Income Inequality: A look at how all cities are not created unequal and some are more unequal than others

Income inequality is a growing problem in municipalities across the country. The latest U.S. Census Bureau data confirms that overall, big cities remain more unequal places by income than the rest of the country and the problem has gotten worse in recent years. The Brookings Institution released a study that shows the increases in income inequality in the country’s largest 50 cities.

Income inequality can be measured by using the “95/20 ratio”. This figure represents the income at which a household earns more than 95 percent of all other households, divided by the income at which a household earns more than only 20 percent of all other households. Essentially, it represents the distance between a household that just cracks the top 5 percent by income, and one that just falls into the bottom 20 percent. In the last 35 years, members of the top 5 percent have generally experienced rising incomes, while those in the bottom 20 percent have seen their incomes stagnate.

The big cities with the highest 95/20 ratios in 2012 were Atlanta, San Francisco, Miami, and Boston. In each of these cities, a household at the 95th percentile of the income distribution earned at least 15 times the income of a household at the 20th percentile. In Atlanta, for instance, the richest 5 percent of households earned more than $280,000, while the poorest 20 percent earned less than $15,000. In another six cities (Washington, D.C., New York, Oakland, Chicago, Los Angeles, and Baltimore), the 95/20 ratio exceeded 12. Overall, 31 of the 50 largest U.S. cities exhibited a higher level of income inequality than the national average.

Source: The Brookings Institution

 

Interestingly, the study found that in many cities, inequality rose, not because the rich got richer while the poor got poorer – but because the rich became somewhat poorer while the poor got much poorer.

A city where the rich are very rich and the poor very poor means a far too narrow tax base from which to sustainably generate revenue that would allow the city to provide services. It also makes it increasingly difficult for cities to maintain mixed-income environments thus creating concentrations of poverty that have proven disastrous for residents living in those environments, especially in policy areas like housing, public safety, and education. For example, in education, research has shown that there exist tangible benefits for low-income children learning in mixed-income environments. The increased stratification in communities means a reduction in the benefits of learning in a mixed environment. Likewise, public housing projects decades ago demonstrated the public safety impact of concentrated poverty.

Moreover, this analysis requires an understanding of regional economic and mobility trends – particularly the fact that a larger percentage of people in poverty now live in suburbs as opposed to cities. Those whose incomes decline face increasingly limited options of where to live and are oftentimes forced out of the city. In Chicago for example, almost a quarter million residents  left the city over a 10 year period. A large number of these moved to areas immediately south and west of the cities borders – particularly areas with lower taxes, a lower cost of living, but less social service infrastructure to handle high-need populations. High-income households did not lose much ground during the recession. however, Alan Berube of Brookings states that low-income households lost ground and haven’t gained it back. The pressures around the cost of living are higher at the low end than they are at the high end, thus the resulting population loss in areas where residents can no longer afford to live.

No doubt, these factors have generated calls for action at various levels of municipal government and community organizations. In Chicago, the Workers Organizing Committee of Chicago’s  “Fight for 15” calls for an increase in wages to $15 for workers. They argue that an increase in the living wage means fewer individuals and families relying on government assistance. New York’s new Mayor Bill de Blasio has identified income inequality as a key policy area for action. He proposes shifting the tax burden, but also the implementation of initiatives that would attract middle-class families with cheaper housing and better schools. Minneapolis Mayor Betsy Hodges has made equity a central part of her list of priorities and in San Francisco which saw one of the highest increases in income inequality, equity has become a hot topic.

It is incumbent upon mayors across the country to prioritize income inequality and develop sound policy that not only preserves growth, but also creates opportunities for individuals and families to rise out of poverty. Ensuring that large segments of the population are not being left behind economically is not only necessary for healthy, growing communities, it is necessary for a city to truly thrive.

 

 

Breaking Bonds: Understanding Chicago’s fiscal crisis and how to avoid the tightening noose

For the last couple of weeks, the Chicago Tribune has been running a series called “Broken Bonds” that throws the covers off of the obscure and complicated world of municipal finance and details what happens when cities turn to desperate and unsustainable mechanisms to address  financial woes. What lies beneath should concern the average citizen because the implications of the city’s spending and borrowing will indubitably impact quality of life for years to come.

A mayor who prides himself on making tough decisions, has instead opted to use short term fixes for the city’s long term problems by relying heavily on bond money. Municipal bonds are loans. The bond holder is the creditor, and the bond issuer is the borrower. The issuer of the bond in this case, is the city of Chicago and since the bond issuer is indebted to the bond holders, it is required to pay them interest and/or repay the principal at a later date. As Chicago issues bonds, it incurs more and more debt.

Municipal bonds are typically used to finance long-term infrastructure projects and investments such as schools, roads and highways, utilities, sewer and water systems, and other public projects.  However, a review of the city’s fiscal practices reveals that the City has become reliant on bond money for general day-to-day operations. Not only that, the city has used bond money to pay for other non-capital projects such as equipment, pension payments, and racial discrimination and policy brutality lawsuits, possibly abusing the federal tax code.

One tragic example is the story of Joseph Regalado. The City ended up covering the $28 million a jury awarded to him in 1999 after the jury found that, years earlier, a Chicago police officer had beaten him in the back of the head and neck with a blunt object, which ripped apart an artery and cut off the blood supply to his brain. The injuries left Regalado unable to walk, talk or care for himself. The judgment won’t be paid off until 2019 at the earliest; by then, the total cost will have grown to $53 million. About $54 million from a tax-exempt bond helped cover a legal judgment awarded to African-Americans who were denied a chance to become firefighters by a 1990s entrance exam that favored white applicants. Tax payers are essentially paying for the city’s misdeeds since future property taxes help pay interest on the bond debt used to pay off these judgments.

