Get Off the Pot

There’s a solution to the city’s deficit. It’s not legal, but since when is that a problem?

Alan Martin/istockphoto

By Ben Joravsky

Before we talk about possible solutions to the city’s budget problems, let’s take a moment to review why we have them.

As we all know, it has to do with the collapse of the housing market—those greedy lenders, those careless Wall Street investors. But let’s not pretend we’re all innocent victims. As my old mortgage banker, a free-market Republican, loves to tell me, most of us were only too happy to take advantage of the easy credit made available by banking deregulation.

For some perspective, consider how things were done back in the caveman days of the mid-1980s, when my wife and I bought our dumpy little house under the el. Lenders were selective about who got credit. They generally believed that the more buyers put down, the less likely they’d be to walk away from their mortgages. For us that meant coming up with 15 percent of the $63,000 purchase price. An appraiser was sent out to see if the house was in sound condition. Our lenders compared the asking price with other property in the area—they wanted to make sure that if we couldn’t make our payments and they had to foreclose, they’d be able to sell the house on the open market. In order to prove we were financially solvent, my wife and I had to expose our financial secrets, however puny, to the bank’s loan officer, showing him three years’ worth of income tax returns. The bank was a stickler about its lending formula: housing costs, which included property taxes and our mortgage payments, could not exceed 28 percent of our joint income. They insisted on examining our credit reports, including recent credit card payments, to make sure our monthly bills would not exceed 36 percent of our income. They checked our credit history for outstanding claims. They weren’t playing around.

Back then, my broker says, banks were much more conservative, and most stuck with the 3-6-3 formula: “Take money in at 3 percent, lend it at 6, and be on the golf course by three.”

But in the post-deregulation go-go days of the last ten years, the attitude has been: Need a loan? Got no credit? Come on down!

Thousands of people in Chicago either got their hands on property they didn’t have the income to pay for or were lured into predatory deals they had no chance of working their way out of. As long as the markets kept going up 20 percent a year, there seemed to be little need for vigilance. If a buyer foreclosed, so what—the bank could always sell the property to someone else. Everyone was making money—the real estate agents, the bankers, the appraisers, the mortgage brokers, the banks, the developers . . .

And, of course, the city. Don’t forget—the real estate boom was behind the revitalization of Chicago. As banks lent out more money, developers built more town homes, condos, and houses, more people snatched them up, and property and real estate sales taxes flowed into the city’s coffers. Those fast and easy loans helped pay for building (and maintaining) Millennium Park, installing wrought iron fences, planting trees and flower beds, renovating downtown theaters, and constructing new schools, police stations, and libraries. They also poured hundreds of millions of dollars into tax increment financing funds.

It didn’t really matter if the boom was illusory—all that mattered was that the city was moving forward. Isn’t that how Mayor Daley and his supporters put it when he was up for re-election last year? And isn’t that what 70 percent of the voters agreed with when they re-elected him?

Well, now the good times are over, and we’re all left holding the bag. The banks are lending less money and fewer homes are being built or sold. And the city, for anticipating that the real estate boom would last longer than it did, faces a $420 million deficit from overspending.

Even Mayor Daley realizes that if he tries to reduce the debt by raising property taxes he’ll force more people out of their homes. When this year’s second installment tax bills come out in October, the howling will be particularly loud from south- and west-side communities like Engle­wood, Fuller Park, and North Lawndale. Cook County assessor Jim Houlihan anticipates tax bills will rise in these areas as much as 70 percent.

So what can the mayor do? Here are his options: He can let the city go bankrupt (not very palatable, but it is an option). He can drastically cut services (yeah, right—that’s not going to help anyone’s political standing). Or, as much as it might pain him, he can raid the TIF funds.

As regular readers of this column know, the amount of property taxes collected by the schools, parks, county, and other taxing bodies are frozen when a TIF district is instituted, and any additional revenue from higher assessments or new development is siphoned off into the TIF fund, which is controlled by the mayor and the local alderman with little or no oversight.

By my tally, there’s close to a billion dollars sitting in the 160 or so TIF funds the city currently has. And if, after years of diverting money from the schools and other agencies, Daley decided to dip into these funds, I know exactly how he’d spin it: he’ll claim he’s been socking the money away for a rainy day and not, say, for pet projects, including the Olympics. And people will probably believe him—they always do, as far as I can tell, if they’re paying attention at all.

There’s one small problem— since TIF money’s not supposed to be used for general operating expenses, tapping into these funds wouldn’t exactly be legal. But as we all know, in Chicago rules are made to be bent, which is kind of how we got into all this trouble in the first place.

You’re Welcome

I was sort of hoping that Mayor Daley would personally call to tell me he was killing the Central Loop TIF—you know, the way a vanquished candidate calls the winner on election night.

I’ve been crusading against the TIF program for years, and while he’s killed a couple of losers, this is the first time the mayor’s ever pulled the plug on a big-money district.

Not only have I heard nothing from the mayor—I haven’t received any thank-you calls from taxpayers either. When you hire lawyers to appeal your property taxes, most will keep at least 10 percent of what they save you from paying. Now that this TIF is dead, Chicago’s citizens will save about $100 million a year, so I figure you guys owe me $10 million. You’re welcome.

Actually, though, we’ve still lost far more than we’ve gained. In 2009 the schools will now get about $50 million that would have gone into the Central Loop TIF fund. But since 1984 they probably lost $500 million to the TIF, and they’re still losing to the 160 other TIFs Daley and the City Council have created, with more on the way.

As Greg Hinz points out in Crain’s Chicago Business, Mayor Daley gave up on the Central Loop TIF because it was about to expire and by law he needed Springfield’s approval to extend it. This would have resulted in a loud and nasty public fight with Governor Blagojevich, who’s emerged as a TIF skeptic, arguably for leverage against the mayor. The last thing Daley wants, Hinz notes, is to call attention to the TIF program. The Central Loop TIF was a small price to pay to keep the rest of the program going strong.

Besides, he still has another huge downtown TIF, the LaSalle Central, which he created in 2006 partly to replace money he would lose if he had to kill the Central Loop TIF. The LaSalle Central will soon be soaking up far more than $100 million a year. And if I know our mayor, I’m sure he’ll be looking for new TIFs to create downtown in the next year or so. He’s nothing if not resourceful.   

Hear Ben Joravsky interviewed about this and other columns on the Mr Radio podcast, mrradio.org/benj.php.

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