Cleaning up Tax Increment Financing

Cleaning up Tax Increment Financing Rethinking Chicago’s Troubled Redevelopment Program Cleaning up Tax Increment Financing Rethinking Chicago’s Troubled Redevelopment Program

Illinois PIRG Education Fund

Rob Kerth Frontier Group Celeste Meiffren Illinois PIRG Education Fund

January 2012 Acknowledgments

The authors wish to thank Richard Dye for his insightful comments and suggestions. Thanks also to Tony Dutzik and Benjamin Davis of Frontier Group and Phineas Baxandall of U.S. Public Interest Research Group Education Fund for their writing and editorial assistance. Additionally, the authors wish to express their gratitude to Ben Joravsky and Mick Dumke of the Chicago Reader for their reporting on this issue, and to the members of Chicago’s TIF reform task force for their research on the city’s TIF program. Their work was invaluable in preparing this report.

Illinois PIRG Education Fund is grateful to the Ford Foundation for making this report possible.

The authors bear responsibility for any factual errors. The recommendations are those of Illinois PIRG Education Fund. The views expressed in this report are those of the authors and do not necessarily reflect the views of our funders or those who provided review.

With public debate around important issues often dominated by special interests pursuing their own narrow agendas, Illinois PIRG Education Fund offers an independent voice that works on behalf of the public interest. Illinois PIRG Education Fund, a 501(c)(3) organiza- tion, works to protect consumers and promote good government. We investigate problems, craft solutions, educate the public, and offer Illinoisans meaningful opportunities for civic participation. For more information about Illinois PIRG Education Fund, or for additional copies of this report, please visit www.illinoispirg.org/edfund.

Frontier Group conducts independent research and policy analysis to support a cleaner, healthier and more democratic society. Our mission is to inject accurate information and compelling ideas into public policy debates at the local, state and federal levels. For more information about Frontier Group, please visit www.frontiergroup.org.

Design: Harriet Eckstein Graphic Design Cover photo: Paul Velgos Table of Contents

Executive Summary 1 Introduction 3 Basics of Tax Increment Financing in Chicago 5 Life Cycle of a Tax-Increment Finance District 5 Chicago Has Misused TIF in the Past 9 TIF Has Captured Revenue That Would Otherwise Have Gone to Other City Priorities 10 Chicago Has Created Too Many TIF Districts, and Kept Them Open Too Long 12 Chicago’s TIF Process Is not Transparent or Democratic Enough 13 Chicago’s TIF Process Lacks Well-Enforced Protections for Taxpayers 14 Chicago Is Moving in the Right Direction on TIFs, But Needs to Do More 17 The TIF Sunshine Law Has Improved Transparency, But the Public Still Needs More Information 17 The Mayor’s TIF Reform Panel Lays Out Sound Principles, but Will Need Follow-through and Specifics 18 Policy Recommendations 21 Notes 23

Executive Summary

very year, $500 million worth of prop- leaders should adopt the reform panel’s erty tax revenue collected in Chicago proposals and then go further—taking Eflows into funding pools shielded the steps necessary to rein in overuse of from public scrutiny and democratic TIF, prevent TIF districts from becom- control—the bank accounts of the city’s ing a piggy bank for projects unrelated Tax-Increment Financing (TIF) districts. to their original purpose, and provide That money—10 percent of Chicago’s an- transparency and accountability in the nual property tax revenue—is intended to TIF process. promote development in struggling areas of Chicago’s TIF process is in need of the city, but the fashion in which it has been reform. TIF spending takes place without handled in the past—without full transpar- full public transparency, making it hard ency, democratic oversight, or accountabil- for residents to determine how their tax ity for the recipients of funds—has opened dollars are being used. Residents cannot, the door to misuse of public money. for instance, find information about TIF Chicago has 163 TIF districts, or areas spending in a convenient form online. in which a portion of tax revenue is set aside into special accounts. The revenue • TIF spending takes place outside of collected by those districts is spent outside the city’s budget process, making it ordinary city budget processes, allowing hard to consider TIF expenditures for unsupervised spending, political horse- in the context of the city’s overall trading, and a concentration of spending development needs and undermining authority in the mayor’s office. democratic control. Even aldermen Mayor Rahm Emanuel has vowed to have been denied access to the city’s reform the city’s TIF process, and con- overall TIF budget. vened a reform panel to recommend improvements. The reform panel’s recom- • TIF districts—which in theory offer mendations point in the right direction, “free money” for development by but would not correct the fundamental triggering growth and then captur- problems with Chicago’s TIF program. City ing the revenue that results from that

Executive Summary 1 growth—can end up taking money districts and projects, and hold away from other purposes by divert- developers accountable for providing tax revenue that would otherwise ing agreed-upon benefits by includ- have flowed into general tax funds ing provisions in subsidy contracts from inflation or ongoing growth. that call for repayment of subsidies if targets are not met. • TIF districts often operate without a clearly defined plan, spinning off • Build on the initial steps towards money that becomes the basis for a greater transparency in TIF spend- “shadow budget” under the mayor’s ing taken after passage of a 2009 TIF control. In the past, aldermen have Sunshine Law by adopting “Trans- reported that the mayor’s office used parency 2.0” best practices that al- the promise of new TIF spending in low residents to easily monitor city their districts as leverage to win their spending online. votes in the City Council. • Use TIF only in areas where it • Developers who receive TIF subsidies promises real benefits to the city, are rarely, if ever, held accountable by setting a high standard for the for delivering the benefits promised. creation of TIF districts. When Republic Window and Door closed its Chicago plant in 2009, • Close TIF districts once they fulfill for instance, the city had no way to their initial redevelopment plan, or reclaim a share of the subsidies the require reauthorization if they are to company had received, which were continue with a new redevelopment intended to support jobs through 2019. plan. Districts should not continue diverting money once the purpose Vowing to reform Chicago’s TIF pro- for which they were created has been cess, Mayor Rahm Emanuel created a panel achieved. of TIF experts to review the city’s policies and historical use of TIF and recommend After years in which Chicago’s TIF improvements. Mayor Emanuel’s TIF program was allowed to grow into an commission has proposed reforms that unaccountable, unsupervised program would move the city in the right direc- accounting for 10 percent of the city’s tion, but more needs to be done. The property tax revenue, the city government mayor and the City Council should: is beginning to take steps to return TIF to its originally intended uses. Further • Adopt the commission’s proposal to action and long-term commitment from include TIF spending in overall city leaders will be required, however, if city budgets, which would place TIF the city is to transform the TIF program spending under more democratic from an overgrown shadow budget into an control. effective and targeted tool for promoting development. • Adopt the commission’s proposal to measure the performance of TIF

