From the TIF Archives: "The Schools Scam"



Since state test scores are among the big news items today, here's an excerpt from Ben Joravsky's 2006 piece "The Schools Scam: Under the TIF system millions of dollars in property taxes are being diverted from education to development"; it's long because the issue is tricky:

Originally TIFs weren't intended to build tax-exempt properties like schools: they were supposed to subsidize economic development in blighted communities with the goal of even-tually increasing property tax revenue. But as the TIF program has expanded and evolved—the city's created more than 100 districts in the last ten years—Mayor Daley and the City Council have drawn on them to subsidize projects from upscale condos in trendy neighborhoods to Millennium Park to a rehab of of the lake-shore campus of tax-exempt Loyola University.


According to CPS officials, the city has already spent about $280 million in TIF funds building or rehabbing schools. By 2012, when the proposed construction program is completed, that amount will have gone up to about $880 million. Since TIFs operate without budgets, the other side of the ledger is more difficult to calculate. But based on the annual statements provided by the county clerk's office, TIFs have diverted about $621 million in property taxes over the last two years. Since roughly half of this would have gone to the schools, the money diverted from the schools to TIFs amounts to about $310 million in the last two years alone. As TIFs continually grow, this means that by a conservative estimate they will have diverted well over $1 billion from the schools by 2012, when the new construction is completed—a shortfall of $120 million or so.

[you're probably aware of that aspect; here's where it gets complicated]

But this is only part of the story. If you really want to understand the impact of TIFs on the schools, you have to know a little about state education funding. Illinois sets what school officials call a "target foundation level"—a minimum per-pupil amount—that every school district must meet. In 2004 the foundation level was $4,810 (I'm using 2004 because that's the most recent year for which all the needed statistics are readily available). State law requires that school districts use "available local resources" (i.e., property taxes) to raise the target amount. "If districts are too poor to raise the foundation level though property taxes, the state makes up the shortfall," explains Rachel Weber, an associate professor of urban planning at UIC and an expert on public financing. "As the property tax base decreases, or if it stays the same as the number of students increases, the amount of state aid increases. This is how the state compensates poor school districts."

Intentionally or not, the state formula also compensates school districts that are losing money to TIFs. That's right—the more money Chicago diverts into TIFs, the more money it gets from the state to meet the target level. How much are we talking about? Based on the city's property tax yield, its public school enrollment, and the state's foundation level, I figure the state paid Chicago about $112.6 million in 2004 to compensate for the TIFs, about 70 percent of the $163 million TIFs diverted from the schools that year.

As Weber notes, with this policy the state is effectively encouraging cities to create TIFs. "The fact that the school aid formula will compensate TIF-ing municipalities is a case of what economists call a 'moral hazard,'" she wrote in one paper on the subject. Borrowed from the insurance industry, this phrase "refers to a situation in which the insurer makes terms so favorable to the insured that there is no incentive to take precautions," Weber says. "In this case, the state may be creating an incentive for municipalities to over-TIF and to take on more risk."

This twist helps put CPS officials in a box. Privately, several admit they're trying to make the best of a bad situation. Publicly it's a different story. Schools CEO Arne Duncan and the school board members are mayoral appointees, and when it comes to TIFs they're team players. At last week's press conference Duncan praised Daley for his "unwavering leadership and support," adding that "our students are benefiting from our city's commitment to its schools." The schools' publicists are armed with a four-point press statement headlined "Key factors that lead to the conclusion that City TIFs have had a positive net financial impact on CPS." The final item on the list is the acknowledgment that "most of any additional property tax revenue that CPS would have gotten without TIFs would have been offset by a reduction in general state aid. . . . The offset is equal to at least 70 percent of the new property tax revenue."

"What a cynical admission," says Jason Hardy of the Center for Economic Policy Analysis, an independent watchdog group. "They're manipulating the system to get the state to subsidize development in the name of funding schools. It's your state educational dollars at work."

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