If you’ve read the financial news out of Chicago the last few weeks, you’ve probably heard that the city faces a major pension shortfall, supposedly because police officers, firefighters, teachers and other public workers are selfishly bleeding the city dry.
You’ve also probably heard that the only way investment banker-turned-mayor Rahm Emanuel can deal with the seemingly dire situation is to slash his public workers’ retirement benefits and to jack up property taxes on those who aren’t politically connected enough to have secured themselves special exemptions.
This same story, portraying public employees as the primary cause of budget crises, is being told across the country. Yet, in many cases, we’re only being told half the tale. We aren’t told that the pension shortfalls in many US states and cities were created because those same states and cities did not make their required pension contributions over many years. And perhaps even more shockingly, we aren’t being told that, while states and cities pretend they have no money to deal with public sector pensions, many are paying giant taxpayer subsidies to corporations — often far larger than the pension shortfalls.
Chicago is the iconic example of all of these trends. A new report being released this morning shows that the supposedly budget-strapped Windy City - which for years has not made its full pension payments – actually has mountains of cash sitting in a slush fund controlled by Mayor Rahm Emanuel. Indeed, as the report documents, the slush fund now receives more money each year than it would cost to adequately finance Chicago’s pension funds. Yet, Emanuel is refusing to use the cash from that slush fund to shore up the pensions. Instead, his new pension “reform” proposal cuts pension benefits, requires higher contributions from public employees and raises property taxes in the name of fiscal responsibility. Yet, the same “reform” proposal will actually quietly increase his already bloated slush fund.
But it gets worse: an investigation by Pando has discovered that Emanuel has been using that same slush fund to enrich some of his biggest campaign contributors.
How a “shadow budget” is bankrupting Chicago
The new report, from the taxpayer watchdog group Good Jobs First, shows how Chicago’s roughly 150 “tax increment financing” (TIF) districts divert property taxes out of schools and public services and into what is now known as Chicago’s “shadow budget.” That’s a slightly nicer term for what is, in practice, Emanuel’s very own sovereign wealth fund.
Living up to his billing as “Mayor 1%,” Emanuel has used the fund to (among other things) offer up $7 million of taxpayer cash for a new grocery store, $7.5 million for a proposed data center, $29 million for an office high rise and $55 million for a huge new hotel (and that latter project is on top of $75 million more in tax money Emanuel has offered up to build a private university a new basketball stadium). And these are just a few of the corporate subsidy proposals in a $300 million spending spree Emanuel has championed at the very moment he has pled poverty to justify pension cuts, property tax increases and the largest school closure in his city’s history.
Contrary to the story of public employees bleeding taxpayers dry, the Good Jobs First report proves that the slush fund is the root of the city’s true fiscal problem. As the municipal budget figures show, over the last 14 years Chicago refused to make its necessary pension contributions. Yet, at the same time, the city’s TIF-based “shadow budget” skyrocketed. In effect, more and more public revenue that was contractually obligated to pensioners was being diverted by politicians to fund TIF subsidies, many of which go to subsidize wealthy corporations.
The scheme has gotten so out of control that, according to Good Jobs First, annual TIF revenues now far exceed the annual cost of funding the city’s pension systems. The report shows that in 2013 Chicago’s pension costs were $385 million whereas Emanuel’s slush fund that year received $457 million.
For his part, Emanuel has insisted that roughly a third of TIF funding goes into schools (at his sole discretion, of course). Yet, his slush fund is so opaque there’s little way to verify this claim. Indeed, Chicago’s local public radio station WBEZ recently noted that it “has repeatedly requested a breakdown of all current TIF-funded projects, but [the Emanuel administration] has not yet provided it.”
Enlarging the slush fund under the guise of “reform”
What is certain is that while Emanuel has been shuttering schools and proposing big pension cuts, he has also refused to release more than $800 million in surplus taxpayer monies sitting in his slush fund. He has also killed legislation that would force him to put at least some of those resources into plugging school funding gaps and pension shortfalls. Instead, as of this week, he has put forward a proposal that uses the guise of pension “reform” to further balloon his corporate-subsidy slush fund.
Of course, that’s not how it is being billed. Emanuel’s administration insists the proposal “strikes the right balance of reform and revenue and serves as an honest framework in which everybody gives something.” Not surprisingly, the notion that the mayor’s proposal is about “sharing the pain” has been loyally echoed by much of the Chicago press. Yet, there’s one group that is being exempted from sacrifice and that will likely be further enriched by Emanuel’s proposal: Chicago’s corporate class.