Cleaning up Tax Increment Financing Introduction

n 2008, as the economy struggled and of both good government practice and Chicago politicians raced to patch a sev- simple common sense. Ieral hundred million dollar hole in the Today, one out of every 10 property tax city budget, the city spent $350 million to dollars collected in Chicago is earmarked fight blight in the Central Loop. to support development in one of the city’s The Central Loop, of course, is far from 163 TIF districts, which include areas blighted. True, it faces many of the same of the city that are far from “blighted.” challenges as any urban downtown area. Those funds are allocated not through But there is plenty of reason to question the traditional budget process but through whether taking $350 million that would a separate process that has been heavily otherwise have supported police, fire, controlled by the mayor’s office. The recent education and other critical public services track record of the TIF program includes and using it to support development in the numerous stories of TIF being used as city’s thriving downtown district was really a piggy bank for subsidies to well-con- a sound use of public funds. nected developers and rewards for politi- Unfortunately, when it comes to how cal supporters, rather than as a legitimate money is spent in Chicago’s many Tax- economic development tool. Increment Financing (TIF) districts—like Chicago now has the opportunity to the one in the Central Loop—the public, turn the TIF program around and restore and even many elected officials, have little it to its original purpose. Mayor Rahm opportunity to ask questions or make Emanuel has vowed to make TIF reform a their opinions known. TIF was originally priority of his administration and his TIF created to help cities like Chicago spark reform panel has developed recommenda- investment in blighted areas that would tions that will begin to move the program otherwise have little hope of turning them- in the right direction. selves around. Over the years, however, The reform panel’s recommendations Chicago’s TIF program has outstripped its are a positive step, and should be imple- original mission, as well as the boundaries mented—with strong follow-up to ensure

Introduction 3 that the reforms made are meaningfully overuse of the TIF mechanism and ensure enforced. Beyond that, however, Chicago that TIF district funds are limited to uses will need to take further steps to restrict that serve their redevelopment mission.

Cleaning up Tax Increment Financing Basics of Tax-Increment Financing in Chicago

n 2011, 10 percent of the tax revenue the basic steps that take place during the Chicago took in bypassed the police, creation, operation, and closure of a TIF Ifire department, streets and sanitation district in Chicago. department, and all the other purposes on which the city spends its general revenue, Creation and went directly into a series of special The life of a Chicago TIF district begins funds separate from the city’s general with a proposal to invest in redeveloping budget—the accounts of the city’s 163 tax- an area. The proposal can come from any increment financing (TIF) districts. source—an interested developer, the may- Tax-increment financing is a mecha- or’s office, or an alderman, for instance. nism, invented in the 1950s, that allows Before a new district is created: municipalities to obtain funding for development efforts by setting aside a por- • The Department of Housing and Eco- tion of the tax revenue generated within a nomic Development has to review the district over a period of time. In the 1970s proposal and certify that the proposed and 1980s, as federal urban redevelopment district is needed to create economic funds disappeared, cities across the coun- growth—or, to use the technical try—including Chicago—began to look to phrase, that development would not TIF as an alternative. take place “but for” the subsidy. The department prepares a redevelopment plan, describing how the city plans to improve the district. The city also has to assert that the district is “blighted”— Life Cycle of a Tax-Increment run down or physically deteriorating. Financing District • A “Joint Review Board” composed Every TIF district differs from others in of representatives from the overlap- its particulars, but all work according to ping tax districts affected by the new the same mechanism. This section lays out district (the school board, for instance)

Executive Summary 5 has to review the district, and recom- multiple properties over a broader area, and mend for or against creating it. aim to support redevelopment of that area as a whole.2 Area-wide TIF districts offer • Plans for the district must be present- the city the latitude to select new projects ed at a public hearing. to fund over the lifetime of the district.

• The City Council must approve the Operation district and the proposed redevelop- Once a TIF district is created, any addi- ment plan. If the Joint Review Board tional property tax revenue generated as a has recommended against the district, result of an increase in property values in a 60 percent vote in favor is required the district (as opposed to changes in the for passage in the City Council. 1 tax rate) is diverted away from the tax districts that would ordinarily have received Districts can be one of two different those taxes and into a special fund. For the types. Project-specific TIF districts next 23 years (or until the district closes) usually contain only a single property or a those entities will receive tax revenue set of properties that a developer plans to only on the value of the properties in the develop in concert. A project-specific TIF TIF district at the time the district was district is created to support a developer’s created. (See Figure 1 for a generalized plans for the properties in question, and example.) all the district’s revenue is allocated for One crucial feature of tax-increment that purpose from the time the district is financing is that TIF districts divert taxes created. not only from the city’s share of the area’s Area-wide TIF districts, which are revenue, but also from the other taxing more common in Chicago, encompass districts that collect from the area, and thus