Photo by Zbigniew Bzdak – Chicago Tribune

While cities across the country are grappling with fiscal challenges – not the least of these is Chicago’s northern neighbor, Detroit – Chicago has racked up more general obligation debt per capita than any of the 10 largest U.S. cities with the exception of New York. In fact, Chicago actually has more general obligation debt than Detroit, which became the largest city in the country’s history to file for bankruptcy earlier this year.

63 percent of all property taxes collected in Chicago go toward debt payments as of last year. At $7.2 billion of debt as of last year, the total bill will amount to twice that amount when interest is included. Several facts become apparent when considering possible solution to the city’s debt crisis. As it relates to spending, the city needs increased oversight, more accountability, more transparency, and more public input. As it stands there is very little oversight on the city’s bond practices. City Council is perhaps the only opportunity for bond deals to be vetted. With a decidedly weak council and strong mayor, ordinances that give the mayor wide latitude to issue debt have been passed time and time again.A referendum protocol, though costly, would provide more public accountability to projects funded by bond money. Moreover, this heightened public accountability and a stronger council would help minimize polluting the finance process with deals only embarked upon for political reasons, such as those detailed by the Chicago Tribune in which politically connected developers were able to complete pet projects with bond money.

It is absolutely imperative that the City of Chicago track bond-funded projects. City officials have stated that they have not done so because the computer program used to plan and budget for them doesn’t match up with the software that records actual spending. This is unacceptable. Bond-funded projects must be traceable and trackable. This facilitates higher accountability about just how bond money is spent. Moreover, Chicago is one of the very few municipalities across the country that does not put bond-funded projects to a public referendum. This would ensure much more transparency by requiring information on how bond money will be spent and also ensures buy-in and voter approval before projects are begun. It will also provide some checks on drastic cost overruns that end up costing taxpayers millions more dollars than originally anticipated for these projects.

Photo courtesy of the Chicago Tribune http://www.chicagotribune.com

The other factor that will be critical in assessing the city’s future fiscal health is its ability to retain population. The city has lost hundreds of thousands of residents over the last ten years, thus decreasing the tax base that is so vital to supporting the city financially. Moreover, the high volume of foreclosure solidifies the inability to maximize property taxes that are a critical source of revenue for the city. The current mayor’s strategy of destabilizing communities by closing public schools, and mental health clinics, and difficulty in curbing crime has negatively impacted the city’s ability to retain population. Coupled with increased fines and fees via speed cameras, red light cameras, and tickets, and it’s become more difficult than ever for the vast majority of Chicagoans to say in the city.

Securing the fiscal future of the city is about more than just the numbers; it’s about the people. Investment in Chicago’s human capital, particularly in the city’s neighborhoods, is critical to ensuring  a strong labor force. This, coupled with a push to both create and retain  jobs in high-wage, high-value sectors such as manufacturing and health care will help create a population that is financially able to pay the taxes that support municipal government. Supporting small businesses and creating stability in Chicago’s neighborhoods is just as important as devising creative ways to share debt load across generations.

Chicago must set an example for other municipalities by being willing to make the hard decisions that will secure both its present and its future and do so before the ties that bind the city’s future become a noose.

 

 

Fines, fees and frustration: Why balancing a budget on the backs of taxpayers is bad news for Chicago

Municipal revenue generating schemes are becoming more and more like a noose – they keep getting tighter and tighter. Eventually, it will strangle its victims, the taxpayers. In announcing Chicago’s proposed 2014 budget, the first thing proponents giddily declare is that the budget contains no new property, sales, or gasoline taxes. A closer analysis of the budget includes measures that give residents little to celebrate, and in fact speak to a much more troubling, unsustainable trend of  revenue-seeking by the City.

The most recent budget includes $34.2 million in higher taxes, fees and fines. Many supporters of the Mayor Emanuel’s budget have applauded City Hall for trying to find ‘creative’ ways to raise revenue.  However, when the most obvious change focuses more on increasing fees and fines to taxpayers instead of more substantial and longer-lasting spending reductions, creativity seems hardly the appropriate word. The city’s focus on increasing fines and fees is unsustainable and creates even worse economic conditions for the entire city.

The issue not addressed by the budget is the city’s declining population. Over the last ten years Chicago lost roughly 200,000 residents – mainly from the city’s West and South sides. While some may say “good riddance” to those individuals and families, the truth of the matter is that those are tax dollars that are bleeding out to suburban municipalities. In other words, the city loses the property tax, sales tax, and any other tax the city would have gained by virtue of their still residing within city limits. Indeed, they event represent additional potential revenue from some of the tickets, fees and fines now concentrated on a smaller population. The math is simple. Fewer residents = less revenue. It stands to reason then, that the city’s leadership would put effort into understanding how to retain residents, such as intentional economic and human capital investment in some of the city’s most challenged community areas.

Photo courtesy of http://www.theguardian.com

Instead, the new budget chips away at whatever good will exists on the part of residents.  For example, if you own a car in Chicago, now may be a good time to consider other transportation options (although if some aldermen have a say, switching to bicycles won’t alleviate fines and fees either). Mayor Emanuel is counting on $120 million in fines from red-light and speed cameras and $10 million more from higher parking fines and impounded vehicle storage fees to balance the $6.97 billion 2014 budget.

Most of the six parking fines targeted for increases have been frozen for years. They include: $60 for parking illegally on streets being cleaned; $110 for parking within 15 feet of a fire hydrant; a three-fold increase to $75 for RVs, taxicabs and trucks parked on residential streets; $100 for parking illegally during rush periods and $250 for parking in spaces designated for people with disabilities.

