Category Archives: Chicago

Trends in Education and Income in Chicago

Harvard economist Edward Glaeser shows that education is one of the strongest predictors of urban economic growth.   This is particularly the case for older cities like Chicago.  One of the reasons for this is that a higher density of college-educated workers is associated with higher levels of worker productivity.

There is very good news for Chicago.  Recent data for 2016 from the United States Census Bureau’s American Community Survey shows that the city of Chicago now has the highest percentage of college graduates of the seven largest cities in the United States (Table 1).  Almost 2 out of 5 adults twenty-five and older in Chicago have at least a bachelor’s degree. Chicago beats New York City, Los Angeles, San Antonio, Houston, Phoenix, and Philadelphia.  Of the ten largest cities, only San Diego and San Jose have higher levels of educational attainment as measured by the percentage of adults with at least a bachelor’s degree.

If the sample is limited to non-Hispanic whites, Chicago even beats San Diego and San Jose, the home of Silicon Valley.  For this population, over 3 in 5 have a college degree in Chicago.  In some community areas in Chicago like Lincoln Park, Lakeview, and the Loop, about 4 out of 5 have a college degree.

One of the reasons for Chicago’s success in this arena is that the city of Chicago is an attractive place to live and work for college graduates, especially young grads.  Over half of the young college graduates in the Chicago metropolitan area live in the city of Chicago.  This is up from about forty percent in 1990.

Another reason is that migrants to Chicago are more likely to have a college degree.   Last year about 3 of 4 migrants to Chicago from other states and from abroad had a college degree.  Ten years ago only about 1 in 2 migrants to Chicago had a college degree.  It is particularly noteworthy that in 2016 seventy-three percent of foreign migrants to Chicago had a college degree.

If one goes back in time, Census data indicates that adults in the city of Chicago were significantly less educated than their suburban counterparts.  This is no longer the case.  The percentage with a college degree in Chicago is higher now than in the suburbs of the Chicago metropolitan area although some suburbs have higher levels of attainment (Table 2).  For example, 2 out of 3 residents of Evanston have at least a bachelor’s degree.

Although non-Hispanic whites who account for about one-third of the population of Chicago are doing well, the situation for African-Americans and Hispanics is more mixed.  Of the ten largest cities in the United States, African-Americans in Chicago rank seventh and Hispanics rank ninth in the percentage of adults with a college education.

The good news is that both the percentage and number of college-educated African-Americans and Hispanics in the city of Chicago has increased since 2010.  This is also the case for non-Hispanic whites and Asians. In Table 3, data are arrayed on the number and percentage of college graduates in the city of Chicago by race and ethnicity.  The data indicate that the largest gain in the number of college graduates was for non-Hispanic whites followed by Hispanics.  The largest relative gain was for Hispanics (over fifty percent) followed by Asians.  Overall, there was a 20% increase in the number of college graduates in the city of Chicago between 2010 and 2016.   Part of the increase is a result of growth in the number of non-Hispanic whites, Hispanics, and Asians in the city.  For the African-American population, growth in the number of college graduates cannot be attributed to population growth because the number of blacks in the city declined by ten percent during the 2010-2016 period.

In suburban areas, the story is different, as shown in Table 4.  For example, in suburban Cook County non-Hispanic whites are over twenty percentage points less likely to have a college degree than their counterparts in the city of Chicago.  Further, there has only been a one percent increase in the number of non-Hispanic whites with a college degree in the suburbs of Cook County. This is partly a result of a seven percent decline in the non-Hispanic white populations in suburban Cook County.  At the same time, there have been large increases in the number of African-American, Hispanic, and Asian college grads in suburban parts of Cook County.  For example, for the 2010-2016 period, the African-American population in suburban Cook County increased twelve percent.

Further, Chicago public schools that disproportionately serve African-American and Hispanic families have improved considerably. Over the past ten years, CPS high school graduation rates have increased from fifty-seven percent to seventy-four percent. Of high school graduates, a higher percentage are going to college. Test scores are up as well. Low-income students in Chicago outperform other low-income students in other districts in Illinois.  A Stanford study argues that CPS is the fastest-improving school district in the country.