Figure 1: Revenue Allocation in TIF Districts

Cleaning up Tax Increment Financing Figure 2: Shares of Chicago Tax Revenue by Taxing District4

divert revenue from those other districts as takes in. The city can issue bonds secured well. In Chicago, most of the city is covered against the future revenue to be captured by a number of overlapping tax districts. by the district, thus acquiring an immedi- The districts covering the entire city are: ate infusion of cash to jump-start development in the area. The bonds are then paid • City of Chicago back with revenue collected by the district • Cook County over time. Alternatively, the city can allow • Cook County Forest Preserve funds to accumulate in the district’s bank District account and pay for projects with the cash • Metropolitan Water Reclamation it has on hand. District of Greater Chicago The city can spend TIF funds on sev- • Chicago Board of Education eral kinds of projects, including public • Chicago Park District infrastructure construction, support for • City Colleges of Chicago3 private development efforts, and programs As assessed property values in the TIF aimed at providing small-scale assistance to district rise, any new revenue occasioned small businesses and property owners in by the increase in property value flows the area. Chicago has historically spread into the TIF district’s account. This rev- TIF funds over a wide range of different enue—the “tax increment” from which the activities. Over the entire history of the mechanism takes its name—is the source TIF program, the city has spent 50 percent of the development funds that the district of its TIF funds on private development, 46 will spend over its lifetime. percent on public works, and 4 percent on Once a district is created, the city has programs that provide direct aid to small several options for spending the revenue it businesses or property owners.5

Executive Summary 7 Different kinds of projects require below, or the mayor’s office can create a different levels of scrutiny; the mayor’s new redevelopment plan, which can be office can spend money on many public implemented after review at a Joint Review infrastructure projects without seeking Board and public hearing. If the city judges outside approval, but transferring funds to that a TIF district needs more than 23 another government agency or to a private years to complete its objectives, it can ask developer requires explicit approval from the state legislature to extend the life of the the City Council and the Community district by an additional 12 years. Development Commission, a board appointed by the mayor and confirmed by Closure the City Council. The mayor’s office can Once a TIF district either completes its also transfer, or “port” funds between redevelopment objectives or reaches the adjacent districts, within certain limits. end of its lifetime, it closes. From that point From 2005 to 2009, Chicago “ported” forward, the city and the other overlap- about five percent of its TIF funds; in 2010, ping tax districts covering the area receive that level increased to 15 percent, and will all the property tax revenue collected in likely remain there through 2013, in part to the district. Any funds remaining in the fund the city’s Modern Schools Initiative, district’s account at the time it closes are which involves constructing new schools distributed to the tax districts covering the across the city.6 area, with each district receiving the same Once a TIF district has met its initial proportion of the accumulated funds as development objectives, several things can it receives of property taxes collected in happen. The district can close, as described the area.

Cleaning up Tax Increment Financing Chicago Has Misused TIF in the Past

ax-increment financing offers cities 10 percent of the city’s property tax revenue access to resources for investments to flows into TIF districts. That revenue promote development. Municipalities amounts, at present, to approximately $500 T 8 that would otherwise lack the resources million every year. to prompt investment in struggling areas While those $500 million come from turn to TIF for funds to entice private the same source as the other 90 percent developers back into those areas. Those of the city’s property tax income, they funds, however, may also be directed for are treated as a separate stream of money less publicly beneficial activities. operating under separate rules. Ordinary In practice, Chicago has used TIF too tax revenue follows a fairly straightforward often and without proper transparency and path through Chicago’s government, first accountability measures. flowing into the city’s general fund. Money The city of Chicago began using TIF in that fund is spent according to the city’s for development in 1984, under Mayor budget, which is drawn up by the mayor Harold Washington. It was in the late and amended and approved by the City 1990s, however, under Mayor Richard M. Council. The budget is openly debated and Daley, that the development tool Daley made available to the public. once described as “the only game in town” TIF revenue, on the other hand, flows became a centerpiece of the city’s develop- to a separate fund for which no overall ment strategy. Between 1998 and 2002, spending plan is published or debated. the city added 86 new TIF districts to its In some cases—such as investments in 41 existing districts—more than twice as streetscapes or parks—the mayor’s office many, in a five-year period, as it had created has the ability to spend TIF revenue over the previous 14 years.7 without seeking approval from the City As Chicago’s use of TIF districts ex- Council.9 Other expenditures, such as panded, those districts began to account for providing financial assistance to private a larger and larger slice of the city budget. developers, require approval from the At present, 30 percent of Chicago’s taxable City Council and a board appointed by the land is contained within TIF districts, and mayor.10 Because the City Council never

Basics of Tax Increment Financing in Chicago 9 considers or approves a comprehensive TIF • Inflation can drive up nominal prop- budget, there is no forum for debate over erty values, whether or not the area is how the TIF program fits into the city’s experiencing real value appreciation. overall development strategy.11 Between 1986 and 2005, local gov- The reduced transparency and account- ernments in Cook County lost $700 ability of TIF spending open the door million of revenue captured by TIF to abuses that the rules governing run- because of inflation—$300 million to of-the-mill public spending are designed districts in Chicago alone.17 to prevent. Open bidding for contracts, public hearings, and rules requiring care- • “Natural growth” is the increase ful record-keeping and open public access in property values that would have to those records were created to ensure taken place without the creation of that the public can monitor how their tax a TIF district. While it may be hard dollars are spent and hold public officials to identify precisely what portion of accountable. Chicago’s TIF program has a district’s growth is attributable to few of these core protections against waste natural growth, one can estimate it and abuse. by, for instance, looking at the growth Chicago’s TIF program has several rate in the area before the TIF district problems, often linked with one other. TIF was created. is too widely used, insufficiently transparent, insufficiently democratic, and lack- • Investments made with TIF funds ing mechanisms to hold its beneficiaries can spark economic development that accountable. By correcting these flaws, leads to higher property values in the Chicago can return its TIF program to district. its original purpose—providing needed development funds in narrowly targeted Each of these sources of growth in- circumstances. creases the amount of property tax revenue generated inside the TIF district, but only the third is linked to the investments made with TIF financing. In other words, TIF can divert tax revenue that would otherwise have flowed to parks, schools and other TIF Has Captured Revenue municipal services to support private development instead.18 That Would Otherwise Have In Chicago, studies have suggested that Gone to Other City Priorities TIF districts have captured revenue result- Part of the attraction of TIF as a devel- ing from natural growth. In 2002, in the opment tool is that the revenue spent midst of the flurry of TIF district creation through TIF districts is perceived to be that accompanied the Daley administra- “free money”—revenue that would never tion’s embrace of the TIF mechanism, a have been raised in the first place had the coalition of Chicago community groups TIF district not prompted growth in the undertook a study that suggested many area. That premise breaks down, however, of Chicago’s TIF districts were capturing if some or all of the revenue captured by more of their revenue from pre-existing a TIF district would have existed even if growth than from development prompted the district had never been created. by TIF spending. Property values in a TIF district can rise The Neighborhood Capital Budget for several reasons: Group (NCBG), a coalition of community

