How an idea becomes a law: Chicago’s new Transit TIF

December 1, 2016

By Chrissy Mancini Nichols

“We had to get it in the president’s budget, get it funded, and also pass legislation in Springfield, so we’ve been working on this a long time,” Mayor Rahm Emanuel on Chicago’s new Transit Tax Increment Finance (TIF) district.

Yesterday, November 30th, Chicago City Council voted unanimously—46-0—to enact a new "Transit Facility Improvement Area", a Transit TIF that will fund the $2.3 billion Red and Purple Line Modernization, a critical project that will reconstruct tracks and stations on the Chicago Transit Authority's Red and Purple Lines to add capacity and speed up trains.

City Council had to pass the ordinance yesterday as it was the deadline for Chicago to apply for $1.1 billion in federal funds authorized in the 2015 federal transportation bill. Mayor Emanuel signed the ordinances authorizing the Transit TIF at the Council meeting and U.S. Dept. of Transportation Secretary Anthony Foxx was called right away to relay the news.

While many news outlets have highlighted how “quickly” the Transit TIF passed, it’s actually been years in the making.

Six years ago, while at the Metropolitan Planning Council, I began researching how in the world Chicago was going to fund the transit projects needed to maintain and expand the system. Billions in funding needs — on the North Side, the Chicago Transit Authority’s (CTA) Red and Purple Lines are almost a century old and are in dire need of a renovation. On the South Side the Red Line stops at 95th street, leaving thousands of workers with no access to transit for their commute. And Union Station, hub for Metra suburban commuters, is at capacity.

There certainly weren't billions of dollars available to fund these and other projects—with the City of Chicago and State of Illinois in fiscal distress. Increasing traditional revenue sources wasn't the answer either—the Chicago Sales Tax that funds transit has the highest rate in the nation—can’t raise that. Any revenue from increased property taxes must go toward the police and municipal pension liability—hundreds of millions in the red. Plus, Chicago is overextended in debt and police and schools vie for limited funds.

Crumbling viaduct along the CTA Red Line Tracks, not world class

So I looked to other cities—those that were building transit infrastructure—how were they funding construction? Many were using a finance mechanism called value capture or Transit TIF—Denver, San Francisco, Atlanta, New York, Washington, D.C. and Milwaukee.

I researched and wrote case studies about how Transit TIF financing worked in those cities. I Held roundtables on value capture to fund transit, bringing in leaders from Washington, D.C., Atlanta and San Francisco, all places that have used this financing to build transit projects. I invited city leaders to these events so they could hear first hand how it worked. Then I researched and planned how a Transit TIF could be implemented in Chicago and mapped it out for specific projects—the Red and Purple Modernization, Red Line South Extension, renovation of Union Station and Blue Line reconstruction. I then created a model to forecast how much revenue the Transit TIF would bring in over 35 years and helped draft the legislation—SB2562—that passed in Springfield this past June, granting Chicago the authority to create the Transit TIF. All the while working with my colleague, at the time the Metropolitan Planning Council’s Executive Vice President Peter Skosey, as well as Chicago’s transit and government leaders.

A critical part of the process—in the 2015 federal transportation bill, Chicago gained the ability to receive a $1.1 billion Core Capacity grant for the Red and Purple Line Modernization. As Mayor Emanuel stated: “Literally in Washington, there’s a check with Chicago’s name on it. And I don’t want to miss an opportunity for all the work we’ve done.” But as with most federal dollars, Chicago needed a match to pull those funds.

Yesterday the Transit TIF became that match.

How the Transit TIF works

The Transit TIF runs for six miles along the Red and Purple Lines and one-half mile on either side of the tracks.

Map of the new Chicago Transit TIF: Chicago Transit Authority

Revenue from the Transit TIF generated over its lifetime will repay a $625 million federal low interest loan the Chicago Transit Authority hopes to secure next year. Called a TIFIA loan, (Transportation Infrastructure Finance and Innovation Act) both Denver and San Francisco have used it and similar federal RRIF loans to build transit, repaid with financing mechanisms like the Transit TIF.

The remaining cost of the project will be covered by the $1.1 billion federal grant and $428 million in Chicago Transit Authority funds.

How this Transit TIF is different from a traditional TIF

Transit increases the value of the land surrounding the station, so it makes sense to capitalize on that benefit to fund the transit project. Similar to traditional tax increment financing, under a Transit TIF a special district is created where the property tax base is frozen for 35 years (traditional TIFs are 23 years.) As property values increase over time the added property tax revenues (also called the tax increment) repay the bonds and loans used to finance the project.

