 Anyone who has lived in or near Chicago at any point in the last decade has
undoubtedly heard the term “TIF.” But what exactly are TIFs, and how do they
affect the city?
Tax increment financing, or TIF, is a mechanism by which local governments
provide economic incentives to developers to redevelop blighted neighborhoods.
TIFs freeze the existing tax rate for a designated area and collect all tax
revenues above that rate due to increased property valuations for use in the
TIF. Individual taxing bodies (e.g., the city of Chicago, Chicago Public
Schools, or CPS, Metropolitan Water Reclamation District, Chicago Park District,
Chicago Public Library, Chicago Community College District, Cook County, Forest
Preserve District, Cook County Health System, etc.) get their usual share of the
money at the frozen rate.
If it seems complicated, that’s because it is. TIF is intentionally complicated
to distract from an elaborate budgetary shell game municipal governments play to
shirk honest debate about spending priorities and taxes, and to avoid
transparency and accountability for the use of tax dollars.
What is a TIF?
A TIF district is a designated area within a city that officials have determined
is “blighted” and unlikely to see private development without government
incentives. The city, in accordance with state law, ensures several criteria,
such as obsolescence, deterioration or declining property valuations, are met in
order to place the TIF designation on the area. Luckily for city planners, the
definitions of “blight” are vague. That’s what allows Chicago to implement TIF
districts in the Loop and River North.
Once city planners decide to implement a TIF, and the city council approves of
the designation, the existing tax rate is frozen for a period of 23 years. This
means that all taxing bodies (the city of Chicago, CPS, Metropolitan Water
Reclamation District, etc.) will get their share of property taxes. As property
valuations increase due to redevelopment, the increased revenue is deposited
into the TIF account to be used for future development or to reimburse
development costs.
The Cook County Clerk has provided the following example to illustrate how a TIF
district works. The Chicago City Council has created TIF district A. It has a
base equalized valuation, or the total value of all property in the TIF just
before the TIF district was established, of $10 million for the entire area. In
year one, the equalized valuation for the area increased to $11 million, and
each subsequent year has brought additional growth of $1 million. In this
example, taxing bodies such as the city of Chicago, CPS, Metropolitan Water
Reclamation District, etc., would each get their proportional share of the $10
million in taxes, as that represents the frozen rate. The $1 million in annual
growth is deposited into the TIF account to be used by the city as it sees fit
for the area’s development. Assuming the rate maintains for the life of the TIF,
TIF district A can expect $23 million dollars in revenue to be spent toward
development.
History of TIF
TIFs are not unique to Chicago. In fact, since the creation of the Illinois Tax
Increment Allocation Redevelopment Act in 1977, more than 250 municipalities
across the state have created over a thousand TIF districts. TIF is used in
nearly every state with 49 states and the District of Columbia choosing to
participate. Interestingly, the only state without TIFs is the state responsible
for its creation: California.
TIF began in California in the early 1950’s as a means to slow the post-World
War II exodus of the middle class from city centers. Lawmakers envisioned paying
for redevelopment projects with the property taxes from future owners. Slowly
but surely, TIF began to spread across the country as a way to funnel money
toward projects without raising taxes.
TIF took hold in Chicago in 1984, after the City Council unanimously approved a
governing ordinance creating the North Loop TIF. Since then, Chicago has
expanded to nearly 150 TIF districts (as of the close of 2014) and has diverted
over $5 billion in property taxes.
Past analysis of TIF spending showed TIF money was spent equally between public
and private projects. However, regardless of how much money goes to public
projects in general, a more recent analysis shows only 8 percent of total TIF
spending under Mayor Rahm Emanuel has been allocated toward school projects,
notwithstanding the mayor’s declared focus on schools. And the city spent nearly
$50 million in 2015 from TIF to pay for the financing costs associated with
running the TIF districts.
TIF has been a constant windfall for Chicago government. Cook County Clerk David
Orr recently announced that Chicago has seen an increase in TIF collections in
2015 of approximately 24 percent, or nearly $90 million. With large annual
revenues, proponents of TIF view the program as “free money,” but that couldn’t
be farther from the truth. TIF funds redevelopment by taking money from other
taxing bodies. That has allowed Emanuel to cry poor and impose on taxpayers the
burdens TIF tax revenue diversions exacerbate.
A common belief is TIF districts are intended to increase economic development,
including bringing more jobs to TIF areas. But TIFs may not actually do much to
improve the economic environment of those districts. A study from Ball State
University found TIF districts “have little impact on economic development other
than increasing [the] assessed value of property within the district.” In sum,
TIF districts only serve to keep more tax money within those districts, and do
not necessarily bring in more jobs or a better standard of living for residents
within the districts.
Two examples illustrate the unfairness of Chicago’s TIF system.
TIFs as slush funds
The corruption and unfairness associated with TIFs in Chicago is well
documented. TIFs have served as political slush funds, into which the mayor
diverts millions of tax dollars to reward his political donors. While there are
many examples of TIF dollars being used to benefit the well connected, two are
particularly egregious: Lathrop Homes and the South Loop.