10 Cleaning up Tax Increment Financing Case Study: The Central Loop TIF District

hicago’s first TIF district, created in 1984, offers a window into the problems with Cthe way the city currently handles TIF revenue. The Central Loop TIF District was created at the request of Mayor Harold Washington, who was worried that shoppers were developing negative impressions of the downtown business district, threatening the economic vitality of the central city. As initially designed, the district included a block of downtown land—known as “Block 37,” and bounded by Washington, State, Randolph, and Dearborn streets—that the city intended to redevelop to bring in new businesses.12

In 1997, with redevelopment of Block 37 still incomplete, Mayor Daley requested, and the City Council approved, an expansion of the district to include more of the northern Loop area. As property values in the district rose, the Central Loop TIF account took in larger sums year after year—to the point where annual receipts in the mid-2000s reached over $100 million a year, close to 20 percent of the city’s total annual TIF revenue.

With the district due to expire in 2008, returning its annual revenues and any unspent money remaining in the district’s accounts to the city’s general fund, along with the county, schools, and other recipients of taxes from the area, Mayor Daley began lobbying for a 12-year extension of the district’s life, which the state legislature can grant to any TIF district.13 The administration hoped that further revenue from the TIF district could provide funds towards hosting the 2016 Olympics, among other endeavors. Faced with opposition from the governor’s office, however, Mayor Daley consented to let the district expire.14

The district’s expiration promised to return a large amount of money to the overlapping tax districts that had lost revenue from the Central Loop. Schools, parks, and the county, among others, stood to receive their shares of the $358 million the district had in 2008 ($255 million in its accounts at the beginning of the year, and $103 million in new income over the course of the year)—less, of course, whatever funds were spent during the remainder of 2008. At the beginning of the year, about $100 million of the district’s remaining money was already allocated, leaving close to $250 million to potentially return to other local government bodies.

At the end of the year, however, none of that accumulated revenue reached the schools and other potential recipients. Over the course of 2008, the Daley administration spent not only all the remaining money in the Central Loop District’s account, but also close to $3 million from neighboring districts, in a final burst of activity. Money went to politically connected developers and allies of the Daley administration. In total, more than 30 percent of the money the Central Loop district raised in its 24-year lifetime went out the door in the final 12 months.15 ($1.2 million eventually did find its way to schools and other recipients, when a partial audit of the district’s activities in the mid-2000s turned up a bank account containing unspent revenue.16)

Basics of Tax Increment Financing in Chicago 11 organizations, examined 36 Chicago TIF as Chicago continues to set the baseline districts with the aim of separating the tax value for TIF districts in such a way impacts of TIF district investments from that the inflationary and natural growth the impacts of factors like inflation and increments flow into TIF district coffers, a growing economy—factors that would the potential for revenue diversion from exist with or without TIF districts. To overlapping tax districts will remain. separate this “natural growth” from new growth induced by TIF investments, the NCBG projected forward the rate of growth that existed in the TIF districts before TIF legislation was enacted, and Chicago Has Created Too compared the results that would have taken place had growth continued at that rate to Many TIF Districts, and Kept the eventual results if growth took place at Them Open Too Long the pace achieved under the TIF regime. The ideal outcome of a TIF district is that a Over the 23-year lifetime of the 36 jolt of investment sparks new economic ac- TIF districts, the NCBG found that ris- tivity in a stagnant area, creating economic ing property values under the TIF regime activity that benefits the broader commu- would increase total tax receipts by a cu- nity and increases the value of land within mulative $1.6 billion—revenue that would the district when its full value returns to flow into TIF districts to pay for develop- the tax rolls. Poorly targeted use of TIF, ment spending in the area. Without the however, can actually produce the opposite TIF districts, though, revenue would have effect—sucking further investment out of increased by $1.3 billion—and would have economically challenged areas to concen- gone directly to schools and other public trate growth in areas already attractive to functions. In other words, local govern- developers. In addition, without strong tar- ments had given up $1.3 billion dollars geting rules to limit the situations in which ($631 million from the schools alone) in TIF can be used, it becomes yet another revenue they would have received, resulting tool in the arsenal of municipalities locked in only a mild increase in property values in mutually destructive competitions to at- when the districts finally expired after 23 tract new economic activity and jobs. years. TIF spending was redirecting money In Illinois, municipalities are required away from other public purposes and to- to assert that a targeted area is “blighted” wards subsidizing growth that (for the most and in need of redevelopment support be- part) would have taken place anyway.19 fore creating a TIF district.21 Such claims The fact that TIF allows the city to are difficult to disprove, however, and this capture revenue that would have otherwise requirement has not allayed concerns that gone to other local tax districts sets up a po- TIF districts are being created where they tential conflict between the interests of the are not needed. Anecdotally, the presence city and other local governments. Studies of TIF districts in the city’s thriving down- on why local governments adopt TIF have town—the LaSalle Central TIF District, pointed to the potential to capture revenue for instance, is centered on the financial from overlapping tax districts as one poten- district—suggests TIF is being used in tial incentive for governments to turn to areas that few people would describe as the mechanism; in several cases, conflicts “blighted.” between TIF-using municipalities and the In addition to creating TIF districts in overlapping tax districts losing revenue to inappropriate places, Chicago has also fre- TIF have resulted in lawsuits.20 So long quently allowed TIF districts to remain in