The easy response for those who point out the fines and fees for red light cameras and speed cameras is “don’t break the law”. But what happens when more drivers actually do follow the law? The revenue will decrease, and then what? How will the city recoup the lost revenue? At its core, taxpayer-driven revenue schemes are unsustainable because they do the very thing the city claims it wants them to do – it changes people’s behavior. Residents will  begin buying goods and services elsewhere. They’ll drive less. They’ll go and engage in citywide activities  less. And eventually, they will move out more thus sticking an ever decreasing population with the burden of plugging the city’s budget shortfall. Punitive fines should not be a revenue on which the city depends. Instead, they should be an excess of dollars for the treasury. Chicago’s city government has become overly reliant on these sources.

Instead of balancing the budget on the backs of taxpayers, it’s time for the mayor to take a long look at the way the city does business. As a start, strengthening the Office of the Inspector General could facilitate a complete audit of all insider deals that currently take place out of City Hall and end up costing taxpayers millions of dollars.  The Office should also investigate the business-dealings of elected officials, explore conflicts of interests, and root out under-the-table deal-making the benefits a select few politically connected individuals and corporations.

The city should also re-evaluate how we attract companies to locate here. Currently, Chicago (and many other municipalities and states, even), in an effort to attract companies, heavily subsidize them with tax incentives. This limits the benefits of having large companies locate here. In addition to jobs (which aren’t always going to benefit Chicago residents), the city could stand to benefit from taxes generated from companies that decide to locate in Chicago.

The city should also enact wholescale TIF reform. More transparency and oversight is imperative if taxpayers are to actually reap some of the benefits of TIF districts. Indeed, more oversight and public input could lead to funds that are spent on improving schools, infrastructure, and other capital projects that can benefit neighborhoods. TIF dollars should never be seen, or used, as a tool to wield power over city council members. That money belongs to the public.

These are a few suggestions that would enact long-term cost reductions that will save the city money and facilitate reduced spending and over-reliance on taxpayers to fill budget gaps. One hopes that the Mayor is sensitive to the outcry spurred by the 2014 budget, but the last two years have shown a glaring disconnect between the will of the people and the policies that emerge from City Hall across issues from education, public safety, economic development, and now, the budget. It’s beginning to feel as though the mantra from City Hall is “let them eat cake.” With 2015 elections around the corner, let’s hope Mayor Emanuel remembers the fate of Queen Marie Antoinette.

 

 

According to the National League of Cities, city financial health is improving nationally, but still on shaky ground

The National League of Cities’ which advocates on behalf of 1,700 member cities
recently revealed its 28th annual survey of city finance officers. This report shows an overall picture of a gradually improving economy and improving city fiscal conditions. A majority of city finance officers report that their cities are better able to meet financial needs in 2013 than in 2012.

This is largely a result of slowly improving housing markets and increased consumer spending, which are strengthening local tax bases and economic outlooks in local and regional economies. However, continued high levels of unemployment, uncertainty about federal and state actions, and long-term pension and health benefit obligations continue to constrain the potential for strong economic growth for many cities.

Beyond 2013, the report finds that a number of factors will play a role in determining the fiscal conditions of cities:

• The strength of the real estate market and its impact on property tax revenue
• The level of consumer confidence, employment, and wages
• The costs of healthcare coverage and pensions
• The continuation of cities operating with reduced workforces and service levels
• External policy shifts in the face of an economic recovery, including cuts in federal spending and threats to regional-local economic conditions from political gridlock on issues such as the federal budget and U.S. debt ceiling

Here are some key findings

Revenue Trends

• For 2013, city finance officers project a small year-over-year increase in general fund revenues measured in inflation-adjusted dollars – the first increase since 2006.
• In a shift from prior years, more city finance officers report increases in the local tax base (51%) and the overall health of the local economy (66%).
• Property tax revenues continued to decline in 2012 and are projected to decline in in 2013, reflecting the lagged impact of real estate market declines.
• Sales tax revenues and local income tax revenues experienced marked increases in 2012, with projections for further growth in 2013.
• Ending balances increased in 2012 as cities began to rebuild reserves that were used to help weather the aftermath of the Great Recession. Similarly, general fund expenditures declined in 2012 and are projected to increase marginally in 2013.

Pressure Factors

• Factors putting pressure on city budgets include infrastructure costs, public safety costs, employee-related costs for health care, pensions, wages, and cuts in state and federal aid.
• Leading the list of factors that finance officers say have increased over the previous year are health benefit costs (84%) and pension costs (80%).
• Infrastructure (79%) and public safety (69%) demands were most often noted as having increased among specific service arenas.
• Increases in prices, or costs of services, were also noted by the majority of city finance officers (81%).
• Leading factors that city finance officers report as having decreased are levels of federal aid (49%) and state aid (48%).
• Confronted with these pressures and conditions, cities are maintaining local services while continuing to reduce personnel costs for pensions, health care benefits, and employee wages.

Revenue Actions and Spending Cuts

• As has been the case for much of the past two decades, regardless of the state of national, regional, or local economies, the most common action taken to boost city revenues has been to increase the amount of fees charged for services.
• Two in five (39%) city finance officers report that their city has raised fee levels.
• Approximately one in four cities increased the number of fees that are applied to city services (22%), and one in five (19%) cities increased the local property tax in 2013.
• Since the mid-1990’s, the percentage of city finance officers reporting increases in property taxes in any given year has been reported at about this same level, reflecting state- and voter-imposed restrictions on local property tax authority as well as the political challenges of raising property tax rates.
• Increases in sales, income or other tax are even less common than property tax increases, and this continued to be the case in 2013.