As the Chicago Reader’s Ben Joravsky reports, Emanuel’s proposal will actually “cut payments to municipal retirees, jack up property taxes, and give the mayor more slush funds to play with.” Here’s how this latest wealth-transfer scheme works:
If the mayor raises the overall tax rate to fund his pension bailout, he is of course raising the rate in TIF districts thereby. That means more property tax dollars will flow into the TIF bank accounts. Think of it as more slush for the fund…
Remember, the mayor says he’s cutting benefits for geezers cause Chicago’s dead broke and he wants to limit the burden on beleaguered taxpayers…But, as I like to point out, there’s “broke” as in “We gotta make some retired Water Department clerk live on less” and broke as in “Ah, what the hell—might as well add a little more slush to the pile.”…
So in short…Mayor Emanuel cuts benefits to retirees, jacks up your property taxes, and brings in more cash for things like the River Point office building in the West Loop, the Hyatt hotel in Hyde Park, the aforementioned South Loop basketball arena for DePaul, and that South Loop hotel for Marriott.
The question, then, is why? With his reelection poll numbers plummeting, why would Emanuel refuse to give up some of his slush fund? Why would he instead propose a plan that increases the slush fund and threatens to anger property-tax-averse voters and enrage pensioners? Why, in short, is he so protective of the slush fund?
Still an “insider’s game”
As usual, one answer can be found by following the money. When you do that, you discover that despite Emanuel’s declaration that “government can no longer be an insider’s game, serving primarily the lobbyists and well-connected,” the TIF scheme is often exactly that – an insider’s game. And, as Pando’s investigation into the TIF program proves for the first time, the corporate beneficiaries of that insider’s game just so happen to be Emanuel’s major campaign donors.
For example, just after Emanuel took office, his apparatchiks on Chicago’s City Council passed that $7 million TIF subsidy that will benefit grocery chain Mariano’s Fresh Market. Mariano’s is owned through a parent company by Willis Stein & Partners, whose CEO gave Emanuel $25,000 just months before the TIF was approved.
Similarly, in the above mentioned data center proposal (which fell through), Emanuel offered to use his TIF authority to let private equity firm Madison Dearborn Partners and real estate company JDI Realty get away with not paying back $7.5 million in TIF money that is still owed to taxpayers. Madison Dearborn Partners is one of Emanuel’s biggest sources of campaign cash.
Then there is Emanuel’s $29 million office-tower TIF. That boondoggle will underwrite the new Chicago headquarters of DLA Piper – the same law firm whose employees have given Emanuel more than $125,000. The law firm will benefit not only from having its leased office space effectively subsidized by taxpayers, but also from the preservation of TIFs in general, as the firm’s Chicago office has a long history of TIF legal work. As just one example of that, DLA Piper is the law firm involved in the $4.5 million TIF Emanuel’s allies engineered for Vienna Beef.
Not to be forgotten is Emanuel’s $55 million TIF for a massive new hotel near Chicago’s convention center. According to the Chicago Tribune, Emanuel appointees on the Metropolitan Pier and Exposition Authority awarded commercial real estate company Jones Lang Lasalle the big construction management contract that will benefit from that huge TIF. One of the largest shareholders of Jones Lang Lasalle is Ariel Investments, whose president gave Emanuel’s campaign $31,500.
There are likely more such examples, and we’ll keep digging to uncover them. What we know now is that the real estate and financial industries are among the big beneficiaries of Emanuel’s shadow budget. The former often benefits from TIF subsidies of development deals, while the latter often either has ownership stakes in TIF projects or sells off the debt at a profit in the financial markets. And – surprise, surprise! – campaign finance data show that those two particular industries bankroll Emanuel’s campaigns.
So again, why is Emanuel aggressively trying to preserve his slush fund, even if it means inflicting unnecessary budget pain on retirees and rank-and-file taxpayers? Because preserving his slush fund defends the people he really represents – the financiers who sponsor his political career.
Pando contacted Mayor Emanuel’s office for comment on this story (~2hrs ago) but they had not responded by publication time. We will update this story if we hear back.
[Photo: Eric__I_E (Creative Commons)]