But Chicago’s Transit TIF is different than a traditional TIF in two important ways. Once a traditional TIF is in place funding for Chicago Public Schools is frozen at a base—it does not receive any of the property tax revenue growth over that base for the life of the TIF. But the Transit TIF is the opposite—Chicago Public Schools keep all of the base tax revenue and the growth. Schools receive every cent due them as if the Transit TIF did not exist. Additionally, other taxing bodies—the City of Chicago, Cook County, libraries, the Metropolitan Water Reclamation District—will also receive all of the base tax revenue and a portion of the growth. That also doesn’t happen under a traditional TIF.

“Not only does the board of ed get all of the money that it would normally get in this geographic area described in the TIF, but so too do the other taxing bodies,” said Ald. Pat O’Connor (40th Ward). “So it’s more of a hybrid than your normal TIF and takes into account all of the school needs and gives them all of the money they would otherwise get.”

A project for Chicago’s future

The project will reconstruct the busiest and most overcrowded part of the Chicago Transit Authority system—the 100 year old Red and Purple Lines on the north side. Just over the past five years rush hour ridership on these trains has increased 40 percent. As Ald. Ed Burke (14th) stated, "Overcrowding has frustrated and inconvenienced thousands of the riding public."

If you commute on this section of the El to one of Chicago's 600,000 jobs in the Loop you can either pack in like a sardine or wait for the next train and hope it has room. And if you're on the Brown Line you're often stuck at Belmont waiting for the Red Line to pass.

If the reconstruction isn't completed, not another train can run on the tracks and workers will be stuck, making this a critical piece of infrastructure for Chicago's growth and better quality of life for residents.

When the project is complete the life of the tracks will be extended by at least 60 years. Fifteen more trains, accommodating 7,200 people, will run during rush hour—30 percent more than today. Stations will be rebuilt, making them fully accessible with elevators and wider platforms creating a transit system that will be, according to Mayor Emanuel, “...a 21st Century system for a 21st Century economy.”

Chicago going it alone

Some are arguing this sets a precedent for Chicago funding projects on its own, without the state’s help. But I’d argue the City had no choice. With the state in fiscal meltdown, Chicago could not rely on state capital bill funding and it would have left $1.1 billion federal dollars on the table.

Ald. Harry Osterman (48th) agrees, “With no possibility of a state capital bill, we’re left with a transit TIF [to hold onto] highly competitive,” federal funds.

Chicago isn’t alone in relying on its own resources to build infrastructure. Just this past November cities overwhelmingly voted to tax themselves to increase transit funding—Seattle, Los Angeles, Atlanta, Raleigh and Indianapolis. At the state level, in 2015 six states voted to increase Motor Fuel Taxes to fund transportation. But Illinois’ Motor Fuel Tax has remained stagnant since 1990. As a result the revenues from this tax are now worth about half of what they once were.

While Alderman Michele Smith voted in favor of the ordinance, she raised concerns, “This creates an economic burden for decades that limits our ability to raise money for other things [like recreational space]. Our taxpayers in the 43rd Ward are heavily burdened. They would like to see some return that more directly affects them” Smith said.

I agree that we do need to fund recreational space but improving the transit system is an economic boom that benefits every Chicagoan.

Because transit increases people’s access to desirable destinations, like work and fun, people want to live within walking distance of a train station. In Chicago the total amount of land within a half-mile of a CTA rail station is 24.6 percent. And on that 24.6 percent of land—walking distance to the train—lives 35.3 percent of the population. Because of that demand, land near transit stations benefits property owners because it often commands higher prices. In an analysis of land values across Chicago, I found that the closer a property is to a CTA rail station, the higher its value. Properties one-fourth mile from a train station—roughly two blocks—have almost 160 percent more value per square foot than those one mile away and, while property values city-wide fell from 2010 to 2014, land near transit retained more value than land farther away.

Chicago’s population is declining, lagging other metros, east and west coast cities, Midwest peers and even subzero Minneapolis. The transit system is one of Chicago’s most valuable assets—for the city to grow people and jobs—and get people to those jobs—it must capitalize on transit.

Alderman James Cappleman agrees, stating during the City Council meeting that the $203 million rehab of the Wilson Station on the Red Line will provide a strong economic boost to the neighborhood, in fact as a result, 18 new businesses nearby will open

The City that works is getting back to it.