The problematic pension puzzle: It’s not just a concern for retirees anymore

http://www.ChicagoTribune.com

Pension obligations have become the bane of the existence of municipalities around the country and no where is this more true than Chicago. In fact, Vice President and Senior Analyst for Moody’s Rating Service called Chicago “an outlier among U.S. municipalities” because of the sheer magnitude of Chicago’s unfunded liability, both nominally and as a percentage of operating revenues.

The city’s pension fund is in danger of becoming insolvent in the next one or two decades. In last year’s budget, the pension funds paid out $1.7 billion in benefits to retirees, compared with only $440 million put in by the city. Last week, Chicago Mayor Rahm Emanuel made an attempt to do what he accuses the Illinois legislature of doing on the State’s pension crisis for too long – trying to buy more time. According to a state law approved while Richard M. Daley was mayor, the city is required to put in nearly $600 million more in contributions to police and fire pensions starting in 2015. That additional amount is about one-fifth of the city’s day-to-day operating budget.

The mayor indicated he’s going to try to push the day of reckoning into the future. The measure being put forth by Emanuel’s chief Springfield ally Senate President John Cullerton D-Chicago, would require a series of small city property tax increases starting in 2018 – three years into what would be Emanuel’s second term as mayor. It would also delay the need for big increases in city pension payments to 2022. The warning signs have been flashing red on this issue for some time. Standard & Poor’s Rating Services issued a negative outlook on Chicago’s general obligation bonds nearly two weeks ago. That followed Moody’s Investors Service’s decision to drop the city’s general obligation bond rating three notches in July. The Moody’s move came a month after Fitch Ratings put the city’s rating on review for a potential downgrade. All three ratings services cited the city’s bleak pension outlook.

An analysis of the characteristics of the cities with the highest pension liabilities – cities like Jacksonville, Fla., Los Angeles, Dallas, Houston, and Phoenix – shows a troubling trend – all of these cities have experienced large declines in population which have resulted in declining tax revenues. In prosperous municipalities with growing tax bases such as Washington DC (where pension is only 11 percent of annual revenue) and Wake County, North Carolina (where pension liabilities add up to only 15 percent of annual revenue), the pension costs are easily managed. Strong investment gains can also relieve the fiscal pressure.

None of this bodes well for Chicago residents. Chicago has experienced a steady decline in population over the last decade. Some of Chicago’s most challenged communities like Austin and North Lawndale on the city’s West Side and Back of the Yards and Roseland on the city’s South Side have lost tens of thousands of residents. The abandoned homes – many emblazoned with the ominous red “X” are a testament to the mass exodus. Without targeted economic development in these areas, and without social service infrastructure to support struggling families there is little expectation that the city’s tax base can be shored up substantially enough to generate much-needed revenue.

A second critical factor is that pensioners are typically public sector, middle class employees and many reside in the city’s African American, Latino and white ethnic enclaves. The livelihoods of families in those middle-class communities are at stake. Indeed, the pension crisis will put even more pressure on these families who have already experienced severe cuts in services, increases in fines, fees and overall cost of living in recent years. This lethal combination could push even more of the tax base out of the city, thinning out the middle class and further damaging the public sector.

Compounding the issue is the fact that the Emanuel administration has done very little to engender good faith with public sector unions over the last year. In addition to the fiery showdown against the Chicago Teachers Union, run-ins against SEIU, and now the tense stand-off with the Police and Fire unions, it’s clear that coming to a decision will be difficult.

The Police Union alone is 30 percent underfunded and Fraternal Order of Police President Mike Shields fought against the city’s proposed deal which would have required sergeants to pay more toward their retirement, raised the retirement age, lowered cost-of-living increases and required retired sergeants to pay part of their health care costs. Those negotiations have been on ice since early this summer.

Photo courtesy of http://www.governing.com

One thing is certain: the can has been kicked about as far down the road as it will go. A delay will not solve the problem of the city’s unfunded pension liability. In fact, it may worsen the health of the pension plan and put it on a faster track to depletion of assets. Mayor Emanuel sites Louisville, KY as a possible model for pension reform. However, he may be better suited to examine the pension negotiation process implemented by Atlanta Mayor Kasim Reed.

Reed guided Atlanta’s City Council to a unanimous landmark agreement on sweeping pension reform only a year after taking office. The plan overhauled the the pension plan for new hires as well as existing employees, shifting to a defined-contribution plan and increasing workers’ contributions by 5 percent across the board. The overhaul – along with other fiscal reforms the mayor has achieved – puts the city on its soundest fiscal footing in a generation. The key? Collaboration and determination to tackle pension reform so his successors won’t have to. First, Mayor Reed is known for his pragmatic, bi-partisan approach which he attributes to his 11 years in the state Legislature. While there, he earned accolades from leaders on both sides of the aisle with Lt. Gov. Casey Cagle, a Republican stating that Reed “genuinely puts what’s in the best interest of the city and state ahead of politics.” This is a far cry from the slash and burn, take-no-hostages approach of Chicago’s mayor.

Moreover, Reed is committed to tackling the pension problem regardless of the political implications. Indeed, he stated that “This was going to blow up at some time, either while I was in office or shortly after I got out. I could have duct-taped it and escaped. But it was going to explode on a new mayor.”

A refreshing take from a mayor thinking about the city he will leave behind once his tenure is complete. Unfortunately for Mayor Emanuel, the realities pose an inconvenience for the politics. If the city were to pay for the increased pension tab solely with property tax revenue, homeowners would see a hike of nearly 50 percent on the city portion of their tax bills. Moreover, the 2015 budget must be proposed and the council must approve it late next year, just as the municipal election season gets underway.  But in the mayor’s own words, his re-election should not be the focus. Rather, it’s the potential burden on taxpayers. I agree.

