Talking about politics can be frustrating. Everyone knows that pensions are bankrupting the city. Everyone also knows that public/private partnerships are essential to our future prosperity. How does everyone know these obvious truths? Presumably, it’s the reports that talk about our pensions that have impossibly large unfunded liabilities and the reports of rich and successful business leaders shaking hands with politicians in sharp suits discussing the latest brilliant partnerships. So many respectable people saying the same thing… it must be true! Here’s the thing though, reporters are not good at economics and business men are very interested in taking your tax money. But this post isn’t about Noam Chomsky’s ideas or Upton Sinclair quotes. This post is about TIFs and something you may have learned in your high school math class; exponential growth.
A little background: TIFs
If you don’t know about TIFs go here. Ben Joravsky has been writing about them for years. In short, they are property taxes that go into a slush fund for the mayor and aldermen. They are supposed to be used in “blighted” areas for economic development, but “blighted” is a low legal hurdle to jump which allows many of the TIFs to exist in the nicest parts of the city.
TIF districts siphon $450m each year from the city’s property tax revenue; that’s about 6% of total revenue. In a city the size of Chicago, 6% of total revenue isn’t a small chunk of change. It is especially no small amount when you consider there is little oversight and it that it goes entirely towards politicians’ pet projects.
For some perspective on how entitled our mayor feels towards having almost half a billion dollars in discretionary income, the mayor boasts that 1/3rd of that money goes back to the schools. The thing is, half of that money would go directly to schools if the TIF program didn’t exist. So he’s essentially bragging that he only shorts schools by $75m each year (1/6th of the TIF fund). What a guy.
How does the relatively unknown TIF program compare with the widely known pension deficit? First we have to be clear with how we define the money owed to pension funds.
A little background: Unfunded liabilities
Everyone knows that pensions are underfunded. Not many know they have been since the 1990s. If a person talks about pensions and they start talking about unfunded liabilities, you should just assume they are being disingenuous. The relationship between unfunded liabilities and pensions funds is similar to the relationship between the amount you owe on your mortgage and your bank account. The former in each case represents costs that will have to be paid over decades, whereas the latter simply represents your cash on hand. While it’s helpful to have cash on hand to pay the bills, no one expects you to pay for your house in cash tomorrow.
Note: I don’t like comparing personal finances to government finances (because one day you’ll retire whereas the City of Chicago will continue to work in perpetuity), but the analogy will do for now.
TIFs vs Pensions: An example
I’m going to take the bait of the unfunded liability, but I’m going to flip the script and make a fair comparison by looking at the money that would have come from the TIF program over the long run. I hear a lot of people claim that TIFs are just a drop in the bucket. Just 6% of the city’s budget! But that’s 6% of the city’s budget every year! Unfunded liabilities work over the long run and we have TIF data from the long run, so why not put them together?
The Park District employee pension has an unfunded liability of $467m. That $467m is a big number that blew up over the course of the last 10 years, so let’s not think it’s reasonable to pretend that we should fix it over night.
Now let’s look at TIFs. TIFs have collected $5.5b over the course of 25 years. The Park District receives about 7% of the property tax revenues, so that amounts $385m (7% of $5.5b) that would’ve gone to the Park District had the TIFs not existed. That would’ve gotten us pretty close to having a reasonable level of unfunded liabilities, but that’s using two assumptions:
- All TIF money diverted from the parks would go to pensions.
- The pension funding would’ve received a rate of 0% return on their investments.
So let’s work to improve those poor assumptions. Looking at the EAV of the TIF program for the last decade, we can estimate that the TIF fund grows at approximately 15% every year. Extrapolating that growth rate back 25 years gives us an initial TIF take of $22.4m.
Here’s some R code… In billions,
tif.start <- 5.5 / sum(1.15 ^ (1:25))
Again, Parks would only get 7% of that money and let’s assume only half of that would’ve gone into pensions.
park.pension.start <- .07 / 2 * tif.start
Let’s use a growth rate of 7%, as well as the estimated 15% TIF growth rate:
tif.take.park.pension <- park.pension.start * 1.15 ^ (1:25) park.pension.total <- sum(tif.take.park.pension * (1.07 ^ (25:1))) park.pension.total
So it looks like, using some reasonable assumptions, over the last 25 years TIFs have taken, in total, a current valuation of $333m from the Parks pension fund. That would lead to approximately 70% funding of the Park District’s pension unfunded liability. Given that the fund was approximately 42% funded at the end of 2012, the TIF program siphoned off 70% of the remaining 58%, or 41% (.70 * .58) of the total liability.
The takeaway: without the TIF program the Park District’s pension fund would’ve stood at a healthy 83% (42% existing + 41% ) funding level. So when one makes a fair comparison of decades-long numbers, the big shiny things politicians fund for
their campaign contributors the economic vitality of the city, we see that they are approximately the same size as the pension gap.
Further down the rabbit hole
Some people with economic sophistication will make the claim that the investments from our TIF money have kept the city from turning into the next Detroit. “We’re building a new basketball stadium for DePaul/multipurpose events center at McCormick Place! Development!” Let’s ignore the fact that the entire convention center + Arie Crowne Theater is already a multipurpose events center. Let’s ignore the fact that people are looking to flee Illinois. Let’s ignore the credit downgrades and the deterrent underfunded schools have on young families looking to stay in the city. Let’s ask the simple question: Will this new economic development pay for itself?
This was half a lecture in my Intro to Macro Econ class at UIC. Seriously. For those who missed Wade Rousse’s wonderful lectures, fear not, I have another link:
Ironically, the article talks about Detroit cutting pensions while financing the Red Wings new stadium, but the title pretty much sums it up. People don’t spend more money because there is a new sports stadium. They simply skip dinner and go to the game instead. It’s not adding money to the local economy, it’s just shifting it around. On the other hand, retirees on a fixed income will go out and spend that extra money. They’ll go to the cafe, tip the waiter, go to the show, etc. That is new money in the local economy. That is local economic growth.
A transfer of wealth
These are budgeting priorities that would make Reagan proud… and in Chicago no less! Not only is this starve-the-beast/trickle-down type of budgeting morally dubious, it’s also economically destructive. Taken together, there has been a transfer of wealth from Chicago’s pensioners to corporations and property developers over the last 2 decades. The only winners in this game are the mayor and aldermen (who get campaign contributions in return) and the corporations they subsidize. Unfortnuately, Governor Quinn signed the bill pushed through the legislature that reduced the Park District’s pensions. I suppose he was looking to be “reasonable”, and without the history, economics, and mathematics lesson above I suppose it would look reasonable to the average voter in Illinois. Rahm has raised taxes on telephone bills in the city to make ends meet this year, but everyone seems to agree that after the election he’ll raise property taxes. He most definitely will not overhaul the TIF program like his Task Force suggested last election. Half of a billion dollars buys you a lot of power and who would want to give that up?