Public Finance Proposal: The City of Chicago

The City of Chicago

Chicago is not just a city, but also an economic powerhouse that boasts of a relatively balanced economy. It is the home to the former President of the U.S., Barrack Obama. In the State of Illinois, Chicago stands out and offers the platform from which the state derives its glory. In terms of population, it is the most populous city in Illinois and the entire Midwest. Nationally, the city compares to the likes of New York and Los Angeles. The industrial success of Chicago can be traced to the two world wars, which spurred the local economy to produce steel and other industrial goods to be used in war. It has continued to evolve and become an economic hub complete with major industries running from manufacturing to information technology.

The city, according to U.S. Census Bureau (2018), had an estimated population of 2.7 million people in 2017. Majority of the residents of Chicago City (about 60%) are between the ages of 18-65 years, which indicates that the population has a sizeable workforce. The population is multicultural, multiracial, and multiethnic as many foreigners settled in the city. 83.1% of persons who are more than 25 years old in the city have a high school diploma while those of the same age and with a Bachelors degree or higher stood at 36.5% (U.S. Census Bureau, 2018). The median household income for the city stood at $50,434 and the per capita income for 2016 was $30,847 while persons living in poverty in the city was 21.7% for the same year (U.S. Census Bureau, 2018). Unemployment in the Chicago area improved from 4.5% in 2017 to 3.6% in 2017 (U.S. Bureau of Labor, 2018). Major employing industries include trade, transportation and utilities, professional and business services, educational and health services, and the government among others.

Cost-Benefit Analysis

Analysis and Decision Making with Regards to Expenditure

Decision making in public spaces is an activity that requires prudence and adherence to the rule of law. This is more pronounced especially when it comes to public finances. It is evident that the public expenditures in this question have to be looked at from two dimensions – the revenue dimension and the expenditure dimension. Revenues are coming in since one cannot spend what they do not have.

From the analysis, it is clear that public revenues are not increasing with big margins. This means that public expenditures cannot be allowed to increase. If it happens, a deficit in the budget is likely to arise, which will constrain the future plans of the city. If there is a serious need for expansion, there should be a great evaluation of areas where the revenue net can be expanded further to ensure that it covers the projected increase. To do this, the City of Chicago can explore options beyond the traditional methods of revenue collection. To do this, the City can look at long-term investments, such as the purchase of Federal Government Bonds, trading in the stock market, and conventional investments, which will supplement the more stretched revenue.

Schick (2015) emphasizes on the need for appraisal of objectives and alternatives in public expenditure. For every cost center, the City of Chicago should ensure appraisal of the cost center before and after injection of finances. This will ensure that the city makes decisions on how to spend its revenue from a rational point of view. Consideration of alternative forms of expenditure should also be done to ensure that projects are competitive, and the decision to settle on any one of them is after careful consideration of other ways to spend the money. In this case, only settle on the project with the biggest impact.

Role of Economic Theory

The economic theory has had an important role in this project. Different theories have been referred to and their decisions advice and implications taken into consideration. Some of the theories include the marginal productivity theory of wages, the theory of taxation, and the theory of value. The marginal productivity theory of wages evaluates the impacts of employing additional workers. The theory asserts that wages paid at a certain level should equate to the marginal revenue product of labor (Ehrenberg& Smith, 2016). Marginal revenue product of labor is an increment to revenues resulting from employment of an additional worker. There above, it has been seen that there has been no increase in revenues in the city. Following this theory, no more workers should be employed since employing more workers leads to no corresponding increase in revenues.

It is an increment to revenues caused by an increment in one more laborer being employed. There above, it has been seen that there has been no increase in revenues in the city. following this theory, no more workers should be employed.

Next is the theory of taxation. On this, the most important part is the part of the excess burden of taxation. When considering this theory, the economic losses suffered by the community due to increased taxation become a problem as evaluated by Atkinson and Stiglitz (2015). The community in Chicago is already taxed to the limit and adding to the same tax burden would effectively hurt the economy. For this reason, they should consider exploring the generation of additional revenue away from the traditional sources, which are predominantly taxes or licenses.

The theory of value requires that value creation and dissemination should be equally distributed across the entire city, a concept well enumerated by Quah and Haldane (2007). All communities in the city should be pushed to create value and the same value distributed fairly among them. It is on this premise that this analysis has surfaced the concept of appraisal of objectives and alternatives. There should be sufficient consideration of the objectives the city has concerning financial management. The objectives should ride on the concept of full value, which should be distributed, to the entire community. Projects that have the maximum value to the most population should be evaluated. To do this, various alternatives should be looked into.