 

“It’s war”: Detroit’s bankruptcy filing as the latest battleground in the national struggle between cities and pension funds

Photo courtesy of http://www.cnnmoney.com

“It’s war” declared Greg Orzech, chairman of Detroit’s police and fire pension fund last week after Detroit’s history-making Chapter 9 bankruptcy filing. Pension funds and other creditors reacted with outrage, disappointment and a vow to fight last week’s decision. Detroit is the largest city in U.S. history to file for bankruptcy. While the move was anticipated, given tension between creditors and pension funds fighting tooth and nail in cities across the country, Detroit’s filing could set a precedent for other municipalities especially as it relates to a city’s handling of its debt obligations under a Chapter 9 filing.

Last Friday, Detroit city pension funds sued Republic Gov. Rick Snyder and the city’s emergency manager, saying they could not use bankruptcy to reduce the pensions of about 30,000 current and retired workers to help ease the city’s $18-billion debt. They contended that the pensions were protected by the state constitution. Ingham County Circuit Judge Rosemarie Aquilina ruled in favor of the pension fund suits, saying that the bankruptcy filing had violated the Michigan Constitution and that the governor lacks the power to “diminish or impair pension benefits.”  The state attorney general’s office filed an emergency appeal with the Michigan Court of Appeals late Friday.

During a month of negotiations, Detroit’s emergency manager Kevyn Orr was only able to reach a settlement with two creditors: Bank of America Corp. and UBS AG. Both entities have agreed to accept 75 cents on the dollar for approximately $340 million in swaps liabilities. Orr insisted he “bent over backwards” and negotiated in good faith during more than 100 meetings with creditors.  He also accused unions of refusing to negotiate on behalf of the city’s 30,000 retirees. Metro Detroit AFL-CIO president Chris Michalakis and Michigan State AFL-CIO president Karla Swift said in a statement that the City of Detroit needed to put the needs of residents before those of “out-of-town” creditors.

In general, employee pensions and other retiree benefits are a major factor in municipal financial distress. In Chicago, Mayor Rahm Emanuel has blamed Illinois’ pension crisis for Chicago Public Schools layoffs (more than 2000 employees were laid off last week) and for the city’s bond rating drop. When Central Falls, R.I. declared bankruptcy, the town of 20,000 had been trying to renegotiate its pension contracts for months with no success. When it filed for bankruptcy in August 2011, the slate was essentially wiped clean. The city then immediately moved to change its labor and retiree agreements. The final agreement slashed pensions by 55 percent (although funding from the state’s general assembly reduced that cut to 25 percent for the first five years).

Detroit Emergency Financial Manager Kevyn Orr, left, announces that he filed for municipal bankruptcy during a news conference at the Coleman A. Young municipal building in Detroit on July 18, 2013.
(Photo: Romain Blanquart, Detroit Free Press)

In a nutshell, the Central Falls case showed cities that pensions were not “untouchable”. Two cases in California could further solidify that notion. Stockton and San Bernardino both filed for bankruptcy and are arguing that the California Public Employees Retirement System (CalPERS) should be treated like any other of the city’s creditors (by taking cuts right alongside the city’s other bondholders and shareholders). If a judge rules that the pension systems can indeed be treated like other creditors, many expect the case to make its way to the U.S. Supreme Court.

Early this year, the Pew Center released a survey showing that 61 of the nation’s largest cities — limiting the survey to the largest city in each state and all other cities with more than 500,000 people — had a gap of more than $217 billion in unfunded pension and health care liabilities. While cities had long promised health care, life insurance and other benefits to retirees, “few … started saving to cover the long-term costs,” the report said.

But, barring a settlement now with public-sector unions, it’s hard to see cuts not being part of Orr’s plan in Detroit: relying on a bankruptcy judge to rule that federal law trumps the state constitution. Such a ruling, once made, could change how public employees across the country see their futures, how their unions negotiate contracts, and how their retirees — some of whom, like police and firefighters in Michigan, don’t contribute to or receive Social Security benefits because their pensions were expected to be guaranteed — pay the bills.

The negotiations in Detroit are likely to be long and complex and the effects will no doubt ripple across municipalities around the country struggling with pension obligations and strapped finances. Public employees are unlikely to wait with baited breath on the sidelines. Their very livelihoods depend on the outcome.

 

 

 

 

D-Day in “Tha D”: Detroit becomes largest city in U.S. history to file for bankruptcy

Photo courtesy of Romain Blanquart/Detroit Free Press

They warned this would happen, and yet the news is still shocking. This afternoon, the City of Detroit filed for Chapter 9 bankruptcy protection.  Analysts across the country have begun to pick apart the sequence of events that led to current circumstances. How did it get to this point? If the city proceeds, it would be the largest municipal bankruptcy in U.S. history, in terms of the city’s population of about 700,000 and the amount of its debts and liabilities, which city Emergency Manager Kevyn Orr estimates to be as high as $20 billion.

In June this year, Orr issued a proposal for creditors as he maneuvered through debt negotiations. The proposal outlines the major issues that led to the Chapter 9 filing – decades of mismanagement, extremely high unemployment, and drastic population loss which led to a loss of tax revenue for the city. Indeed, the city’s population has declined by 63% since its postwar peak, including a 26% decline since 2000. In June 1950 Detroit had 1,849,600 residents. By June 2000 that number had fallen to 951,270 and by December 2012 the city’s population tottered at 684,799. Likewise, unemployment has skyrocketed from 6.3% in June 2000 to 18.3% in June 2012.

Detroit’s eroding tax base has been one of the biggest challenges. Property tax revenues have decreased by approximately 19.7% over the past five years as a result of declining assessed values of properties. Income tax revenues decreased by $91 million since 2002 (approximately 30%) due mainly to high unemployment driving lower taxable income of City residents and non-residents working in the City.