It is worth noting that in the 1980s Secretary of Education Bennett called the Chicago public school system “the worst in the nation.”  Although it is not clear if that was ever the case, it certainly is not now.

Although there is good news on education, the evidence on income is more mixed.  This is partly a product of national trends over the past couple of decades.  For the city overall, median real household income increased three percent last year.  Since 2010, real income has increased close to eight percent  although there is substantial variation by race and ethnicity.  Non-Hispanic white income increased seven percent while Hispanic income increased almost ten percent.  Although household income in the African-American community increased this past year, it is almost five percent lower in real terms since 2010.  Over a longer period of time (since 1979) African-American income has declined even more (twenty-one percent) although non-Hispanic white income is up substantially (forty-three percent).

In the suburbs of Chicago, household income has also increased modestly (about three percent) this past year.  Over a longer period of time, non-Hispanic white income in the suburbs is about where it was at in 1979.  However, median household income for African-Americans in the suburbs has remained constant since about 1979.

Although education has increased in the city of Chicago relative to suburban Chicago, median household income in suburban areas is still significant higher than in the city of Chicago.  In 2016, household income in the city was eighty percent of median household income in the metropolitan area.  This is up two percentage points since 2010.

These changes have driven other important changes in Chicago.  On the positive side, the high concentration of talent in parts of the city is resulting in high skilled jobs following the talent, especially to areas in and around the central business district.  Further, more educated and affluent African-Americans and Hispanics have been able to move to suburban locations for better opportunities for their families.

On the negative side, the large and continued decline in income in the African-American community in many parts of the city of Chicago is cause for concern.  This is resulting in well over half of the children in community areas like Englewood and West Garfield Park growing up in poverty.  It is also resulting in large population declines in communities like Englewood and West Englewood.

 

Revisiting fiscal federalism: Implications of Illinois’s and Chicago’s fiscal problems

Broadly speaking, fiscal federalism is a theory of public finance concerned with how to most appropriately and efficiently provide government services (or public goods) through different levels of government. This theory also involves how to set up the fiscal relationships (e.g., conditional versus unconditional transfers) between the different levels of governments to best provide these services. In the United States (and many other countries), there have traditionally been three levels of government—federal, state, and local—among which to divide up key government functions. According to the purist form of the theory, decentralization away from the federal government promotes welfare gains, as the scale of provision of particular services is scaled to the size of the population being served. This is partly based on the idea that public goods should be defined by geography, such that there are national public goods (such as defense) and local public goods (such as public school systems). Moreover, cost efficiencies—and benefit spillovers—may occur when the level of public service is calibrated to the particular preferences of the electorate in that geography rather than the central government providing the service in a uniform way.[1] Generally, the theory of fiscal federalism has been a guiding principle for the design and delivery of government services in the United States.

In 2008, public finance economist Wallace Oates suggested a revised theory for fiscal federalism.[2] Oates observed that while lower levels of government (states or municipalities) may have explicit rules against running budget deficits or amassing unsupportable levels of debt, they often ignore these restrictions under the hope and belief that a higher level of government (the federal government or states) will bail them out. For Oates, the lower level of government’s political incentives for not having to make difficult fiscal adjustments might outweigh those for exercising fiscal prudence. Therefore, lower levels of government can engage in fiscal behavior that can place burdens on higher levels of government. This reallocation of fiscal costs can undermine the efficiencies gained under the traditional notion of fiscal federalism. In this blog entry, I will consider fiscal federalism, including Oates’s revised version, in light of Illinois’s and Chicago’s recent fiscal challenges. Is the state or the city skirting fiscal rules in the hopes that a higher level of government might bail it out? Are the political incentives not to solve the problems now large enough to forestall any further action to fix them?

