Dean’s ChallengeChicago: Taxes, Non-Taxes, & TIFs

Paula R. WorthingtonSeptember 2012

Outline

• Overview: budget gaps, city revenues, measures of municipal financial health

• City of Chicago– Funds & revenues– Taxes: sales, sin, property– TIFs– Pensions

• Resources: IG, Civic Fed, Pew, Lincoln Inst

Big picture: budget gap improving

Chicago worse off than other cities

Sources of revenue for local governments—cities alone would be somewhat different—more sales and gross receipts taxes, less IG transfers

City Revenues Still Falling Nationwide

Cities & other local governments “squeezed” by declines in own-source

& state revenue

States have their own budget woes….

Many cities have raised fees

Fund balances may have hit bottom

Civic Federation Project

• Financial indicators for 13 large US cities– Fund balance ratio, debt service ratio, etc.

• Chicago in bottom ½ or 1/3 of group• Doesn’t even include liabilities from

underfunded pensions and other post-employment benefits

• Data through FY2010 shows little improvement, though FY 2011 may be better

Turning to City of Chicago....

• What are revenue options?• What limits does city face?– Legal– Political– Economic• Mobility of residents, jobs, and capital• Elasticites!

Where does Chicago get its money?

Several years of “one-off” revenues…

Where did one-shot $ come from?

Asset lease funds practically empty….

Taxes I: Can Chicago raise its sales tax?

City expects $560 million in FY2012

Why not tax services as well as goods?

Illinois taxes few services, and Chicago uses same sales tax base…..

Why not raise “sin” taxes?

What about property taxes?

• Remember…..property owners pay taxes to many jurisdictions, not just the City!

• Other jurisdictions include– Chicago Public Schools– Cook County– Chicago Park District– Metropolitan Water Reclamation District

City uses property taxes to cover debt services & pension contributions

Full “burden” of City property tax shows through as levy, TIFs, and

library levy

Why not go after nonprofits?

• Currently exempt from paying property taxes• Litigation on-going related to health

organizations (e.g., hospitals) and tax-exempt status

• Other options– PILOTs– User fees and charges for city services provided

Chicago water & sewer rates are currently subsidized for nonprofit

property owners…..

What about PILOTs?

• Payments in Lieu of Property Taxes• “Voluntary”, infrequently used, and

contentious• Don’t typically generate huge $ (less than 1%

of general revenues)• Urban Inst-Brookings Tax Policy Center &

Lincoln Institute of Land Policy are resources

Time to talk about TIFs!Lots of money: over $500 mil!

How do TIFs work?

TIFs widely used in Chicago and suburban Cook County

TIFs can raise tax rates…..

Do TIFs Generate Economic Development?

How are TIF funds spent?

TIF funds be “ported” between TIFs on a limited basis

Bottom line on TIFs?

• Act as a somewhat opaque way of raising property taxes and directing more $ towards specific local economic development projects

• Reforms are coming, but system seems likely to remain in place for near future

What about pensions? Chicago’s four city plans are underfunded

Sources of underfunding…..

New state law forces city to “up” its funding to attain 90% funding by 2040

Resources?

• Inspector General http://chicagoinspectorgeneral.org/major-initiatives/budget-options/

• Civic Federation http://www.civicfed.org/• Pew Center http://

www.pewstates.org/projects/american-cities-project-328139

• Lincoln Institute http://www.lincolninst.edu/