12 Cleaning up Tax Increment Financing operation—diverting revenue from other voters, holding public hearings, and requir- public services—long after their original ing City Council approval for the creation missions have been accomplished. TIF and amendment of redevelopment plans. districts are approved in the context of a Public control over public spending is specific redevelopment plan, which calls for a vital principle of good government—all spending set amounts of money on certain the more so when the spending in question types of projects. In practice, districts have comes in the form of subsidies to private been able to linger and experience “mission developers. Unfortunately, Chicago’s creep,” as revenue is spent on purposes TIF budget lacks basic transparency, and not contemplated in the original rede- is shielded from full review even by the velopment plan. For instance, the Daley City Council, not to mention members administration made plans to transfer $38 of the public. The City Council votes on million from one district in the South Loop the creation of TIF districts, and the city to build a transit station and high school has to present its plans to the public and outside the district.22 a Joint Review Board of representatives Creating or maintaining unnecessary from the other tax districts affected when TIF districts is particularly problematic in it creates a district or significantly alters a light of the evidence that TIF districts pro- redevelopment plan, but a large portion of mote growth inside the district boundaries TIF district operations take place beyond at the expense of slowing growth elsewhere scrutiny from the public or even the City in a city. A 1999 University of Illinois study Council. For instance, the mayor’s office of Cook County and the collar counties can initiate public infrastructure invest- found that the value of properties outside ments in TIF districts without any outside of TIF districts in towns that used TIF input at all (see page 8). grew at a significantly slower rate than This absence of City Council control property values in similar towns that did removes a critical check on fraud and abuse not use TIF.23 This research suggests that in the awarding of contracts, as well as TIF subsidies redirect growth within a freeing these investments from the sort of community at a cost to areas outside TIF cost-benefit scrutiny that ordinary public districts, raising the stakes of the decision spending receives. Even in the case of pri- of whether to create such districts. vate development projects, where the City Council does have to approve a project before it can go forward, the fact that only the mayor’s office has the ability to initiate projects (without reference to any overall Chicago’s TIF Process Is budget or plan) creates the potential for TIF spending to be used as a reward for Not Transparent or political allies. Democratic Enough While subsidies to private developers are The creation of a TIF district is a decision approved one-by-one in the City Council, with long-term implications for a juris- the council never examines the TIF budget diction and its residents. It is important, as a whole, since that budget has histori- therefore, that residents have access to cally been kept secret by the mayor’s office. clear, accurate information with which Under the Daley administration, individual to evaluate TIF proposals and the ability aldermen were allowed to view the budgets to make their voices heard. Democratic for TIF spending within their districts, but control involves providing full information the overall plan for the entire city was not about proposed districts and projects to published.24

Basics of Tax Increment Financing in Chicago 13 This sort of sealed budget and planning searchable so that members of the public process creates the opportunity to use pub- can make best use of it.27 Without those lic money to reward political allies. Several tools, too much of Chicago’s TIF activ- aldermen interviewed by the Chicago Reader ity will continue to take place out of the with regard to the TIF budget indicated public eye. that TIF revenue—which could either be awarded to or withheld from projects in their districts—was used as a lever on key votes by Mayor Daley’s office.25 This kind of dealing is possible because the City Council does not have the opportunity to Chicago’s TIF Process Lacks view, amend, and approve an overall TIF Well-Enforced Protections budget, giving the mayor’s office an effective veto power—the freedom to only for Taxpayers initiate projects that have the mayor’s Tax-increment financing provides po- support. tentially lucrative subsidies that benefit Similarly, the Chicago Inspector Gen- developers. Cities frequently plan TIF eral’s office recently found that the city districts with a specific developer in mind; had used the public benefits clauses (under when they do not, specific developers are which subsidy recipients agree to make eventually selected for the projects. contributions to public programs or chari- In return for the benefits they receive, ties) of various TIF agreements to channel developers need to commit to delivering on funds to particular non-profits, without specific goals, and, at minimum, provide using clear criteria to determine which regular reports on their progress towards non-profits received such benefits. The meeting the goals of the TIF district. largest recipient of public benefit agree- Contracts signed with subsidy recipients ment funds between 2000 and 2009 was should require them to pay back part of After School Matters, a charity founded by their subsidy if they fail to deliver the Mayor Daley’s wife, which received funds promised benefits. from 59 percent of the agreements that Chicago has at times used such contract directed money to private nonprofits.26 provisions, but in at least some cases they Flaws in the transparency of Chicago’s have lacked sufficient strength and en- TIF process extend past the authorization forceability. In 2009, for instance, when of TIF districts and projects. The city has the Republic Window and Door factory also historically failed to publish informa- on Goose Island closed down, setting off tion on how TIF money has been spent, a high profile battle between laid-off work- and what benefits the city has received, ers and the company, the city lost jobs that in a form that voters can digest. A TIF were promised in a TIF deal. transparency law passed by the City Coun- Between 1996 and 2000, Chicago paid cil in 2009 required the city to post more out over $9 million in subsidies to Republic information on line, but the data made (the total cost to the city budget, includ- available to date have been insufficient. ing interest, came to $10.4 million) to help As documented in Illinois PIRG’s recent construct its Goose Island factory. As part report, Shining a Light on Tax Increment Fi- of the deal Republic signed to earn that nancing in Chicago, the city has so far failed subsidy, the company promised to “use to provide sufficient data on how money commercially reasonable best efforts” to is spent and what results are obtained, or maintain 549 jobs at the facility through to make its website readily accessible and the end of the TIF agreement—in 2019.28

14 Cleaning up Tax Increment Financing Transparency 2.0

n recent years, governments around the United States and around the world have embraced “Transparency 2.0”—a new standard of comprehensive, one-stop, one- Iclick budget accessibility and accountability. Cities and states that have adopted Transparency 2.0 principles have developed transparency websites that enable citizens to find government spending information that is:

• Comprehensive—including all the various ways governments spend money, including the provision of subsidies to private actors.

• One-stop—aggregating all information on government spending into a single website.

• One-click—providing searchable, downloadable information that can be accessed by citizens without requiring a pre-existing knowledge of budgetary nomenclature or bureaucratic structure.

At minimum, jurisdictions with TIF programs should create websites that provide key information about TIF that meets the standards of Transparency 2.0. Ideally, information on TIF revenue and spending should be included in a transparency website that includes all aspects of municipal spending. With regard to TIF districts, governments should:

• Provide budget information about all TIF districts in a city, school district, or state, and about each individual TIF district, accessible online.