The pension problem looms especially large in Detroit where two pension funds sued Orr and Gov. Rick Snyder in an attempt to block Orr from slashing pension benefits for thousands of current and active city workers as part of his plan to restructure the city’s massive debt.. The City is not making its pension contributions as they come due and has deferred payment of its year-end Police and Fire Retirement System contributions . As of May 2013, the City had deferred approximately $54 million in pension contributions related to current and prior periods. By the end of the fiscal year (June 30th) Detroit will have deferred over $100 million of pension contributions. The city is, for all intents and purposes, insolvent. Absent ongoing cash intervention (primarily in the form of payment deferrals and cost cutting) the City would have run out of cash before the end of FY 2013. Without restructuring, the City is projecting to have negaitve cash flows of $198.5 million in FY 2014. And to top it all off (though not surprising), the City’s credit ratings have continuously declined during the past decade. No U.S. city has lower credit ratings than Detroit.

Going beyond the numbers

Detroit emergency manager Kevyn Orr/Andre J. Jackson/Detroit Free Press

The  horrendous statistics are more than just numbers. They factor directly into quality of life for Detroit residents. It is virtually impossible for the city to provide basic needs and services such as public safety – and Detroit can ill-afford reductions in public safety support. In 2012 the City had the highest rate of violent crime of any U.S. city having a population over 200,000 (based on the FBI’s Uniform Crime Reports database). The city’s violent crime rate is five times the national average. Emergency Management Services and Detroit Fire Department response times were found to be extremely slow when compared to other cities (15 minutes and 7 minutes respectively). this has caused some residents and business owners to take matters into their own hands by creating private security forces in certain areas of the city.

As of April 2013, approximately 40% of the City’s street lights were not functioning and the ones that are functioning are scattered across the City’s historical population footprint (and thus are not focused to meet the current population’s actual needs). And unfortunately, it doesn’t look like residents who have complained will get a response in a timely fashion. As of April 2013, the City estimated there was a backlog of approximately 3,300 complaints regarding street lights. The  City has enacted other cutbacks that will have a substantial impact on quality of life. In 2008-2009 the City closed 210 parks taking the number of parks from 317 to 107. Many of the parks that remain are in poor condition due to lack of funding that has led to neglect. The City announced in February this year that 50 of the remaining 107 parks would be closed and another 38 parks would shift to limited maintenance.

Where does a city begin to address the monumental challenges that led to a bankruptcy filing? Ultimately, Detroit’s top priority must focus on three things: stabilizing its shrinking population, implementing efficiencies that will generate cost-savings for municipal government, and try its best to strike a workable deal with creditors. With regard to   population, it’s not enough for Detroit to convince existing residents and businesses to stay. The City must attract new residents and businesses to locate there. This is the only way to increase the tax base from which the City can garner revenue. This means that emergency and public safety services are critical. Without getting a handle on high crime rates, the City stands to do little by way of enticing new residents and businesses. In addition, quality-of-life components such as parks and other open/green spaces, outlets for arts and culture, and other amenities should be points of focus. Detroit’s municipal leadership must recognize that quality-of-life factors are major indicators of the city’s health and ability to stabilize, attract new residents, and eventually thrive.

From an efficiency standpoint, the city has decreased operating costs substantially. However, more difficult decisions must be made that will require the city to closely examine what’s needed from a municipal leadership standpoint. This should include analyzing current vendors and reducing vendor costs. It should also include a close look at the City’s procurement practices as well as existing leases and contracts to determine opportunities for cost-savings. The City will has also have to make substantial capital investments in infrastructure and technology that, while costing the city in the short run, will generate significant cost-savings and efficiencies in the long run. For instance, the City can oversee building upgrades to many of its public buildings that cost the city millions of dollars every year in facilities repairs and energy costs. From an information technology standpoint, it is imperative that Detroit invest in an integrated IT system that spans across departments, reducing redundancy and enhancing interdepartmental and intradepartmental functionality. As well, an upgraded IT infrastructure can help the City better track its contracts, vendors, existing leases, etc.

No doubt, there is much work to be done. The mountain of debt and liabilities facing the City could seem insurmountable. However, bringing the city around to the right track starts with making some very difficult decisions. Hopefully, Detroit’s Chapter 9 filing will be the first step to righting so many of the wrongs that had been able to exist for so many decades. The effort must be made. The current (and future) residents of Detroit deserve it.

DemisTIFying TIFs Pt. 2: The (not-so-good), the bad and the ugly

This is part 2 of a 2-part series examining Tax Increment Financing

Job piracy, suburban sprawl, and mis-use are just a few of the controversies that have accompanied the proliferation of tax increment financing as an economic development tool. These controversies warrant a deeper look into why such a popular tool has, in some municipalities, created substantial ire toward municipal leadership – even spurring lawsuits in some cases. (if you haven’t already, please check out the first post on TIFs here).

Chicago Mayor Rahm Emanuel recently rankled many Chicago pols as well as average residents when he announced plans to build a new Depaul University basketball arena near McCormick Place in Chicago’s South Loop neighborhood. The new arena would use $55 million of TIF funds – public money that would be used to buy the current property now paying property taxes and essentially turn it into a tax-exempt property. Some have called the project a “monstrosity” and the latest in chronic gross misuse of Chicago’s TIF program – a program that one journalist called “deranged.”

In Iowa’s Johnson County, the Highway 6/Mall TIF diverted nearly $5,000,000 from the schools and $2,700,000 from the Johnson County budget. The money was retained by Coralville City Hall to service the losses at the Iowa River Landing, a 180-acre mixed-use development project in Coralville that’s anchored by a 286-room Marriott hotel and Conference Center. In fact, the City of Coralville was downgraded by Moody’s in 2012 based on “the underperformance of the city-owned hotel,” which had not met its initial cash flow projects.  Meanwhile, property taxes in Johnson County were increased to cover the costs from the diverted TIF funds.

