Dean’s Challenge
Chicago: Taxes, Non-Taxes, & TIFs
Paula R. Worthington
September 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 postemployment 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/majorinitiatives/budget-options/
• Civic Federation http://www.civicfed.org/
• Pew Center
http://www.pewstates.org/projects/americancities-project-328139
• Lincoln Institute http://www.lincolninst.edu/