TIFs are the brainchild of politicians trying to figure
out ways to give money back to their campaign donors.
— Jim Bosco, to NBC Chicago
Where should one begin on this disaster? I already wrote a fairly long post about how most people, including the media, do not understand what a TIF is or how it works. I would also encourage everyone to take the time to read Ben Joravshy’s excellent work over at the Chicago Reader covering the subject.
But the basics of why TIFs are bad can be summed-up in three major points:
- The create a short term gain and a long term liability;
- They are not necessary to development as claimed, in fact they may be counter to correct development; and
- The bulk of the money goes to friends of connected politicians.
Let’s take them in order.
1. BASIC TIF FUNCTION – GAINS AND LIABILITIES
TIFs create a long term taxpayer liability, weakening our city and burdening our children. They do this by taking an area of land that is heavily blighted, i.e. has many empty lots or abandoned buildings, and placing it in the “TIF District.” Once that happens, a property tax baseline is set for all of the properties within the TIF. That does not mean that property taxes will not go up. Oh no, far from. What it does mean is that when property taxes go up, any increase in property tax revenue within the TIF does not go into the appropriate taxing funds, e.g. schools or city operations, but into the TIF fund.
Consider for example we’re in the year 2000 and the city wants to create a new TIF district. So the city goes through the necessary legal hoops, maps out the area, and creates the TIF. Assume in our example TIF, in 2000, there are say 100,000 people living in maybe 30,000 residential units, paying a total of $1 million in property taxes. And there we have our property tax baseline, $1 million.
So what’s the first thing the TIF does? Hire people to help manage the TIF and issue bonds to raise money. Why? Because the TIF initially has no money, zero. It will make money later when the property taxes within the TIF go up, but initially it has to borrow some money to get going. So the first product of a TIF is more bureaucrats and debt.
Once functional, the TIF gives money to businesses and developers to buy land, finance projects, remodel offices and other things that will help expand the tax base of the TIF. Naturally many of these developers are politically connected and they use this to their advantage. Throughout the TIF program the most common project is to build residential housing. So a typical example may be something like a developer gets a nice piece of vacant land from the city, paid for by the TIF, on which to build housing.
The issue is that the vacant land required no city services. An empty lot didn’t need any garbage pick-up, snow removal, schools, or police, fire, or EMS services. An empty lot doesn’t need affordable housing, never goes to the doctor, doesn’t get sent to jail, or ever go to the library. But in the name of “development” the TIF is going to fund a developer to build on the empty lot. This happens again, and again, and again. Such that pretty soon, the dynamics of the TIF district have changed.
So 10 years later in 2010, our sample TIF district went from 100,000 people to 150,000 people, in 45,000 residential units, who are paying $1.5 million in property taxes. And “Success!” cry the TIF supporters, “The TIF District now has 50% more property tax revenue than it had before. Development worked.” But not so fast…
Remember how there was a $1 million property tax baseline? Well, the property taxes used for operations and schools is still only $1 million. The extra $500,000 does NOT go into operations or school budgets; it goes into the TIF.
But the TIF district now has an extra 50,000 people. Some are children and need schools. Some are sick and need EMS and a medical clinic. Others enjoy the library and still other get into trouble with the police. All produce garbage that needs to be picked-up and removed. But there are no additional funds in the operations or schools tax bases to pay for these services; all the extra money went into the TIF.
So what the TIF does is create immediate debt in the form of labor and bonds, and then a short term gain of some additional housing coupled with a long term debt of being unable to pay for the services of those who moved into the new housing. This is why at a recent aldermanic forum I called TIFs a “ponzi scheme sanctioned by the government.”
2. DEVELOPMENT — POSITIVE OR NEGATIVE
People who don’t understand TIFs often say things like, “TIFs are necessary to development.” This is incorrect. For starters consider this simple fact: TIF were created in the 1950’s and were not legal in Illinois until the late 1980’s. Really, the late ’80s.
Ask yourself one simple question: If TIFs are necessary for development, how did the city of Chicago grow from it’s inception back in 1837 to the late 1980’s without TIFs? Think about that. 150 years of growth without TIF’s. Surely there were ups and downs, but Chicago experienced its most explosive growth during a time before TIF’s came along.
Further, when a developer gets a piece of land, financing, or other services from the TIF it lowers the developer’s costs. This causes an interesting thing to happen. This developer has a competitive advantage over a developer who has to buy land or services at market rate. Therefore, this developer can sell units either cheaper or at a higher margin than the developer without the TIF. This interferes with the market forces, causing more units to be built in TIF districts than would otherwise by market forces alone. This over-development has caused Chicago’s housing market to be overly sensitive to the nationwide collapse in real estate. In Chicago we have overbuild so many housing units that we have damaged not only the home owners market but also the rental market. Thousands of condos build to be owner occupied are now rentals. Standard rental apartments are going unfilled because of the cheap flood of rental condos.
Chicago’s real estate market is a disaster and TIFs are partly to blame.
3. THE PAYOFF
Here’s just a partial list of some not so well deserving TIF recipients:
- UPS, $6.9 million (2nd Ward)
- CNA, $13.7 million (2nd Ward)
- Miller-Coors, $6 million (2nd Ward)
- CME Group, $15 million (2nd Ward, this is the Chicago Merc. Exchange)
- Willis Holdings, $3.9 million (2nd Ward, this is the Willis Tower folks)
- NAVTEQ, $5 million (2nd Ward)
- Ziegler, $2.5 million (2nd Ward, this is an investment firm)
- United Airlines, $25 million (2nd Ward)
- CareerBuilder, $2.9 million (42nd Ward)
- Quaker Oats, $11 million (42nd Ward)
Others include the Wrigley Innovation Center ($15 million) and Sara Lee on Goose Island, several Target stores, a Mercedes Benz dealer, and a host of others.
Not one of these projects was in a “blighted” area. Nor were any of these project cost justified on a ROI bases. Every one was handed out as a thank you from the mayor or an alderman to a large corporate sponsor.
In talking with someone about TIFs the other day I told them, “There are only two kinds of people when it comes to TIFs: those who think TIFs are ok because they don’t understand what they are, and those who understand what TIFs are and know they are evil.” Naturally I did forget one additional kind of person, the current ruling class that is fully aware of the pure evil that TIFs represent but likes them anyway because of the amount of taxpayers money they can dish out to friends and campaign contributors.
As I wrote in my response the Chicago Tribune’s questions, “Right thinking people should lobby Springfield to repeal the TIF statute.”