New perspectives on fiscal federalism

Oates suggests an important revision to thinking about the actual operation of fiscal federalism. Oates argues that rather than promoting the efficient provision of government services, fiscal federalism can incentivize certain levels of government to try to extract or indeed extract (albeit inefficiently) resources from other levels of government. An example of this is a “soft-budget constraint.” If there’s an implicit understanding that a lower level of government can count on help from a higher level of government when the former gets into fiscal difficulties, the lower level may be encouraged to unduly run deficits and expand debt. Essentially, for the lower level of government, there’s no credibility to any pledge by the higher level of government to not intercede during a time of fiscal stress. The lower level of government operates under the assumption that the higher level of government is interested in the welfare of all of its citizens, so it cannot allow a lower level of government to fail. The key question is why there is a soft-budget constraint? One theory is that the fiscal responsibilities between governments are poorly defined, which can lead to fiscal misbehavior. For instance, local governments may view themselves as providing essential public services that higher levels of government could justify supporting during an economic downturn. So, local governments may not be maintaining a rainy day fund, instead allocating dollars that should have reserved for such a fund to other parts of the budget that are more politically expedient. A second theory is that in many cases, the bond market presently does not—or perhaps cannot—accurately account for the political or financial risk of some government bonds. This may be reflected in fairly positive bond ratings for poorly fiscally performing units of government. Of course, bond ratings are designed to reflect the default risk attached to a specific bond issuance and not necessarily the underlying strength of the issuing government. If the bond covenant provides protections and preferences for the bond to be repaid even in the face of poor fiscal performance, the rating will reflect this. Still, such “mispricing” in the bond market can allow for mischief on the part of lower levels of government. So, for example, if borrowing (to cover a deficit) can continue even in the face of fiscal instability, the only penalty a profligate local government faces is having to pay a higher borrowing rate. Similarly, if the capitalization of poor fiscal performance into land values is not readily recognized (or in the case of strong fiscal performance, not rewarded), the political penalties of poor management may be small, at least to the current stewards. Additionally, if there is a history of bailouts by the federal government during recessions, it can be rational to assume that lower levels of government can be bailed out by a higher level of government that does not face a budget constraint. This belief can breed fiscal misbehavior among lower levels of government.

Considering the fiscal woes of the State of Illinois and the City Chicago, there’s a strong case to be made that all of the aforementioned may have occurred. First, despite frequent and substantial credit rating downgrades, both Illinois and Chicago have repeatedly issued bonds despite their deteriorating fiscal conditions. While these bonds have carried higher interest rates, the ability of the state and local government to take on more debt despite their fiscal problems suggests that the bond market provides little discipline for poor fiscal behavior. Second, Chicago has sought fiscal relief for times when the state has tried to impose a fiscal limit. The state passed new pension contribution requirements for Chicago; and when the costs of funding these requirements became apparent, the city government requested a new schedule for making these payments. Even at the state level, the funds that Illinois received from the federal government in the wake of the Great Recession (as part of the countercyclical aid program instituted under the American Recovery and Reinvestment Act of 2009) arguably helped the state not make fiscal adjustments in light of deteriorating circumstances. In practice, this means that residents potentially overconsume public services because they do not pay the full tax associated with providing the service.

How to make fiscal decentralization more effective

With all that said, this discussion of the theory of fiscal federalism can still extend to whether the “right” level of government is delivering the “right” service and which level of government should be paying for that service. Early childhood education is a good example illustrating the challenges associated with figuring these things out. Often early childhood education is provided at the local level (sometimes, it’s provided at the state level); yet given the national returns to improving educational outcomes, some would argue that this should be a federally funded program.

To determine the size of welfare gains from fiscal decentralization, it is important to calculate the variation in demand for the government services across jurisdictions, as well as the variation in costs for providing these services. If no variation existed, central provision of a uniform public service would probably make the most sense. However, since variation does exist, welfare gains can be realized, assuming the state or local government can estimate the level of service that residents demand. Under fiscal federalism, a multilevel system of government efficiently provides different types of public services to its specific constituencies. A complicating factor is when a government service provides a spillover benefit to another constituency. In a case of a locally provided government service that has a spillover benefit, an efficient form of fiscal federalism would suggest that the higher level of government provide a grant in order to encourage the local government to provide the service in a socially efficient way. An example of this might be a grant from the federal government or state government to a local police force to share its law-enforcement database with others. Oates also argues that in some cases fiscal equalization grants might be called for when a locality lacks the tax base and/or resources or faces high costs in providing particular services.