Influence of Economic Theory on CBA

The influence of economic theory on this cost-benefit analysis cannot be underestimated. Economic theory informs actions and potential effects of the same. In light of this, three theories have been mentioned above including the marginal productivity theory of wages, the theory of taxation, and the theory of value. The marginal productivity theory of wages has been instrumental in the evaluation of whether more hiring should be done with the current increase in productivity. Consistent with the theory, it is not advisable to hire more labor is there is no sign or prospects of revenue increase. The city should evaluate other means of stimulating productivity with its current workforce.

The theory of taxation has made it possible to evaluate the effects of increasing taxes, levies, and license fees to the community. By following the maxims of this theory, it is evident that the City has exhausted its revenue streams and expanding the same will be detrimental to the economy of the city. Last is the theory of value. This theory provides that there be a maximum value of the population, and the value should be distributed effectively and fairly. In this case, the concept of appraisal of objectives and alternatives should be done effectively.

Sources of Funding

The city of Chicago uses public-private partnerships as a source of funds, which is achieved through asset lease agreements. Evidently, 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 fund provided to the residents of Chicago approximately $3.6 billion. It is also important to note that,  these long-term leases of infrastructure assets are only used where there is 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 the capital investments. The key requirement by the City of Chicago in each public-private partnership is 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

The city of Chicago sometimes issues bonds as a means of relieving the 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 are cheaper but come 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. Notably, in 2015, the city issued a bond of $743 million at a rate of 8%. This 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.

The City of Chicago also raises another bond referred to as General Obligation Bonds. This is to be 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 to be used in 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.

Effects of Taxation

The residents of the city of Chicago have been always subjected to heavy taxation, which causes financial strain. For instance, the 2015 Chicago property hikes had cost implication to an average homeowner amounting to $500 a year. Additionally, even in the wake of increased violence in the city, weak job expansion and incompetence of the 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 has also significantly reduced between 2000 and 2010. Along with that, 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. Evidently, there is variation in the impact of spending. Subsidies offered for the purpose of commercial development indicate 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).

Income Redistribution and the Local Economy

Income redistribution can have either positive, negative, or zero effects on the local economy, especially in the long term. Income redistribution can take different forms. For instance, the government can use taxes or measures that will grant the poor some economic advantages. When the poor are handed economic advantages, such as food STAMPS and unemployment benefits, benefits are mostly accrued in the short term. The programs are also not sustainable as they are financed directly from the government revenue, which also means that the government must have obtained the money from somewhere. In such a case, authorities might raise taxes to finance such activities, which would negatively affect the local economy as examined by Dabla-Norris et al., (2015). When authorities use taxes to redistribute income then the effects change. For instance, consider a situation where taxes for the poor are reduced or a reduction in taxes for activities that affect capital investments by companies. In these situations, the propensities of investment in activities that create wealth exist and there are positive effects to the local economy.

Welfare Spending in the City and the Effect on Employment Market

The City of Chicago has different measures aimed at checking on the welfare of the residents in the city. The City of Chicago has been experiencing a reducing unemployment rate as shown in the graph below. The city has been subjected to intense tax reduction and the effects have been felt. The city has instituted measures to ensure that some of the welfare spending is sustainable. For instance, the unemployment welfare has been reshaped to save the city huge amounts by ensuring that employed people are insured against unemployment. This ensures that they can contribute to the welfare when they have the means, and when they fall into problems they can be helped. The city spent about $584 million on community services in 2015, which reduced to $580 million in 2016. This showed that the city reduced its expenditure on welfare services by 4 million. It shows that a decrease in expenditure on welfare leads to an increase in the employment rate in the short term.

References

Atkinson, A. B., &Stiglitz, J. E. (2015). Lectures on public economics. New Jersey: Princeton University Press.

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

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/

Dabla-Norris, M. E., Kochhar, M. K., Suphaphiphat, M. N., Ricka, M. F., &Tsounta, E. (2015). Causes and consequences of income inequality: A global perspective. International Monetary Fund.

Ehrenberg, R. G., & Smith, R. S. (2016). Modern labor economics: Theory and public policy. New York: Routledge.

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

Quah, E., & Haldane, J. B. S. (2007). Cost-benefit analysis. Routledge.

Schick, A. (2015). The road to PPB: The stages of budget reform. In Public Budgeting (pp. 39-56). Routledge.

U.S. Bureau of Labor. (2018, March 10). Chicago Area Economic Summary. Retrieved from: https://www.bls.gov/regions/midwest/summary/blssummary_chicago.pdf

U.S. Census Bureau. (2018). Quick Facts: Chicago city, Illinois. Retrieved from: https://www.census.gov/quickfacts/fact/table/chicagocityillinois/PST045217