Sources of Funding

The city of Chicago uses public-private partnerships as a source of funds, achieved through asset lease agreements. Under Mayor, Richard Daley, the City of Chicago was the first local government to run successful innovative lease for the toll road, underground parking system and a metered parking system. For instance, in 2017 this source of funds provided the residents of Chicago approximately $3.6 billion (City of Chicago, 2018). Importantly noted, these long-term leases of infrastructure assets are only used where there are expected potential financial returns for the city residents. The areas that have been put forward for this kind of management are the non-core competencies areas and those areas where the introduction of experienced and professional operators is bound to improve efficiency, quality of service, and improvement in the capital investments. The key requirement by the City of Chicago in each public-private partnership is on fair treatment of employees, upholding safety levels, strong performance, and maintaining engineering standards.

The City of Chicago also acquires grants funds from federal and state agencies, private functions, and other non-profit organizations. The Office of Budget and Management manages, monitors, and enforces the grant management process. Such grants are used to support the city services, programs, and capital projects

From time to time, the city of Chicago issues bonds as a means of relieving financial pressure. Among the bonds issued include the taxable bonds that are characterized by high-interest rates, which makes their price much higher. Most cities prefer to use the tax-exempt bonds, which though cheaper, comes with a restriction on how to spend them. However, the city of Chicago sought to gain funds that would allow it to pay for its operating expenses such as cater to the daily expense without increasing property tax or reducing prices drastically. For instance, in 2015 the city issued a bond of $743 million at a rate of 8% (City of Chicago, 2017). The money was to be used to cater for costs such as repayment of debts, bank fees, and penalty payments. The cumulative cost in interest for this bond would be more than $500 million over a span of three decades (City of Chicago, 2017).

The City of Chicago also raises another bond referred to as General Obligation Bonds. The bond is used in construction and development of municipal facilities, acquisition of real property, to stimulate economic development, cater for cash flow needs, fund judgment implications against the city, provide grants to not-for-profit organizations, improve infrastructure, and acquisition of personal property (City of Chicago, 2017). In 2017, the City of Chicago issued a general obligation bond worth $3 million for school development. In January 2017, the city of Chicago had also raised general obligations amounting to $1.2 billion that would be split into two series, with series A covering $887 million for tax-exempt and refunding bonds, and series B comprised of $275 million in taxable project bonds (City of Chicago, 2017). 

The mayor of the City of Chicago indicated the plan to create a new entity tasked with the responsibility of issuing bonds backed by the city’s proportion of share of the Illinois sales tax collection. The aim of this move would be to cut down its borrowing costs. Conditions facing the City of Chicago such as chronic structural budget deficit and high levels of unfunded pension liability at $35.76 billion negatively affected the credit ratings of the city, which made investors require higher interest rates to provide debts for the city (Pierog, 2017). The 2018 budget for the state of Illinois made a provision that would allow local governments such as Chicago to apportion their state revenue for issuing debt (Pierog, 2017).

Effects of Taxation

The residents of the city of Chicago have always been subjected to heavy taxation, which causes financial strain. Notably, the 2015 Chicago property hikes had cost implication to an average homeowner amounting to $500 a year (Dabroski & Klinger, 2017). Even in the wake of increased violence in the city, weak job expansion, and incompetent government, the residents of Chicago have been subjected to higher taxations. One noticeable effect of this course is the reduction of the population living in the city as people seek areas with more favorable tax regimes. The population in Chicago is noted to have reduced between 2000 and 2010. Additionally, the Chicago metro area has experienced a reduction in population size for the second year in a row (Dabroski & Klinger, 2017).

Another effect of taxation that can be assessed is whether tax increment financing contributes to expansion in growth. Notably, there is a variation on the impact of spending. Subsidies offered for the purpose of commercial development have indicated a positive relationship between expenditure and property value in Chicago. On the other hand, the infrastructure spending indicated a negative effect between expenditure and property value in Chicago (Kane & Weber, 2015).

Role of Financial Efficiency on Obtaining the Funding

Financial inefficiency conditions at the City of Chicago characterized by the perennial budget deficit and huge unfunded pension liability makes the city’s general obligation credit ratings to be low. This affects the interest rates at which bonds may be provided. It is important to note that, higher interest rates that investors demand, leads to high cost of borrowing for the city.

References

City of Chicago. (2017). Chicago General Obligation Bonds. Retrieved from:https://www.cityofchicagoinvestors.com/generalobligationbonds/i1398

City of Chicago. (2018). Public Private Partnerships; Asset Lease Agreement. Retrieved from https://www.cityofchicago.org/city/en/depts/fin/supp_info/public_private_partnerships.html

Dabroski, T., & Klinger, J. (2017). The Damaging Effects of Chicagoland’s Latest Tax Hikes. Illinois Policy. Retrieved from: https://www.illinoispolicy.org/the-damaging-effects-of-chicagolands-latest-tax-hikes/

Kane, K., & Weber, R. (2016). Municipal Investment and Property Value Appreciation in Chicago’s Tax Increment Financing Districts. Journal of Planning Education and Research, 36(2), 167-181.

Pierog, K. (2017). Chicago Touts New Debt Structure Aimed at Saving Money. Reuters. Retrieved from: https://www.reuters.com/article/us-chicago-bonds/chicago-touts-new-debt-structure-aimed-at-saving-money-idUSKBN1AP2O5