A new model for fiscal federalism?

Coupled with the original notion of a fiscal federalist system, Oates’s critique suggests a new model may be needed. This model would have two components. First, there would be a binding budget constraint on both the state and local governments. If policymakers in both subnational governments knew that they had to provide truly balanced budgets on an annual basis, they could not create budget deficits under the assumption that their governments could be bailed out by a higher level of government. In practice this would mean that each subnational government would have to have a structurally balanced budget,[3] based on normal trends in the state or locality. Work by Richard Dye and David Merriman[4] has created a structural model of total state expenditures and revenues for the State of Illinois, which allows the future budget performance to be projected under the assumption that the underlying trends in expenditures and revenues are maintained. This type of model allows an estimation of the structural budget gap between expenditures and revenues to be identified.

To be clear, a binding budget constraint would need to exist to determine the structural trend in the state or localities budget. The exception where aid from the federal government could be warranted is in the case of a national recession. During a downturn in the business cycle, maintaining social service and other countercyclical state and local spending can have a positive spillover effect to the national economy and, therefore, reflect good fiscal policy. However, even in this case, the federal assistance should be linked to an objective, rules-based method for determining the timing and appropriate level of federal support.[5] The alternative to permitting federal intervention during a national recession would be to require states to carry larger budget reserves to smooth out what would otherwise be volatile fiscal behavior during a downturn. The size of the reserves could be determined from a stress-test type model, where the sensitivity of the state budget to differing economic scenarios could be estimated. States with more stable revenues and expenditures in fiscal downturn scenarios would carry smaller reserves than those with more volatile taxes and spending.[6] Again, the approach would be to base this on a rules-based system to ensure all states and localities comply. Part of the goal of such a binding system is to improve fiscal transparency: This approach would make the true tax price of providing government services readily apparent.

The second element of this revised federalist model is to do a better job at estimating where spillovers occur in government provision to ensure that the right level of government is providing resources for the service. Robert Inman[7] has consistently argued that it is inefficient for cities—which often have larger shares of distressed population than suburbs and rural areas—to be responsible for funding government programs targeted to this population. His preferred strategy would be for the city government to develop and administer the government programs, but with funding provided at the regional level. Under the usual fiscal federalist structure, the city absorbs the cost of providing a service (to the distressed population) that yields regional spillovers. Inman has further argued that program provision at the local level can be more efficient because those in the local government will likely know the needs of the population better than those in a higher level of government. He suggests that this is what occurs in Pittsburgh: The county funds Pittsburgh’s social welfare programs, and the city is responsible for administering them. When cities are forced to bear these costs alone, this can limit their ability to fund other government services that might encourage private sector investment. An example of a more controversial extension of this idea would be to examine how investments in human capital and education are made. If it can be assumed that there is a national economic return to human capital investment, an education model that is based on local preferences may not be the most efficient. A purely local model would make sense if it can be assumed that the level of education provided meets local taxpayers’ expectations and that recipients of the education stay in the locality. However, under the assumption that promoting labor mobility is desirable, changes in certain expectations for education might be appropriate. For example, state reductions in funding for higher education has been frequently lamented. A clear case for state support could in theory be based on whether the graduates stay in the state after graduation so that the state and taxpayers receive a return on their education investment. Assuming that students at community or regional institutions within the state may be less mobile, state support may be more justified for these types of schools than for a flagship university drawing an increasingly national or international student body that is more mobile after graduation. In fact, in most cases, recent reductions in support for public university systems have been most pronounced for the flagship public institutions. That said, if the spillovers from the national public universities are to the nation as a whole, this suggests that increased federal support might be appropriate. Again, the goal is to identify where the spillover occurs and to better match where the funding comes from with the level of government benefiting from the service provision.