• Provide information on each TIF district, including: o The overall goals of the TIF district; o The specific benefits (in terms of jobs or other measures) it is expected to produce; o The most current information on what benefits have been produced to date; o The identities of all recipients of TIF funds, and the amount of money received by each; o Regular reports on the progress of the project.

• Ensure that funds raised through TIF districts are covered by at least the same transparency requirements that apply to ordinary municipal spending.

• Track all city spending in TIF districts, including not only direct outlays, but also subsidies provided in the form of selling land at below market value, allowing delayed repayment on loans, or issuing loans at favorable rates.

Basics of Tax Increment Financing in Chicago 15 Though Republic clearly failed to meet turned out that Republic had filed its man- that benchmark, the company paid no datory annual reports on the TIF project penalty. The TIF agreement had included for only 5 of the 10 years it did business at a clawback provision if the company fell Goose Island.30 below the agreed-upon jobs target, but it Reclaiming taxpayer money from failed only applied through 2006. Even before TIF projects is difficult under the best 2006, however, Republic may have been of circumstances, but stronger protec- short of its target; union organizers re- tions—especially clear and unambigu- ported fewer than 500 workers at the site ous statements of what standards will be in 2004, although a nonprofit working with used to measure the success of subsidized the city counted 750 in 2006.29 Whether development projects, and what penalties or not Republic was meeting the terms will be paid for failing to meet those stan- of its contract, the city was not keeping dards—offer the public the best possible track; when the Chicago Reader obtained insurance against losing money on failed documents relating to the TIF district via TIF projects. a Freedom of Information Act request, it

16 Cleaning up Tax Increment Financing Chicago Is Moving in the Right Direction on TIF, But Needs to Do More

ince 2009, as concerned citizens and districts. Before the law’s passage, citizens elected officials have questioned how hoping to view these documents would Chicago manages its TIF program, have had to perform a time-consuming S 31 the city has begun taking steps to reform Freedom of Information Act request. the program. The two most important of Simply making these documents avail- these steps have been the adoption of the able online is a marked improvement in TIF Sunshine Ordinance, passed in April transparency. 2009, and the release of Mayor Emanuel’s Chicago’s TIF transparency still falls TIF reform panel’s recommendations for short of the mark, however. While citizens the city. can see a broad overview of how each TIF district spent money through the districts’ annual reports, they still lack the ability to review individual contracts, and information is presented in a format that makes it difficult to access and use. Additionally, The TIF Sunshine Ordinance some required documents have still not Has Improved Transparency, been posted on the city’s website.32 But the Public Still Needs In fact, an August 2011 analysis by Il- linois PIRG found that only 30 percent More Information of the city’s TIF districts had Economic The TIF Sunshine Ordinance is intended Disclosure Agreements—documents that to allow the public and elected officials any person or group seeking action from outside the mayor’s office to scrutinize the City Council must fill out to reveal the city’s TIF spending by giving them how they stand to benefit economically access to documents that detail where and from the action—posted online for pub- how the city is spending TIF revenue. The lic viewing. Only 45 percent of districts law requires the city to post online vari- had staff reports from the Community ous documents pertaining to the creation, Development Commission posted. The management and performance of TIF TIF Sunshine Ordinance requires that

Chicago Is Moving in the Right Direction on TIFs, But Needs to Do More 17 Illinois PIRG found that Chicago has not posted The Mayor’s TIF Reform reports on the job creation and preservation Panel Report Lays Out impact of any of the TIF projects ongoing Sound Principles, but Will Need Follow-Through within the city—a necessary tool for citizens to and Specifics evaluate the efficacy of TIF spending. After taking office in 2011, Mayor Rahm Emanuel made reforming the city’s TIF process one of his early priorities. To begin, these documents be posted for every TIF he assigned a commission to review the district. Other documents not mentioned city’s use of TIF and propose reforms to by the TIF Sunshine Ordinance are none- the process. That commission returned its theless vital to full public oversight of TIF findings on August 23, 2011. activities, and should be posted for public The commission proposed a series of review. Illinois PIRG found that Chicago improvements to the TIF process in Chi- has not posted reports on the job creation cago. The key proposals in the report are and preservation impact of any of the TIF as follows: projects ongoing within the city—a necessary tool for citizens to evaluate the efficacy • Establish an overall plan for TIF of TIF spending.33 spending. The commission called Using Chicago’s TIF website, a resident for the city to produce an Economic can examine TIF districts near them and Development Plan, to be approved by see which companies have received money the City Council, which would guide from those districts through subsidies or the city’s use of TIF. contracts. One cannot, however, give the city’s TIF spending the level of scrutiny • Consider TIF in the context of the made possible when governments adopt overall budget. The commission “Transparency 2.0” best practices (see page proposed bringing TIF spending back 15). In scrutinizing TIF spending, Chicago “on the books” by including TIF proj- residents cannot yet: ects in an overall Capital Budget that would be considered and approved by • Look at the specific contracts the city the City Council. signs with contractors. • Monitor performance. The commis- • Use basic search functions to sift sion called for the creation of a stan- through large documents posted on- dard set of metrics that the city should line (documents are posted as images, use to track the progress and measure not text). Without a function of this the success of each TIF district and sort, residents cannot, for instance, project. search for the name of a company to see where and when it has received • Increase accountability. The com- subsidies. 34 mission called for strengthening the “but for” test—the requirement that Without these features, Chicago’s TIF TIF revenue only be used to fund website still fails to offer the level of trans- projects that would not take place parency required for interested residents to without public support—for TIF proj- monitor the city’s TIF activities. ects, more overtly stating the rationale

18 Cleaning up Tax Increment Financing for public funding of development laying out spending priorities—as it is for projects, more closely monitoring ordinary city spending. projects to ensure that they meet their Incorporating TIF spending in a goals, and ensuring that public money citywide budgeting process would be can be reclaimed if development an effective first step towards reducing projects fail to deliver promised the potential for abuse of Chicago’s TIF benefits. process.