In Dolton, Illinois it was previously reported how the new mayor moved to borrow $500,000 from TIF funds because the city was t0o broke to make good on payroll obligations. The use of TIFs became so controversial in California that  Gov. Jerry Brown (D) proposed to end TIF initiatives in that state, signaling a dramatic change in the fiscal landscape of a region with a long history of tax innovations, often with national repercussions (California was the first state to introduce TIFs in 1952).

So what is driving the controversy that pervades the use of TIF as a public finance tool? The answer to this question goes back to the original intent for which TIFs were designed – blight – and how close, or far, contemporary use aligns to this intent.

TIFs were originally created to spur development in blighted areas that would not otherwise garner private investment. What qualifies as “blight” for the purposes of creating a TIF District? The National Association of Housing Officials created a laundry-list test of broad, vague terms to categorize blight such as “dilapidation, obsolescence, over-crowding, poor ventilation, light or sanitary facilities, or a combination of these factor that are detrimental to the safety, health, morals, and comfort of the inhabitants of a particular area. When most states TIF statutes were enacted in the 1970s and 1980s, these Progressive-era and Depression-era definitions were routinely borrowed, sometimes verbatim, in defining TIF-eligible redevelopment areas. However, another definition – that an area is not realizing its greatest potential for commercial use or tax revenue – began to expand TIF’s economic development mission more explicitly into commercial and industrial projects with fewer geographic restrictions. For example, Virginia deleted the word “blight” from its TIF statute in 1990, enabling localities to TIF any area in the interest of promoting “commerce and prosperity.” Other states granted localities broad discretion to designate TIF where they find that an area may have future blight.

Flier from a recent TIF discussion in Chicago’s Englewood community.

The preeminent question in TIF debates generally centers on who benefits from TIF dollars. Blighted areas and their residents? Or private developers. For critics, private developers are seen as major beneficiaries because they acquire public funds to help complete their projects, while communities that perhaps would benefit substantially from the public funding, often seem to be left out of the equation. For example, Columbia College Journalists and Chicago Talks listed all TIF agreements by the city, according to TIF district from 2000 to July 2010. LaSalle Central TIF district exists in the heart of downtown and Stevenson Brighton TIF district covers the south west Brighton Park neighborhood. During this time period, tax increment financing created 3551 jobs in LaSalle Central and zero jobs in Brighton Park.

In many municipalities, financial difficulties have distorted the use of TIFs. Forced to find other sources of revenue, these municipalities have a perverse incentive to adopt economic development and land use strategies that stray from traditional measures of development (such as rising living standards or declining dependency). The perverse incentive prompts them to maximize revenue. For example, they favor big box stores that generate a lot of local sales tax revenue and minimize spending (so they shun multifamily housing because it raises costs for public education). A survey of local development officials in California, for example, found that the first priority in developing or redeveloping land is to attract big box retail – not to create good jobs or build affordable housing. When localities make such distorted decisions, TIF is led astray.

Instead of being used where it is needed most, to leverage investment in disinvested areas, it becomes most attractive to use in areas where it can sequester the most sales and/or property tax for the locality – .e. where it is needed least because the project is attractive for private investment. This scenario plays out in cities as well as suburbs. Indeed, the circumstances are even more challenging in suburbs where TIF becomes a tool to entice companies to relocate from elsewhere in the same metropolitan area (and thereby win jobs and long-term tax-base growth). When there is no regional mechanism to promote cooperation and TIF’s targeting rules have been relaxes so that even newly developing areas can create TIF districts, intraregional “job piracy” is inevitable – companies end up relocating on the basis of TIF incentives, thus taking the jobs with them. In one Minnesota study focusing on Minneapolis and St. Paul, it found that in a large percentage of companies relocated away from the city to suburbs that had attracted them with TIF incentives.  The suburbs that newly acquired these companies – and the jobs, had lower percentages of diversity, higher growth rates, and generally higher household incomes – a prime example of job piracy that moved companies away from areas where the impact was most needed.

As cities struggle to manage decreasing revenues, TIFs will continue to serve as a primary tool for financing public projects. Former Chicago Mayor Richard M. Daley famously (or infamously) called TIFs “the only game in town,” but TIFs shouldn’t be. Municipal leaders will have to be creative about developing revenue sources. Also, serious consideration must be given to the numerous reports that have proposed recommendations on creating additional oversight and public accountability for TIF funds. Participatory budgeting is just one example of efforts to increase public input in how public funds are spent. Overall, though, accountability for how TIF dollars are spent is the best way to ensure that it serves those communities most in need.

DemysTIFying Tax Increment Financing (TIFs)

This is part 1 of a 2-part series examining Tax Increment Financing

Part of The Municipal Maven‘s goal is to make policy open and accessible to everyone (because we know not everyone is a government geek). Really, some level of understanding of some key aspects of municipal policy such as Tax Increment Financing are important for civic engagement purposes and just for general information. The goal here is to simplify a fairly complex aspect of municipal finance.

So here is a crash course:

Residents in Chicago’s Englewood community listen to a presentation on how TIF Funds in their ward are used.

The first thing to know about TIFs, even before knowing what they are, is that they were established to foster development in blighted areas. A TIF District is an area specified for development. In other words, an area eligible for a TIF must be an area without hope of attracting private investment without some governmental intervention. The criteria for establishing a TIF are designed to ensure that funds generated from a TIF are used in areas truly in need of redevelopment. That means that a municipality can’t simply slap a TIF designation on any neighborhood or area they fancy.