Conclusion

Fiscal federalism’s guiding principles have generally served the United States well throughout its history. However, Oates and others are correct in arguing that these principles, along with the underlying theory, need to be revised—especially given how federal, state, and local governments have behaved over the past few years.

[1] Another gain from fiscal decentralization may be innovation. Allowing service delivery experimentation tailored to the constituency the level of government is serving can lead to breakthroughs in service delivery, which may applied to other jurisdictions.

[2] Wallace E. Oates, 2008, “On the evolution of fiscal federalism: Theory and institutions,” National Tax Journal, Vol. 61, No. 2, June, pp. 313–334, http://www.jstor.org/stable/41790447.

[3] To see what I mean by “structurally balanced budget,” see http://gfoa.org/achieving-structurally-balanced-budget.

[4] See, for instance, https://igpa.uillinois.edu/policy-initiatives/fiscal-futures-project.

[5] For a discussion on how to optimally design federal support, see Richard H. Mattoon, Vanessa Haleco-Meyer, and Taft Foster, 2010, “Improving the impact of federal aid to the states,” Economic Perspectives, Federal Reserve Bank of Chicago, Vol. 34, Third Quarter, pp. 66–82,  https://www.chicagofed.org/publications/economic-perspectives/2010/3q-mattoon-haleco-meyer-foster.

[6] Richard Mattoon, 2003, “Creating a national state rainy day fund: A modest proposal to improve future state fiscal performance,” Proceedings: Annual Conference on Taxation and Minutes of the Annual Meeting of the National Tax Association, Vol. 96, pp. 118–124, http://www.jstor.org/stable/41954399.

[7] Robert P. Inman, 1995, “How to have a fiscal crisis: Lessons from Philadelphia,” American Economic Review, Vol. 85, No. 2, May, pp. 378–383, http://www.jstor.org/stable/2117952.

Poor fiscal performance a problem for both state and local governments in Illinois

For a recent Chicago Fed Letter article, I looked back at the fiscal performance of Illinois’s state and local governments and found that, taken together, Illinois governments had been consistently spending more than they had brought in since at least the late 1980s. I also found that while the typical U.S. state often spent more than its revenues over this period, the extent of Illinois’s overspending (or under-taxing) was significantly greater. Finally, I found that the biggest difference in spending between Illinois and the typical state was that Illinois governments spent more on pensions.[1]

As I discussed in the article, in order to compare Illinois’s fiscal performance with other states’, I had to combine the data for state and local governments together. This was necessary because each state divides responsibilities for its activities differently between state and local governments (for example, some states fund K–12 schools primarily through state revenues, while others fund them primarily through local revenues).

That said, one question that naturally arises from my analysis is this: Was it Illinois’s state government, its local governments, or both that engaged in overspending (or under-taxing)? While it is not feasible to use the U.S. Census Bureau data I used for the Chicago Fed Letter to compare the performance of Illinois’s state or local governments with those of other states and their localities, it is possible to compare the performance of Illinois’s state government with that of its local governments.

There is one important caveat to the comparison that follows. During fiscal years (FY) 1988–2013, an average of 25.2% of local government revenues in Illinois came from the State of Illinois. This means that local governments in Illinois depend quite heavily on revenues from the state government to balance their books, and that some amount of overspending (or under-taxing) at the local level could be the result of unpredictable declines in revenues from the state government. However, at least for FY1988–2013, this does not appear to be the case, because the percentage of local revenues coming from the state was relatively stable (the standard deviation was 1.9 percentage points). Any overspending at the local level, then, was largely the result of locally made decisions.