• Review performance regularly. The The Reform Panel’s Proposals commission proposed that the city Would Make it Easier to Hold the should use the metrics established for City and Developers Accountable measuring TIF district performance for Delivering on their Promises for regular reviews, which could lead One fundamental step a city can take to changing development strategies or towards increasing transparency and ac- closing the district if appropriate. countability is to provide citizens with the tools to judge whether a project is a success • Enhance oversight and adminis- or failure. By requiring close tracking of tration. The commission called for how TIF districts and projects perform ac- the city to place authority over and cording to a wide range of metrics, and pro- responsibility for TIF spending in the viding citizens and elected officials with the hands of a government body with suf- ability to compare that performance with ficient staff, resources, and authority initially stated goals, the TIF commission’s to manage the TIF program proposals would make it much easier to properly.35 hold both the city government and subsidy recipients accountable for delivering on The Reform Panel’s Proposals their goals. Additionally, the reform panel Would Broaden Control Over the called for increasing accountability in con- Direction of the TIF Program tracts, establishing when and how the city By tying citywide TIF spending to two would be entitled to reclaim public money documents that would be debated and ap- if companies did not deliver the benefits proved by the City Council, the TIF Re- promised in subsidy agreements. form Panel’s proposals would address one Ultimately, such provisions will only be of the fundamental problems of Chicago’s as strong as their implementation. As seen existing TIF program: the excessive degree above (see page 14), the city had the nomi- of control wielded by the mayor’s office nal authority and responsibility to track over TIF spending. Republic Window and Door’s perfor- In large part, concerns over patronage mance on the terms of its TIF agreement, and misdealing in the TIF program stem and to penalize Republic if it fell short from the fact that the mayor’s office, with of its obligations, but allowed Republic its broad discretionary power to propose to go without even providing the basic TIF projects and direct funds to certain documentation required in the agreement. areas and away from others, can poten- Reports from subsidy recipients, and the tially use its decisions over how to spend results of the periodic reviews recom- TIF funds as a lever for political bargain- mended by the reform panel, will need to ing. Tying TIF spending to an overall be posted online so that members of the city strategy for development and capital public can confirm that the city is fulfill- spending would involve the City Council ing its responsibility to keep track of the in the process of allocating resources and results of TIF spending.

Chicago Is Moving in the Right Direction on TIFs, But Needs to Do More 19 The Reform Panel’s Proposals chance to scrutinize the claim.36 Could Reduce, but not Eliminate, Such changes could indeed reduce the Overuse of TIF overuse of TIF, assuming that the city took sufficiently strong steps to toughen its in- Illinois’s TIF law requires that projects ternal review process for TIF projects. “But meet a “but for” test—that the investment for” will always remain a difficult standard would not be possible but for the financial to enforce, however, and Chicago will need support from the public. Such a provision to approach any request for public funds speaks to the aspirations that first inspired with appropriate skepticism. TIF, but it is extremely difficult to enforce, Chicago’s TIF program currently allows since it involves speculating counterfactu- TIF districts to undergo what might be ally about future economic performance in called “mission creep”—continued spend- hypothetical situations where actual infor- ing beyond what was envisioned when the mation is not verifiable and developers have district was created, after the initial objec- strong incentives to exaggerate. Developers tives of the district have been met. Instead will always have an incentive to claim that of providing funding for an agreed-upon public investment in their project is a ne- set of projects and then ceasing operations, cessity, and the city will have limited ability districts can linger on, continuing to pro- to objectively evaluate those claims. vide revenue for projects unrelated to their The TIF reform panel called for initial purpose. The kind of TIF abuse best changes to the city’s process for evaluating represented by the Daley administration’s proposed development projects that would attempt to extend the life of the Central make the “but for” test “a challenging Loop district so that its funds could be hurdle to meet,” and to publish its “but for” used to help pay for the cost of hosting the rationale publicly for every TIF district and Olympics can only be stopped by holding project funded with TIF revenue, which TIF districts to their initial development would give outside groups and citizens the plans.

20 Cleaning up Tax Increment Financing Policy Recommendations

hicago is moving in the right direc- collect all the required reports from tion on management of its Tax-Incre- subsidy recipients. City leaders should Cment Financing program, but it still make implementation of TIF reforms, has work to do to bring its program in line and scrupulous adherence to transpar- with best practices. In particular, the city ency and monitoring requirements, a needs to expand and improve its existing top priority. transparency measures, and go beyond the reform panel’s recommendations to ensure • Collect and publish performance that TIF is used only where it is appropri- data scrupulously. The TIF reform ate. Chicago should: panel’s proposal to require reviews of every TIF district’s performance • Implement the TIF reform panel’s every five years would be a step in the recommendations. The improve- right direction, ensuring that every ments recommended by the TIF district would receive scrutiny on a reform panel would take Chicago a regular basis. Over the shorter term, long way towards solving the problems the public should have access to the with its TIF program. In particular, schedule for publishing information putting TIF spending back “on the about each TIF district, so that failure books” by including it in budgets to publish such information on time reviewed and passed by the City would be immediately obvious. For Council would reduce the problematic shorter-term accountability, informa- concentration of TIF-related spending tion about TIF districts should be authority in the mayor’s office. made available according to a schedule, which would allow members of • Make follow-through a priority. the public to track whether informa- In the past, the city has failed to take tion was being collected appropriately. all the steps necessary to protect the Subsidy recipients should be subject to public interest when issuing TIF penalties if they fail to report infor- subsidies—for instance, by failing to mation to the city on time.

