(page 7 of 12)
THEN AND NOW
BUSINESS AND PUBLIC FINANCE
In 1968, the chairman of Standard Oil of Indiana, John Swearingen, gave Richard J. Daley some bad news: The company had outgrown its South Michigan Avenue headquarters and would move out of Chicago, maybe to the suburbs, possibly even out of state. Daley I got to work. He helped Swearingen buy parcels of vacant land north of Grant Park from the Illinois Central Railroad. Then the mayor rewrote the city’s zoning laws to allow a skyscraper to rise 83 stories. In the end, Standard Oil of Indiana put up a $100-million, 1,136-foot-high marble-clad skyscraper, today the Aon Center. For one year it was the city’s tallest building, until Daley again used his powers of persuasion to keep Sears, Roebuck in the city. With Sears, Daley I gave the company two city blocks for its tower.
Daley I’s fiscal management has been widely hailed as a textbook example of how to run a big metropolitan economy. He was a micromanager who forged strong ties with the city’s blue-blooded, typically Republican businessmen while keeping labor unions happy by making sure there were always construction projects with high prevailing wages. The strategy helped him save the city. “The Chicago he inherited in 1955 really was a sleepy town with a downtown that was on the skids,” says Adam Cohen. “The Chicago he left behind at the end of his life was much, much grander.”
But it wasn’t easy. In the two decades he held office, Daley I faced a steadily declining tax base and an economy in transformation. The city’s well-to-do and middle class were fleeing to the suburbs, followed by many businesses—manufacturing industries as well as office jobs and retail shops. Faced with a teetering business district, the mayor determined that the city’s well-being depended on reinvigorating the Loop. Thus, says the former Tribune urban affairs reporter John McCarron, Daley I “circled the wagons around downtown and helped keep it strong.” He pumped fat public works projects into the Loop and spurred private development with flexible tax policies and permissive zoning. Essentially, his goal was to bolster commercial property so the city could boost the tax base and his patronage workers and union supporters could keep their good-paying jobs.
Critics griped that he ignored the neighborhoods—particularly ones in the Black Belt. Consider: by 1965, black unemployment in Chicago had reached 17 percent, well above the rate for whites. “What’s good for State Street is good for Chicago, and what’s good for Chicago is good for State Street,” the mayor insisted.
A crafty administrator, Daley I knew budgets as well as politics. He relied on revenue bonds on top of gradual tax increases to pay for his numerous projects. In his first year in office, he got lawmakers in Springfield to support him in a city sales tax and a utility tax, which became a windfall for the mayor to make city improvements. (In 1970, Chicago got “home rule” status, which allowed the city to impose any kind of tax, except for income taxes, without the approval of the state legislature.)
For the first two-thirds of Daley I’s reign, the city budget swelled with additional spending—expenditures increased 46 percent during his first term alone—and year after year property and other taxes climbed. Most of the increased spending was for major capital projects and expanded city services, not to mention for the bloated payroll of patronage workers. In 1971, for example, Daley I hiked property taxes by nearly 18 percent. But even as taxes reached levels never seen before, there were few complaints. The mayor’s spending binge, says Despres, “created an atmosphere of bustling activity and prosperity,” so taxpayers felt that they were seeing their tax dollars at work. “He showed results,” says Despres. And when voters started voting down bond issues in the early 1960s—after all, they’d have to pay the interest on the bonds—Daley turned to an agency he had created, the Public Building Commission of Chicago, to borrow money without public approval. The commission became Daley I’s “private bank account,” says Ross Miller, an English professor at the University of Connecticut and author of the 1996 book Here’s the Deal, about the infamous Block 37.
To sustain the boom, the mayor also tapped Springfield and Washington for funds. He got the state to pay the welfare costs of Chicagoans, and Cook County to pick up the tab for the city jails. And when the Chicago Transit Authority was flat broke, Daley I struck a deal with the state legislature to create the Regional Transit Authority, which infused suburban tax dollars into the city’s transit system. By 1974, only 15 percent of Chicago’s budget financed functions such as mass transit and welfare, compared with 73 percent in New York City, which, by then, was effectively bankrupt. At the height of the Great Society spending—from 1966 to 1970—Daley I helped obtain a 169-percent increase in federal aid for Chicago, according to political science professor Ester Fuchs’s 1992 book Mayors and Money. And during his fourth term, Daley I boosted spending by 40 percent without even raising taxes.