Figure 1 plots expenditures as a share of revenues for the State of Illinois and for the sum of local governments in Illinois since FY1988.[2] Over these years, local governments (summed together) have never spent less than they brought in. Perhaps surprisingly, the State of Illinois often performed better than local governments, though it did much worse in the years following the 2001 and 2008 recessions. The state spent less than it brought in in seven out of the 26 years the data cover—which is not a good performance, but better than the performance of local governments.

blog-1-expliaprev

Because the Census Bureau data lump all 6,963 local governments in Illinois[3] together, it is impossible to know from the data which of these governments are responsible for the overall overspending (or under-taxing). Poor fiscal performance could be concentrated in a few large governments or be widespread. While it is well beyond the scope of this blog post to gather data on the overall fiscal performance of thousands of local governments, I am able to look at the performance of local governments’ pension systems, which is insightful because as I noted earlier, pension spending was one of the biggest contributors to overspending (or under-taxing) by Illinois governments.

Perhaps the best summary measure of the condition of a pension system is its unfunded liability. This is the difference between the discounted present value of all the future payouts the pension has promised to make and the value of the pension’s assets. The unfunded liability, then, is the amount that taxpayers will have to contribute to the pension system in order for it to be able to cover all of its promised future payouts.

Table 1 shows a breakdown by locale of the total unfunded pension liability facing Illinois state and local governments at the end of FY2014.[4] Of the $158.2 billion total, $104.6 billion (66%) was the responsibility of the state government and the remaining $53.6 billion (34%) was the responsibility of local governments. Beyond the state versus local government comparison, things get complicated because some pension systems cover overlapping geographies. The City of Chicago has six separate pension funds covering its workers, and there are three for Cook County employees (Cook County holds almost the entirety of Chicago and a number of its suburbs[5]). On top of that, most municipalities have their own police and firefighters pensions, and there is a single pension system for all other non-Chicago municipality workers called the Illinois Municipal Retirement Fund.

Even though the system of local government pensions in Illinois is somewhat complicated, it is clear from table 1 that the City of Chicago is disproportionally responsible for the accumulation of local unfunded pension liabilities. A little over one-fifth of Illinois’s population is in Chicago, but Chicago is responsible for more than half of local government unfunded pension liabilities in Illinois. Chicago residents owe $10,492 per person to their city’s pension systems, on top of the $8,130 per person they owe to the state pension systems.

blog-3-table-1

To make the comparison of the unfunded liabilities of Illinois’s local governments clearer, I show in table 2 the total per capita state and local unfunded liability by place of residence. There is one wrinkle acknowledged within the table, however, which is that Chicago residents are responsible for the pensions of all Illinois teachers, while Illinois residents outside of Chicago are not responsible for the pensions of Chicago teachers. Thus, perhaps a fairer comparison is to count the unfunded liability of the Chicago teachers’ pension fund as a state-level liability. While this change reduces the unfunded pension liability faced by Chicago residents by 13%, they still would owe a total of $17,506 per person to various Illinois pension systems. Those living outside Chicago would face a smaller, but still quite large, liability per person ($11,954 in suburban Cook County and $10,553 outside Cook County).

blog-4-table-2

While suburban and downstate police and fire pension systems make up a relatively small part of the total unfunded pension liability of Illinois’s state and local governments (5.6%), pension systems for some municipalities may be in much worse shape than others, so that these liabilities can still matter quite a bit. Table 3 shows the unfunded liabilities for police and firefighters pensions for the 25 most populous cities in Illinois. Chicago is in the worst shape, but residents of Moline, Rock Island, Evanston, and Peoria all owe more than $2,000 per resident to their police and firefighters pension systems. Some cities are in much better shape. For example, residents of Urbana owe fewer than $500 per resident to their systems.

blog-5-table-3

This blog post shows that overspending (or under-taxing) has long been a problem for both the State of Illinois and the local governments in Illinois, with the accumulation of unfunded pension liabilities playing an important role at both levels of government. And while the City of Chicago has built up a larger unfunded pension liability than that of suburban Chicago and downstate Illinois, every region of Illinois bears some blame for overspending (or, once again, under-taxing).

[1] See the Chicago Fed Letter for a detailed explanation of how I calculate pension spending.