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Lathrop Homes
Lathrop Homes, located on 32 acres on city’s North Side at Diversey
Avenue and the Chicago River, was once considered the gold standard
in public housing. It spurned the typical high-rise model of public
housing in favor of brick row houses and smaller apartment
buildings. The National Register of Historic Places added the homes
in 2012 in part due to the open space designs of noted landscape
architect Jens Jensen.
It has since fallen into disrepair and needs to be overhauled. The
Plan Commission approved a new development for the area to keep
public housing while adding new market-rate units. In order to
achieve this development, the city is in the process of creating a
brand new TIF district on that site, which is expected to be
presented to the City Council in September.
The land in the proposed TIF district is owned by the Chicago
Housing Authority and is currently tax-exempt. That is, no property
tax is collected for any property on the Lathrop Homes site. If the
city approves the new TIF, the current property-tax rate of 0
percent will be frozen and all taxes collected will go to the TIF.
In other words, all property taxes collected on the redeveloped
Lathrop Homes site – which will house not just people with
affordable housing vouchers, but also people paying full rent – will
be deposited into a TIF account to be spent as the mayor sees fit
after the site redevelopment costs have been paid.
CPS will get nothing. The Chicago Public Library gets nothing. The
Chicago Park District gets nothing. The only entity to receive
property-tax dollars from the site over the next 23 years would be
the city-run TIF fund.
The Lathrop Homes site isn’t a little-known swath of property. This
is prime real estate likely to bring in tens of millions of dollars
annually to the TIF. For reference, three nearby TIF districts had
2014 closing balances in excess of $10 million. Those TIF districts
are Addison South ($11.2 million), Fullerton/Milwaukee ($14.9
million) and Western Avenue South ($16.5 million).
South Loop
Meanwhile, in the South Loop, a half-mile long vacant property – the
largest undeveloped swath in the city – has sat vacant since
developer Tony Rezko sold it in 2005. It should be a big tax boon
for the city, but in reality, a large chunk of the funds from this
new development won’t go directly to the debt-saddled city, but
instead will go straight to a slush fund Emanuel controls.
That’s because the land sits in the River South TIF, a district with
a 2014 closing balance of $50,371,935.
Just as with the Lathrop Homes site, this isn’t a little-known swath
of property in an impoverished area. The 62-acre site is prime real
estate likely to bring in tens of millions of dollars annually to
the TIF. Unlike the example with the Lathrop Homes site, the South
Loop site already sits in an existing TIF.
Tax year 2014 brought in nearly $1.1 million in property taxes from
the South Loop site. This may seem like a large amount, but this
property is nearly 62 acres of undeveloped, vacant land. Once it is
developed, the value of the property will increase dramatically,
property taxes deposited into the TIF will skyrocket and those newly
generated taxes will be spent as the mayor sees fit.
These examples circle back to a greater discussion surrounding the
budget crises of the city and CPS. The mayor often decries CPS’ lack
of funds and the city’s need for more revenue while handing out
millions of TIF dollars to connected companies through TIF deals.
Both the Lathrop Homes and the South Loop development include
Related Midwest, a friend of Mayor Rahm Emanuel. Related Midwest
employees gave over $13,000 to Emanuel’s campaign fund in 2014,
according to the Illinois State Board of Elections.
Solving the TIF problem
The Lathrop Homes and South Loop developments are prime examples of
government mismanagement and the pressing need for TIF reforms. Once
both pieces of land are developed, inhabited and profitable, the
benefits and increase in tax revenue get tucked away in a fund over
which the mayor has complete discretion, rather than going to keep
city parks clean, libraries open, art programs in public elementary
schools, etc. TIF is supposed to benefit local neighborhoods, but
the ones truly benefiting are the mayor, who gets to dole out public
money to favored developers, and the insider developers themselves,
who reap the rewards from profitable business opportunities.
Residents across the city ultimately have to shoulder the burden of
mismanagement and backroom deals. Taxpayers in Chicago’s struggling
neighborhoods should not have to absorb losses caused by the
diversion of tax dollars for TIF developments on prime real estate.
As long as the mayor has total discretion over TIF tax dollars,
Chicagoans will continue to lose.
California has provided a roadmap for the future of TIF by
eliminating TIF from state law, thereby forcing cities to address
their financial issues directly. TIF is not, and never has been,
free money. It funds redevelopment at the expense of the other
taxing bodies. Given that the Illinois General Assembly continues to
pass laws favorable to TIFs, getting rid of TIFs may be a tough
task, but it should be the ultimate goal. In the meantime, a good
first step would be for the city to allow existing TIFs to expire or
close districts until none are left. This will force the mayor and
city council to spend taxpayer money in a responsible and
transparent manner. Until then, the mayor and his connected friends
will benefit while Chicago taxpayers suffer.
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