If it all sounds too good to be true, it was—as subsequent mayors found out. In the 1970s the city’s economy went into reverse. Between 1972 and 1984, the city lost 198,000 jobs, mostly in manufacturing. (By contrast, DuPage and northwest Cook County gained 156,000 jobs.) In addition, local tax revenue stagnated because Chicago was rapidly losing residents. Property taxes, for instance, funded 39 percent of the city’s budget in 1970. By 1979, it had dropped to 27 percent. By 1980, the city was in serious financial trouble, and the credit rating agency Moody’s downgraded Chicago’s bonds.
What happened? When tax revenue slowed and federal and state funds leveled off in the mid-1970s, Daley I and his bean counters began secretly using “revolving funds,” a budgetary gimmick of sorts that delayed paying bills, effectively hiding mounting deficits off budget. Meanwhile, the city resorted to borrowing to pay off past debts, but then used the new funds for operating expenses, not for debt repayment—in other words, robbing Peter to pay Paul, all the while maintaining an illusion of solvency. “All of this was swept under the rug under Richard J.,” says Lois Wille. “And yet, he always had the reputation of being a good budget man.”
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When Daley II took the reins of Chicago in 1989, the city was bleeding a $105-million deficit. He turned it into a surplus by the end of his first term by slashing the city bureaucracy, reorganizing city hall, raising the water and sewer rates, and supporting a 20-percent state income tax hike that boosted school funding. “He’s been a relatively good fiscal steward,” says Ralph Martire of the taxpayer watchdog Center for Tax and Budget Accountability. Daley II has more or less held the line on property taxes—since taking office, they have increased an average of only 1.5 percent a year, according to the mayor’s office. Daley II also cut taxes on businesses, and, like his father, focused much of his attention on keeping downtown Chicago prosperous by aligning with big business. But unlike Daley I, the current mayor has had a lot less state and federal aid (not to mention patronage) to dole out.
Daley II readily admits he’s not the fiscal whiz that his father was. During our interview, he marveled at how his father built O’Hare by getting the airlines to handle the operating costs and the federal government to finance 90 percent of the highway costs and development. “He knew a lot more about finance than I did, to be very frank,” Daley II said.
Nevertheless, this mayor has held his own, thanks in part to a robust economy for much of his two-decade reign. The growth here of professional service jobs, such as lawyers, accountants, and consultants, has outpaced every other metropolitan area in the country. Housing values have risen by an annual average of 5.4 percent since Daley II took office. Under the mayor, the Loop has flourished, and so have the nearby neighborhoods. New buildings have sprouted up, as have new businesses, including Boeing and MillerCoors, both lured here by the mayor. Between 2003 and 2006, Chicago’s diverse economy grew by more than $27 billion. Tourism is thriving. Daley II has helped reinvent Chicago as a destination city, attracting a record 45 million visitors last year, according to Crain’s, tying Chicago with Washington, D.C., as the country’s eighth most heavily visited city. “Without the mayor, absolutely we would not have this renaissance in arts and culture in Chicago, never,” says the city’s culture czar, Lois Weisberg. “His father didn’t have it, period.”
In May, the magazine Fast Company selected Chicago as its “U.S. City of the Year.” And in June, Trader Monthly ranked the city as “the world’s top trading town,” citing Chicago’s thriving commodities and derivatives exchanges.
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But the contrasts between the haves and have-nots remain. A 2006 study found that Chicago had lost nearly 600 businesses and more than 14,000 jobs within the city’s poorest neighborhoods between 1995 and 2004. Critics say that Daley II, like his father, has focused too much attention on downtown development and not enough on historically underserved neighborhoods. If the city seems more prosperous, they say, that’s only because gentrification has expanded to the near South and West sides. “Right now, you go northwest, there’s, like, three jobs for every one person,” says Jesse Jackson. “If you go south, there’re six people for every one job. Here, taxes are up. Services are down. He has not addressed structural inequalities.”