[2]See Chicago Fed Letter for details about how these figures are calculated. Expenditures include the change in pension liabilities.

[3] 2012 Census of Governments (https://www.census.gov/govs/cog/).

[4] All unfunded liability data come from the 2015 Biennial Report of the Illinois Department of Insurance Public Pension Division, http://insurance.illinois.gov/Reports/Pension/pension_biennial_report_2015.pdf.

[5] Technically, a portion of O’Hare Airport—and therefore Chicago—is in DuPage County.

Detroit and Chicago: Real Property Value Comparisons

Both Chicago and Detroit have become poster children for city government financial stress in recent years. Chicago’s city and school district alike have been running structural deficits, meaning that the government has been covering its normal operating expenditures by issuing or over-extending debt and running down its assets. Both Chicago’s municipal government and school district face large shortfalls in required contributions for the future pensions of current and retired employees. Both have raised local property taxes as partial steps toward balancing their budgets. In the case of Detroit, the city has only just emerged from Chapter 9 bankruptcy while its school district teeters on insolvency under state-mandated “emergency manager” operation.

Are these places comparable in terms of their outlooks and situation? The value of real property in each place offers one fascinating indicator of the resources available to their local governments, as well as a look into how private homeowners and commercial property owners perceive the general prospects of Detroit and Chicago.

Why examine real property values? In some sense, real estate and improvements are long-lived assets that are largely fixed in place. In the market for these properties, buyers and sellers must assess and incorporate the government fiscal liabilities and service benefits – present and future – attached to these properties in the prices at which they buy and sell. High (and rising) property values may indicate that home owners and commercial property owners expect that the prospects for value in these locations are good and that they will continue to improve. And from the local government’s perspective, high values indicate that there may be room for further imposition of local taxes to fund government services, if need be.

Nuts and bolts

The estimation of the value of real property—land and improvements– in a locality is far from an exact science. The actual sales prices of property can be thought of as one reflection of an individual parcel’s value. However, as we saw during the financial crisis last decade, sales transaction prices can be very volatile, and sometimes speculative. More practically, parcels of property do not turn over frequently, so that transactions prices of all property parcels are not observed in any one year. In practice, then, local public officials often rely on various estimation methods in assessing the value of property for taxation purposes, most of which involve using a sample of information from similar properties that were sold during a year. From the recorded sales price and a property’s particular features such as size, location, age, and configuration, the property assessment office infers the value of each property and, ultimately, the total value of property against which taxes are levied.1 These taxable values are often termed assessed values or sometimes equalized assessed values and often represent some fixed percentage of market or true value.2

In the charts, we draw on such data from the local and state governments of Detroit, Chicago, and Illinois to estimate the market or true value of real property in both Detroit and in Chicago.3 For Detroit, figures on total assessed property value are published in the city’s Comprehensive Annual Financial Report (CAFR). By law, assessed value must amount to one-half of true value in Michigan. And so, to arrive at our estimates of full value, we simply double the assessed value. We believe that this yields a far upper bound on the value of residential property in Detroit because there is much evidence that, following the steep plunge in Detroit’s property market over the last decade, assessments were not reduced to accord with actual market value in a timely fashion.4

Drawing on prices of homes that recorded sales, the following chart shows that average home prices began to fall in 2004, while assessed value did not begin to fall until 2009.Detroit_Assessed_HomePricesFor Chicago, a prominent local government “watchdog” and research foundation has long been using state and city data on recorded property sales by class of property to estimate full market values.5 The accuracy of these data is believed to be reasonable, though far from exact.6

What do we see?

Due to lags in data availability, the estimates below are representative through calendar year 2014. The charts display total property value across all types, as well as the largest category in both Chicago and Detroit, that being residential property.

As shown here, Chicago real property value rose dramatically during the early part of last decade before dropping off just as dramatically. Detroit’s property values remained flat. However, Detroit’s apparent stability belies the fact that assessed values of residential properties have not been allowed to fall off in tandem with actual market transactions price there. As measured by volume of sales, the market for residential real estate in the city of Detroit became almost nonexistent during this period.7 Few homes were sold using conventional financing; almost all of them sold for cash. By some estimates, prices of homes sold fell by many multiples during this time, though they have since been heading back up in parts of the city.

