Chicago Is Not Broke – Book Review

Chicago Is Not Broke – Book Review

A new book edited by activist Tom Tresser spells out in detail why Chicago should not have to raise property taxes or cut any services or programs.

Chicago Is Not Broke is broken into three parts: The Money Stolen From Us, Money That is Hidden From Us and Money That We Are Not Collecting.

Each chapter is written by a different author, including budget expert Ralph Martire, former Alderman Dick Simpson, economist Bill Barclay, former mayoral candidate Amara Enyia and TIF expert Tresser.

The book begins, “The mayor says Chicago is broke. The newspapers say Chicago is broke. Think tanks and policy shops say we are broke. Can we  believe them? What would be the difference to the lives of Chicagoans and the future of the city if we are not broke?”

The book then lays out a very comprehensive and easy to follow narrative of what the Chicago budget is, who the money goes to and how we the people can access it. In other words, there is plenty of money out there.

The introduction by Martire says Chicago purposely puts out an opaque budget so that people do not understand how the city spends its money. The 2016 city budget is $9.32 billion, and its largest expenditure is on debt service and pensions, while property taxes are its largest revenue source. About 62% of the city’s property tax levy covers pensions, and 31% covers debt service (bonds). “The city’s pension payment is really driven by paying off the debt owed to pensions, rather than the cost of funding current benefits.”

The first chapter is called The Cost of Corruption in Chicago written by former Ald. and Prof. Dick Simpson and Thomas Gradel. They estimate the cost of corruption is $500 million per year, while many experts believe it’s even higher. The corruption includes paying $662 million on police misconduct since 2004. Corruption includes bribery which drives up the costs of city contracts and departments, including an estimated 5% inflated increased cost to run the state prison system. Journalists from the Springfield State Journal-Register documented one-third of state contracts went to individuals or businesses that contributed to the campaigns of statewide office holders. In other words, the lowest bid doesn’t win.

The Chicago Teacher’s Union Jackson Potter wrote the next chapter on the cost of toxic bank deals, detailing how former Chicago Public Schools President David Vitale, who also headed the Board of Trade, was responsible for making CPS the most exposed school district in the country to interest rate swap liabilities totaling almost $1.3 billion. The district paid a fixed interest rate to banks and, in return, the banks would pay the variable rate to bondholders. Meanwhile, bankers like Goldman Sachs, Bank of America and Loop Capital bet the variable rate would be cheaper than the fixed rate. So when the economy collapsed in 2008 interest rates also fell and CPS could no longer cover the interest on the bonds from the swap. The banks required full termination fees and Mayor Rahm Emanuel has almost paid all the swap termination penalties that will exceed $1.3 billion. Emanuel said the city had to pay the banks despite fraud because “there is this thing called a contract,” yet he had no problem ripping up the teacher’s contract and not pay a 4% raise his first year in office because the city was “broke.”

A Bank of America memo prior to the subprime crash showed the bank knew the bond market was going to tank but did not disclose this information to CPS when the bank convinced CPS officials to enter into toxic swaps in 2007, which violates fair-dealing provisions of the Municipal Securities Rulemaking Board. The Baldwin County Sewer Service in Alabama won a $10 million award and got back the full amount it paid the bank on its fraudulent swap and its termination fees were waived. In other words, the Chicago Mayor represents the banks, and not the people.

Tresser’s chapter on TIFs – Billions Off the Books, takes a close look at how this tax scheme has put millions into the pockets of wealthy developers in areas that were never intended to be subsidized by this obscure tax. Tresser writes that TIFs are only for construction costs, and thus cannot be used to hire school teachers, after-school artists, librarians or doctors. “The main thing to remember about TIFs is that they take property tax dollars away from local units of government that rely on property taxes for operation of such entities as the public schools, parks, libraries and the City, itself. TIFs move property tax dollars into secretive funds that are controlled by the Mayor and his allies.”

The more TIFs the city makes (currently 178) and the more taxes they capture, the more starved the city schools become. There is no public record for the first 18 years of the program that began in 1985 under Mayor Harold Washington. TIF owners and developers shower the local alderman with tens of thousands of campaign contribution dollars.

“Our research revealed that, at the start of 2015, there was $1.44 billion in property taxes sitting in Chicago’s TIF accounts. So how can Chicago claim to be broke?” Research shows if all TIFs were eliminated, tax bills could be lowered by 11%.

A couple of chapters focused on implementing a progressive income tax because Illinois overtaxes the poor and middle class while refusing to raise taxes on the rich (wage earners pay 13.7% of their income in taxes while the top 1% pay 5.3%), and a financial transaction tax which could raise $2.6 billion.

The last chapter entitled A Public Bank for Chicago by Amara Enyia is a fascinating concept to create a public bank that would eliminate the predatory banks that have crippled our city via toxic loans and high interest rates that have forced the city to lay off workers and cut programs. Instead of paying billions of dollars in interest, termination fees and other costs to Wall Street banks, the city can create a public bank that will recirculate those dollars into the city’s economy and treasury.

A public bank would invest the money locally into small businesses and provide cheaper student loans, rather than feeding Wall Street banks. “Public banks are chartered to serve the public, not exploit it.”

Enyia cites the Bank of North Dakota that earned $94 million in profits in 2015 and deposits half its profits into the state’s general budget and has averaged 25% return on equity over the past 16 years. Thanks to this public bank, there are far more community banks in North Dakota which make more loans to small businesses and spur job creation in the state.

Chicago has issued $1.5 billion in debt, or municipal bonds (half of which went to Midway Airport), which has imposed a significant revenue drain on Chicago’s tax base. “The public bank would allow tax revenues that are currently devoted to paying interest and principal on public debt obligations to be recaptured and redirected into local investments to improve employment prospects and economic opportunity in low-income neighborhoods.”

Currently 31% of property taxes go to pay debt service, and interest paid to private banks represents 30 to 50% of the cost of most public projects. With a public bank, the city would avoid exorbitant fees designed to generate profit for private bank shareholders. Plus, with a public bank in this city students would be able to access low-interest education loans, which would free them up to buy homes and cars rather than pay off student loans, and homeowners would be able to access reasonable mortgages and home loans.

I would say this book is a must read for anyone who wants to know if Chicago is really broke. As Tresser wrote, “There are many reasons to distrust the mayor when he says Chicago is broke.” This fine quick-read book on the city’s financing proves it – Chicago ain’t broke, but the political system that controls it is.