Some critics argue that the mayor’s controversial use of tax increment financing districts, or TIFs, is a version of the budgetary sleight-of-hand practiced by his father. On paper, TIFs are supposed to freeze property taxes and earmark new revenues for economic development projects in blighted neighborhoods. The TIF, or something like it, is a common economic development tool in cities around the country. But as Ross Miller points out, “Chicago always does it bigger and better.” According to the Cook County clerk’s office, TIF revenues have grown from $10.6 million in 1989, when Daley II took office, to more than $500 million in 2006.
Urban affairs reporter Ben Joravsky, of the Reader, argues that Chicago’s 160 TIF districts—particularly the nine or so TIFs in and around the Loop area—have become a “secret slush fund” for the mayor and aldermen to subsidize private developers (many of them friends or campaign donors to the politicians) in lucrative projects downtown. By Joravsky’s count, TIFs suck away more than $500 million a year in property tax dollars that could be spent instead on parks, schools, libraries, and the city’s ailing mass transit system.
Mayor Daley and many aldermen defend the use of TIFs as their only tool to spur economic development across the city. “Due to the continued decline in federal and state funding that cities are receiving for capital improvements,” Daley says, “TIF has allowed Chicago to continue investing in much needed infrastructure, schools, transit facilities, public housing, streets, roads, and bridges.”
The taxpayer watchdog Ralph Martire sees both sides of the argument: “TIFs can be a good tool,” he says. “They can also be misused. Because this is Illinois, we get both.”
Over the years, Daley II has shrunk the size of city government by privatizing some of its functions—an approach his father, the patronage king, would probably find unimaginable. Daley II started small, first with basic city services, such as towing, building management, and janitorial work. But by 2005 he had leased the Chicago Skyway to an Australian-Spanish consortium for $1.8 billion. Next, he leased four downtown parking garages to Morgan Stanley for $563 million. And he has proposed privatizing the city’s parking meter collection and its waste sorting and recycling centers. The big enchilada, though, is Daley II’s plan to privatize Midway Airport, potentially a $3-billion-plus windfall. If it happens—the city is currently evaluating bids—it would make Midway the country’s first privately operated commercial airport. Martire says Daley II has done a good job so far of keeping his hands out of the privatization-proceeds kitty. “The temptation for a lot of officials,” he says, “is to plug the money into their budgets and pay for services with one-time revenue sources. Daley uses the money only for capital projects.”
And while his father was strictly Chicago-centric, Daley II thinks globally. Last February, for example, he opened a new city office in Shanghai to woo Chinese industries here and assist local companies doing business in China. Listen to Daley II talk these days and you’ll hear a lot of ‘China this,’ or ‘China that’—the mayor knows China’s economy is exploding and he wants to make sure Chicago doesn’t miss out on the action.
But just as his father faced a drastic economic downturn after 15 or so years in office, Daley II is facing an economy that’s sinking with no bottom yet in sight. In Chicago and nationally, home values are dropping, unemployment is rising, and commercial real-estate deals here have dried up. Daley II’s legacy may depend in part on whether he can find his way through a tough economy. In February, he pushed through a budget that included a record-breaking $275 million in increased taxes and fees, including $84 million in property tax hikes. (Eleven times in the past 13 years since Daley II took control over the Chicago Public Schools, the board of education has raised property taxes to the maximum allowed by the state’s tax limits.) In July, the city’s sales tax became the nation’s highest.
So far, Daley II has successfully quelled any career-threatening tax revolts. In 2003, when property assessments skyrocketed to 31 percent citywide, the mayor pushed state lawmakers to pass the 7-percent cap on assessment increases. Three years later, he encouraged extending the cap. But in late July of this year, the mayor said Chicago is facing the worst economy of his tenure. “This is a real crisis,” he told reporters, adding that the city’s budget shortfall was roughly “a couple hundred million.”
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Photography: (Richard J. Daley) Chicago Tribune photo by Arthur Walker, (Richard M. Daley) Kevin Banna, (Pritzker Pavilion) City of Chicago/Mark Montgomery, (Royko and Kass) Chicago Tribune photos, (The Bakery) Chicago Tribune photo by John Bailey, (Trotter) Andreas Larsson, (Butkus) AP photo, (Jordan) Brian Spurlock/US Presswire, (Flynn) WBBM-TV, (Magers) WLS-TV, (State Street, Billy Goat) Kim Thornton, (Magnificent Mile, Gibsons) Megan Lovejoy, (1968 convention) AP photo