Experts and Business Leaders Believe Engines of City’s Fiscal Ship Powerful Enough to Steam Ahead, Despite Headwinds
The Civic Federation and the Federal Reserve Bank of Chicago hosted an event, ‘Chicago’s Fiscal Future: Growth or Insolvency?’ on Wednesday at the Federal Reserve building. Experts in municipal finance, business, and economic development met to discuss the current economic climate and fiscal position of Chicago, and the sectors and technologies that will drive economic growth.
Chicago Fed Vice President William Testa opened the event with a presentation on the actual balance sheet measures of Chicago’s fiscal capacity. Mr. Testa took a deep look into population trends, the city’s assets and liabilities, and the real estate market. While Chicago’s very poor pension funding ratios, political challenges, and recent historical selling of assets as one-time revenue sources are all deep causes for concern, the real-estate market points to signs that businesses and families “Still see considerable value in the ‘Chicago franchise’ despite mounting debt and the administrative disarray,” as property values rebound, office vacancies decline, and residents are continually more highly-educated.
Fiscal Distress and Municipal Bankruptcy
MuniNet’s own James Spiotto led the first panel on lessons learned from recent municipal bankruptcies. Dr. Eric Scorsone, Deputy Treasurer of the State of Michigan spoke to Detroit. Harrison J. Goldin, founder of Goldin Associates and former Comptroller of New York City, provided insight into that city’s previous fiscal distress. Mary Murphy of the Pew Charitable Trusts shared data on how the States vary in their approaches to municipal bankruptcy.
Moving from a ‘we/they’ to an ‘us’ mindset” is important
Dr. Scorsone detailed the Financial Review Commission that the state put in place to oversee Detroit’s bankruptcy process. Most notably, he credited the powers to approve budgets, large contracts, and debt issuances, as well as the requirement that the city provide them with a four-year fiscal plan, as well as the Commission’s powers overseeing compliance with that plan. The instrumentality of the philanthropic community in bringing the other stakeholders together, fighting on a united front for the prosperity of the city as a whole, was crucial in solving the political loggerheads that exacerbated the city’s financial difficulties. Mr. Spiotto’s re-emphasized that “moving from a ‘we/they’ to an ‘us’ mindset” is important in any municipal bankruptcy or fiscal distress situation.
It was acknowledged that the economic environments of Chicago today and Detroit in the mid-aughts make an apples-to-apples comparison challenging. Chicago’s diverse economy is more akin in scope if not size to New York City. Harrison Goldin attributed much of New York’s problems to a genuine effort to maximize breadth and quality of services, coupled with a lack of professionalization of financial management. Something as simple yet as essential as changing the way city accountants managed the books from an accrual basis on the revenue side and cash basis on expenditure side, to a modified cash basis throughout, created substantial results. He also said that service cuts were a painful, but inevitable and ultimately fruitful part of the process. Service cuts that contributed to fiscal stability created an environment ripe for private investment, which created more prosperity overall.
Ms. Murphy provided data showing that fewer than half of all fifty states have fiscal monitoring or state intervention policies (see map below; it should be noted that some additional states have one or the other; Illinois has policies on the books for state intervention, but not fiscal monitoring). Among the states that do have remedies, their variability among the various states, and the rarity of municipal bankruptcies, make it difficult for researchers to determine a ‘best’ system.
Overall, the panel agreed that some of the most important keys to recovery were:
- Fostering an ‘us’ environment where everyone recognizes they won’t get everything they want, and seeks overall improvement
- Creating a multi-year plan that is broken into smaller, achievable steps. This cannot be accomplished without also first definitively recognizing the true extent of fiscal issues.
- Implementing credible and independent compliance mechanisms
- The idea of ‘getting past’ politics is wishful thinking. Politics are essential to the process. It is only through political consensus-building, difficult though it may be, that solutions are agreed upon and achieved
They also agreed that Chicago’s fiscal issues are solvable short of bankruptcy. There is strong growth downtown, an expanding housing market, and the net flow of educated workers is positive. Number one among the threats to Chicago’s future success is a lack of political will, on all sides, to come together and form solutions.
The Future Business Landscape
David Snyder, longtime publisher of Crain’s Chicago, led a panel focusing on the future of business and the Chicago economy. Mr. Snyder was joined by commodities trading expert John J. Lothian, founder and co-owner of MarketsWiki, Caralynn Nowinski Collens, CEO of UI Labs, an innovation incubator at University Illinois Chicago, that dedicates much of its attention to digital manufacturing, and Jerry Szatan, founder of Szatan & Associates, a leading consulting firm specializing in site selection for businesses looking to form, expand, or relocate. Their insights centered around moving Chicago from the ‘City of Big Shoulders’ to the ‘City of Big Brains’.
Mr. Snyder stated that the era of large public companies being the engine of local growth is over. Mid-sized, privately-owned business are what is driving innovation and growth, especially in the sectors of logistics and healthcare. With no sector forming more than 13% of the total economy, Chicago is healthily diverse. John Lothian gave a vivid history of commodities, options, and futures trading in Chicago, using it as a case study in technologies’ changing the workforce environment. Many jobs have been rendered obsolete, and STEM education is now a key driver of opportunity for Chicago’s youth. Mr. Lothian recommended Chicago should become the STEM capital of the world, and should ‘think big’, by planning and executing a World Fair of STEM, just as Chicago introduced electricity to the world with the 1893 World’s Columbian Exposition.
Ms. Collens showed the work of UI Labs, and how Chicago continues to build as a home to an increasing number successful tech start-ups. But rather than attempt to compete directly with California and become ‘Silicon Prairie’, Chicago can carve out its own niche as the global leader in digital manufacturing, building on its industrial roots. Mr. Szatan did not discount that fiscal health and tax liabilities are a factor for companies, and that they can get to a level of severity as to be a dominant factor. However, in his experience, infrastructure can be just as important, and in most cases, availability of talent is the most important consideration for any firm.
Fiscal health and tax liabilities are a factor for companies, but infrastructure can be just as important, and in most cases, availability of talent is the most important consideration
STEM fields, digital manufacturing, and talent pool availability all point Chicago in the same direction for future investment: education.
The Verdict: Growth
Robert Reed of the Chicago Tribune led the keynote panel on the future of corporate investment in Chicago. David Reifman, Commissioner of Planning and Development for the City of Chicago, Jennifer Rodriguez, Director of Real Estate for Motorola Solutions, which recently moved its headquarters into Chicago, and Kent Swanson, Chairman of the Civic Federation and Executive Vice President of Riverside Investment and Development, joined the previous panel in saying investments in education and fostering a welcoming and attractive environment for talent would drive future growth. Mr. Reed was forceful in holding the panel to acknowledge the City’s challenges, most notably pension funding issues. Also being pushed on the possibility that the real-estate market may be overheating and over-building, the panel acknowledged that if this is the case, it is mostly isolated to higher-end residential. Even if capacity in that area creates oversupply, there can still be strong demand for commercial and mixed-use. Furthermore, businesses are still coming into Chicago at an impressive rate, and with them can come the workforce to provide needed demand.
The panel, when pressed to vote for growth or insolvency in Chicago’s future, all voted ‘growth’. Chicago has a diverse, dynamic economy, a superb higher-education environment, including an improving community-college system, and commercial and residential real-estate prices that are still very competitive compared to other global cities in the U.S., like New York and San Francisco. What we need most urgently is city leadership to focus on working collaboratively to come up with lasting solutions to our fiscal problems. If this can be accomplished, Chicago is in a great position for a sustained period of growth and prosperity.
by Jeffrey L Garceau