Policy Recommendations 21 • Use TIF only where it promises real has at times used TIF for projects— benefits to the city.TIF spending such as its Modern Schools Initiative or redirects growth within city borders, construction of transit stations—that from areas outside of TIF districts to would fit more naturally into the over- areas inside such districts (see page 13). all capital budgets of the city, school Policymakers should be careful that district, or another local government they do not turn areas that are already body. City leaders should resist the economically healthy into TIF dis- temptation to concentrate such spend- tricts. By diverting even more activity ing under the TIF budget, and instead towards those areas, and away from handle ordinary capital needs through the rest of the city, using TIF in such the processes designed for them. circumstances exacerbates the problem of low growth in more troubled parts • Avoid accumulating large amounts of the city. of revenue in TIF accounts. TIF is intended to jump-start growth with • Limit revenue collection from immediate investments, not to save up TIF districts to exclude growth in money for large-scale future expendi- property values that would have tures. As such, TIF accounts should happened anyway. A few states, such not be accumulating large amounts as Minnesota, require tax receipts to of revenue. When TIF districts raise overlapping districts in TIF districts more money than is needed to fulfill to grow along with inflation, so that their development plans, that money the TIF district does not divert away should be declared surplus and re- revenue from those other districts that turned to the general property tax would have otherwise increased from pool. Money currently in TIF ac- natural inflation.37 A stronger measure counts that is not already committed to would index the base land value of the projects should be similarly returned, district to pre-existing growth in the unless there is a clear and specific ra- area, so that the TIF district truly tionale, tied to the district’s redevelop- captures only the incremental revenue ment plan, for keeping that money in resulting from TIF-funded investment. the district’s account.

• Stick to the redevelopment plan for • Adopt “Transparency 2.0” best each TIF district, and close districts practices for TIF spending, and once they complete the projects ini- track information about outcomes. tially planned. Districts created with a Citizens should be able to track TIF specific rationale—providing funds to a spending through a website that is certain set of development initiatives— comprehensive, one-stop, and one-click should not continue diverting money searchable (see page 15). Details about from the general budget after those each TIF district and project should be initiatives are completed. If a district is easily accessible—from initial propos- to continue with a new redevelopment als, to redevelopment plans for each plan, it should be reapproved through district, to the specific contracts the the same process required to create a city signs with subsidy recipients or district initially. service providers, to detailed data about the TIF district’s performance. The • Avoid using TIF as a substitute for city should moreover report each year ordinary capital budgeting. Chicago on its compliance with these practices.

22 Cleaning up Tax Increment Financing Notes

1 Chicago TIF Reform Panel, Findings Reader, 6 August 2009. Information from and Recommendations for Reforming the other sources is specifically footnoted Use of Tax Increment Financing in Chicago: throughout, while the bulk of the section is Creating Greater Efficiency, Transparency, and based on the aforementioned article. , 23 August 2011. Accountability 13 “The TIF That Keeps on Taking,” 2 More common in Chicago: See Note 1. Chicago Reader, 5 June 2008. 3 See Note 1. 14 Greg Hinz, “Daley Letting Huge Loop TIF Die,” Crain’s Chicago Business, 24 4 City of Chicago, Budget 2011: Overview September 2008. and Revenue Estimates, downloaded from www.chicityclerk.com/citycouncil/ 15 Based on total spending of approximately budget/2011/2011_Overview_and_Revenue_ $1 billion between 1984 and 2008. Estimates.pdf on 27 October 2011. Several 16 Ben Joravsky, “A TIF Under the smaller taxing districts also cover portions of Microscope: How to Interpret the Inspector the city. General’s Sample Audit of the Central Loop 5 See Note 1. Honeypot,” Chicago Reader, 15 July 2010. 6 See Note 1. 17 See Note 1. Revenues can also rise sharply in a given year because assessments occur 7 Mike Quigley, Cook County every three years, making it possible for a Commissioner, A Tale of Two Cities: TIF district to be created on such a schedule Reinventing Tax Increment Financing, April as to maximize revenue by capturing several 2007. previous years of property value increases. 8 See Note 1. 18 Rachel Weber and Laura Goddeeris, 9 Ben Joravsky and Mick Dumke, “The Lincoln Institute of Land Policy, Tax Shadow Budget,” Chicago Reader, 22 October Increment Financing: Process and Planning 2009. Issues, 2007. 10 Ibid. 19 Patricia Nolan and Helene Berlin, 11 Ibid. Neighborhood Capital Budget Group, “NCBG’s TIF Study Shows that TIF is Not 12 The following section is based primarily Cost-Free” in PRAGmatics, Summer 2002. on Ben Joravsky, “Mr. Big Spender,” Chicago

Notes 23 20 Rachel Weber, Rebecca Hendrick, 28 The initial agreement called for 610 and Jeremy Thompson, “The Effect employees; it was amended to 549 after the of Tax Increment Finance on School company missed that target in 1998 and 1999. District Revenue: Regional Variation and Ben Joravsky and Mick Dumke, “Show Us Interjurisdictional Competition,” State and the Money,” Chicago Reader, 19 March 2009. Local Government Review, Vol. 40, No. 1 29 750: Mick Dumke, “Money for the (2008), 27-41. Taking,” Chicago Reader, 19 March 2009. 500: 21 Illinois Tax Increment Association, About Ben Joravsky and Mick Dumke, “Show Us TIF, downloaded from www.illinois-tif.com/ the Money,” Chicago Reader, 19 March 2009. about_TIF.asp, 23 September 2011. 30 Mick Dumke, “Money for the Taking,” 22 “It’s Our Money” (editorial), Chicago Chicago Reader, 19 March 2009. Tribune, 9 November 2009. 31 See Note 27. 23 Richard F. Dye and David F. Merriman, 32 Ibid. “The Effects of Tax Increment Financing on Economic Development”, Journal of Urban 33 All information about quantity of Economics, September 1999. documents posted is from Celeste Meiffren, Illinois PIRG, Shining a Light On Tax 24 See Note 9. Increment Financing in Chicago, August 2011. 25 Ibid. 34 See Note 27. 26 Office of the Inspector General, City 35 See Note 1. of Chicago, Report of the Inspector General’s Office: TIF Public Benefits Clauses and 36 Ibid. Charitable Donations, 4 October 2011. 37 See Note 18. 27 Celeste Meiffren, Illinois PIRG, Shining a Light On Tax Increment Financing in Chicago, August 2011.

24 Cleaning up Tax Increment Financing