Municipal officials have to utilize the “but for” test. Meaning, they must ask, “Will the same kind of private investment occur here without an incentive?” The answer must be no in order for the area to be TIF eligible. Evidence that the district satisfies the “but for” test is provided in the Redevelopment Plan.  General qualifications for TIF designation vary from state to state. Illinois, however, has the most stringent “but for” test, according to a study by Chapman and Cutler – a large bond counsel firm.

Now, to what TIFs actually are: TIF stands for Tax Increment Financing. A tax increment is the difference between the amount of  property tax generated before creation of a TIF district and the amount of tax revenue generated after creation of a TIF district. Tax Increment Financing is a public financing method that is used as a subsidy for redevelopment, infrastructure, and other community-improvement projects. In other words, Tax Increment Financing permits local governments to capture future increases in property and other taxes generated by new development within a TIF District.  The captured value of the increase in tax revenues is used to attract additional private development or to finance public improvements for economic development projects. Municipal officials control the allocation and disbursement of funds within a TIF district.

 

TIF Diagram courtesy of the CivicLab

TIF captures increases in tax revenue without any change in tax rates. If property values increase as redevelopment occurs, the municipality will receive increased revenues and utilize those revenues to pay for public improvements. Homeowners benefit from a successful TIF district because property values are generally stabilized or improved, which can create a “spill over” benefit for adjacent neighborhoods. Infrastructure such as water/sewer/streets, etc. can be paid for through sources other than general property taxes, and increased business activity can mean that fewer homeowner property taxes are required to provide for essential services like police, fire and public safety.

TIFS were first used in California over 50 years ago. They now exist in almost every state and have become an extremely popular tool for municipal governments. Other development tools like Industrial Revenue Bonds and Urban Development and Infrastructure Grants are no longer as readily available to local governments. In addition, billions of dollars in federal and state aid to local governments have been eliminated. This is coupled with unfunded federal and state mandates such as pension liability that have increased the financial burden on municipalities. Ultimately, local governments are left to do more with less. TIF offers local governments a way to revitalize their communities by expanding their tax base, offsetting, in part, the federal and state funds that are no longer available to them without imposing increased property taxes on the whole community. (For an example of what NOT to do with TIF funds, click here).

In the next post, we’ll look more closely at some of the controversy surrounding use of TIF Funds and why TIF’s have been both hailed and reviled (depending on who you talk to).

Stay tuned!

 

Related articles

• TIF Program Angers Bridgeport, McKinley Park Residents (progressillinois.com)
• Rahm’s new TIF program looks a lot like the old TIF program (chicagoreader.com)
• Englewood Residents Question TIF Program, Call For More Community Mobilization At Town Hall Meeting (progressillinois.com)

No more procrastinating: new mayors must be prepared to make tough decisions for municipal fiscal health

Mayor Riley Rogers walked into something of a mess in the city of Dolton, Illinois located south east of Chicago. After being in office for less than a month, he faces the unpleasant prospect of not being able to meet staff payroll – roughly $500,000 – along with insurance payments due today.

This story, posted in Chicago Tribune, is disappointing – primarily because it seems to be happening almost every week now. According to Rogers, all of the village’s bank accounts are empty. On top of this grim fact, earlier this week, village trustees voted unanimously to approve a loan from a tax increment financing (TIF) account. TIF dollars are designated for economic development projects. Because of Dolton’s financial circumstances, the village is drawing from TIF dollars to keep the village solvent instead of using them on projects that could potentially enhance the quality of life for Dolton residents. I suppose having a solvent village comes first.

The budget shorftall is blamed on years of overspending, including bad development projects that failed to generate revenue, and overtime pay for public safety officials. And of course, the usual culprit of lack of oversight weighs heavily on current circumstances. Treasurer Mike Willis said the village hasn’t had a balanced budget since at least 2009 and that since 2010 the village has faced deficits of about $11 million.

What is troubling about Dolton’s situation is that it represents a trend in municipal governments around the country, to kick the can of responsibility down the road. Cities have become startling reactive to just about everything – lagging behind in making the tough policy decisions that will undoubtedly impact both the city administration and the city’s residents down the line. Rogers served as a village trustee for two years before becoming mayor, and both saw and approved the village budget during that time. The onus rests in the hands of those who have been aware of the village’s financial situation, to speak up and advocate for either austerity measures to be put in place, or a complete restructuring of the city’s role. If collecting taxes has been a weak point, the city must initiate new ways of collecting debts owed to the city. Likewise, the city must be prepared to prioritize services so as to avoid overspending on non-essential projects and initiatives. And of course, municipalities must devise criterion for approving projects to ensure that they do generate revenue. This means perhaps passing over projects that sound exciting or trendy – especially when the revenue generating prospects for the city are shaky at best.

Instead, municipal leaders do the easiest thing to make a quick buck: increase city stickers, fees and fines. In other words, instead of thinking proactively and creatively about how to adjust the city’s function so that it can serve the public as well as remain solvent, cities are quick to pass on extra costs to residents, making life more difficult and in some cases, giving residents a reason to re-locate. Municipal leaders have to understand that increasing fees and fines is only a short-term solution to a long-term problem. In fact, it really isn’t a solution as all it does is contribute prolong the inevitable – making tough decisions in order to keep the city afloat.

Tough economic times means – not a scramble to figure out how to raise money – but an existential questioning of the role of government. In short, if municipal government is unable to stay solvent given its current function, then maybe its function must change. Unfortunately for many cities, they attempt to restructure and reorganize only after filing for bankruptcy (see Harrisburg, Pennsylvania and Stockton, California for example).

Hopefully Rogers is prepared for the rocky road that lies ahead. He and several other new mayors sworn in weeks ago, must commit to running their cities differently if they want to avoid taking office with no money in the city’s accounts, or leaving office with no money in the city’s accounts.