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The Schools Scam

Under the TIF system millions of dollars in property taxes are being diverted from education to development.



On June 15 Mayor Daley brought public school officials and aldermen to a south-side grammar school for a revival meeting of sorts. The ostensible purpose of the press conference was to announce the mayor's plans to spend $1 billion over the next six years to build 24 new schools in neighborhoods across Chicago. But Daley and the other officials made a point of reminding people of the economic development plan that makes this possible: the tax increment financing program.

"This is a creative use of existing dollars which have accrued from our successful TIF program and will not require any property tax increase by the city of Chicago to fund," Daley said in his remarks.

Even as public pronouncements go, this was a whopper. Of course building new schools requires an increase in property taxes. It's just that in this case the deed's been done: TIFs have been jacking up property tax bills for almost 23 years. Rest assured they'll continue to--the city shows no sign of abandoning them. On the contrary, City Hall insiders tell me that the mayor's press conference was part of a move to win public approval for the extension of the Central Loop TIF, the city's oldest and largest, which is set to expire next year.

But as a public relations maneuver the announcement was brilliant. In one fell swoop, Daley managed to tweak the state for not paying more in education funds and look like the heroic protector of the city's schoolchildren, using the promise of new schools to camouflage the diversion by TIFs of millions from public education coffers.

According to the city, as much as $600 million, or 60 percent, of the new construction costs will come from various TIFs, districts created by the City Council that put a rough cap on the amount of property taxes that go to the schools, the parks, and the county for a period of 23 years. Additional property taxes generated in these districts through rising assessments and new development flow into TIF accounts, which function as virtually unmonitored slush funds.

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.

Daley says he's repaying the public. "Our taxpayers have been generous beyond words," he said at the press conference. "Today we're giving back to those taxpayers something real and meaningful--something they will see and touch and feel and know that their dollars are being invested carefully and appropriately."

That's a noble aspiration, and Lord knows there are neighborhoods that desperately need new classrooms. But even with the new construction, the Chicago Public Schools won't come close to retrieving the property tax revenue it's lost to TIFs. 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.

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."

In the long run the strategy is counterproductive. School officials should be clawing for every nickel they can get. Instead they're going along with a system that diverts tax revenue from education and, even factoring in the state's largesse, leaves a strapped Board of Education 30 percent poorer than it would be if there were no TIFs. Meanwhile our tax bills continue to mount--many of us can expect our property taxes to rise as much as 50 percent after this year's assessment. And of course TIFs do nothing to help the CPS address its chronic shortage of operating cash. While Daley boasts of his plans to "assure that our children learn in modern, up-to-date environments," Duncan and his board have proposed raising $55 million by hiking property taxes to the maximum allowed by the state, threatening increased class sizes and teacher firings as the alternative.

Not surprisingly, Daley didn't mention any of this when he announced his school-construction plan. Instead, in a breathtaking show of chutzpah, he took the opportunity to criticize the state. "I can't be waiting for what's going to happen," he told reporters the day before the press conference. "I'm talking about the city of Chicago, and we're not going to shortchange our children."

As observers note, it's disingenuous for Daley to harp about the state's education funding while bragging about the way it offsets money going to build Logan Square condos or refurbish Loyola. But PR-wise, this might not really matter, so long as no one except a few TIF geeks pays attention to the details. "Bottom line--we're building new schools," says one CPS official. "How can you be against that?" Call me a geek.

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