business, industrial and residential development in areas of the city that struggled to attract or retain housing, jobs or commercial activity.”
How is a TIF district created?
TIF districts are born in the city’s Department of Planning and Development (DPD), whose commissioner is appointed by the mayor and operates under his direction. If the city’s leaders decide to create TIF in a certain area, they’ll hire a private consulting firm to prepare a “redevelopment plan,” which includes an “eligibility study” that purports to ‘prove’ that the neighborhood is blighted.
The plan must include a detailed outline of the construction projects the TIF will make possible. However, in many cases these outlines can be as vague as “residential and commercial development.”
DPD will then hold a public hearing to present the plan and hear public comment. But more often than not, if the plan has already reached this stage, it’s not stopping for anything. Last Tuesday, for example, the DPD voted unanimously to create a new TIF district in Washington Park despite objections from community residents at the board’s public hearing. Opponents cited a passage in the plan’s fine print allowing for “displacement of residents,” saying projects funded by the TIF may not always be in the community’s interest.
Once the group approves the plan, it’s sent straight to the City Council for what is usually a swift rubber stamp. The area’s property taxes are then frozen, a TIF fund is created and from that moment private developers can make pitches to the DPD to bankroll its projects.
How long have TIFs been operating in Chicago?
The first TIF district in Chicago dates back to 1986, when then-Mayor Harold Washington introduced the system as part of an effort to bring life to the defunct Block 37. The so-called “cursed” city block in the middle of the Loop had long resisted developers’ efforts to attract businesses and, even with the TIF, stayed vacant until 2005.
The use of TIFs skyrocketed under the leadership of Mayor Richard M. Daley, and by 2010 they brought in more than half a billion dollars in combined revenue each year. If considered as a collective taxing body, TIFs would represent the third-largest district in the county, behind only the Board of Education and the City of Chicago itself. In their 28-year lifespan, TIFs have generated about $5.5 billion in total.
Why are TIFs so controversial?
– When it comes to the areas designated for TIFs, the city has maintained a pretty loose definition of the word “blighted.” Even though it’s intended as a catalyst of positive change in squalid neighborhoods, most TIF revenue over the years has actually gone toward well-financed projects in relatively wealthy areas. The Near South TIF district, by far the most lucrative in the city (it generated more than $60 million in 2013) runs along Michigan Avenue between Jackson and Cermak—hardly a site of extreme poverty. And before expiring in 2008, the legendary Central Loop TIF pulled in almost a billion dollars on its own, which it shoveled into massive projects like the construction of Millennium Park in the early 2000s.
– Although most TIF money goes toward public projects, a substantial chunk of it goes toward private companies as an incentive to open or expand their Chicago offices. All in all, TIFs have doled out $15 million to the Chicago Mercantile Exchange, $3.2 million to the Coca Cola Company, and in one high-profile move by the mayor, $5 million to Vienna Beef. Even Willis Tower (formerly the Sears Tower), the city’s colossal beacon of wealth and power, has gotten nearly $4 million in TIF funding. Public school advocates are quick to point out that TIF, which siphons directly from CPS’s largest source of revenue, is a common source of funding for charters. (Emanuel recently announced that $60 million in TIF money would go toward a new downtown selective-enrollment high school named after President Barack Obama. That school is set to open shortly after Obama leaves office in 2017). In 2013, TIFs generated about $412 million, which is about 20 percent of CPS’s total yearly budget. That begs the question: If it weren’t for TIFs, would the district still face the kind of budget shortfalls that force it to close dozens of schools at a time?
– Not all TIF funding stays in the district where it was raised. In a process called “porting,” the DPD can freely transfer money from one district’s TIF account into another. Because of porting, about $145 million—that’s 35 percent of total TIF revenue—was transferred from one district’s account into another in 2013. The 24th and Michigan TIF, for example, which comprises about 10 square blocks in the Near South Side, received almost $44 million in 2013 from other TIF accounts around the city. So even though TIF is intended to raise money for individual districts, it isn’t uncommon for property taxpayers in Kenwood on the South Side to be paying for constructions projects in Edgewater on the North Side.
– It isn’t by accident that TIFs have come to be known as the city’s “shadow budget.” Since the system reroutes public money from its regular channels into one-off projects controlled by the DPD, it’s difficult to know exactly how much money is being spent where. And aside from obligatory public meetings where two-minute slots are allotted for citizen comment, residents of TIF districts aren’t part of the decision-making process for development projects. Critics often use terms like “slush fund” and “portal hole” to refer to the massive sum of property tax money that’s more or less available at the pleasure of the mayor.
So, TIFs have been around for years. Have we found out anything new about them?
Since TIFs are so heavily shrouded in the tangle of municipal bureaucracy, it can be hard to keep up with them year after year. But due in part to research efforts like the TIF Illumination Project, run by Chicago’s Civic Lab, we’re finding out more every day.
The Civic Lab just released its 2013 TIF analysis after reviewing 151 of the city’s annual TIF reports, and it reached a few staggering new revelations:
– As of right now, about $1.7 billion is sitting idle in TIF funds. This means that either this money is all reserved for imminent projects, or that it’s sitting in wait to be used as the city sees fit.
– In 2013, more than 90 percent of total property taxes were diverted to TIF accounts in 21 TIF districts. In three districts, 100 percent of property tax money went to TIF.
– Even though TIF money is supposed to be used exclusively for construction projects, the DPD extracted about $7.6 million from 91 TIF districts to pay for city staff and administration costs. The TIF Illumination Project report called this process “skimming from the skim.”
In the coming weeks, The Chicago Bureau will continue to look at TIFs in Chicago and examine how they’re impacting schools.