Even using generous measures, and with rising home prices in some neighborhoods, residential property value overall in Detroit have continued to drift lower in recent years. In contrast, following the steep decline, Chicago property values have begun to recover for both residential and commercial (not shown) property.

Most telling, at over $80,000 per resident, the value of overall taxable real property in Chicago remained markedly higher than that of Detroit as of 2014. By even our generous measure, Detroit’s property values were only about $25,000 per resident.Detroit_Chicago_PropValuesDiscussion

It would appear that, as measured by real estate values, Chicago’s economy and prospects remain much stronger than Detroit’s. And from a local government perspective, Chicago’s taxable resources with which to pay down liabilities and fund public services appear to be much larger. Of course, there are myriad political and institutional factors at play that render such a simple assessment of wealth inadequate to characterize the fiscal capacity of these cities. In both places, for example, property wealth is concentrated in a subset of places such as near the downtown areas and along the waterfronts. Accordingly, it may be difficult to tap available property wealth selectively because existing statute largely requires that tax rates be applied uniformly. And voters and their representatives may be reluctant to allow tax hikes at all. Similarly, there may be different levels of sensitivity to taxation in these two places and among different constituencies. For example, the imposition of new and higher taxation may cause economic activity and investment to decline more sharply in one place as opposed to another.

More broadly, we might ask whether property wealth is a good indicator of potential resources that local governments may draw on to fund services. A look at more U.S. cities may be helpful. The next chart undertakes the same exercise for the most populous cities. Here we see that Chicago continues to look fairly robust by this measure, though less so than the cities of San Diego, Los Angeles, Austin, and New York City.MajorCities_ProvValues

  1. Assessed value of property for taxation purposes is often a fixed percentage of market value across all property parcels, or else it is a fixed percentage across all parcels of a certain type or class such as residential, commercial or industrial. In turn, estimates of full value of all property can be made by taking sample average ratios of “assessed value/sales price” and applying these ratios to all parcels’ assessed values.
  2. Equalized assessed values refers to the practice of further adjusting the totalities of assessed value of property across jurisdictions so that each locale’s assessed valuation represents the same or “equalized” value in relation to (percent)  sales price or true value.
  3. The city of Detroit also taxes tangible personal property of commercial enterprises such as computing equipment and furniture; Chicago does not.
  4. Using sales price and assessed values for a sample of 8,650 residential parcels in 2010, Hodge et al find an average assessment to sales price ratio of 11.47, which suggests an average over assessment or property values many times over. See Timothy R. Hodge, Daniel P. McMillen, Gary Sands, and Mark Skidmore, 2016, “Assessment Inequity in a Declining Housing Market: The Case of Detroit,” Real Estate Economics.
  5. See https://www.civicfed.org/sites/default/files/Estimated%20Full%20Value%20of%20Real%20Property%20in%20Cook%20County%202005_2014.pdf
  6. Discrepancies arise because only sample values of real estate transactions are available in any one year. In addition, full value projections derive from the median value of property in each class. However, the median property value may not represent the entire distribution of property values.
  7. See http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000739-Detroit-Housing-Tracker-Q1-2016.pdf

Why Chicago is not Detroit

By William Sander and William Testa

Over the past decade, 17 of the 20 largest cities in the United States gained population. Recent academic studies on these trends have attributed them to changes in residential preferences, the location of skilled jobs, and cultural amenities. Both Chicago (third largest) and Detroit (18th) are exceptions to these trends. The population of the city of Chicago declined modestly from 2.9 million in 2000 to 2.7 million in 2010 after increasing during the 1990s. The population of the city of Detroit has declined more drastically over time from a peak of 1.8 million in 1950 to about 700,000 today; the city filed for bankruptcy in 2013. Since 2010, the population of the city of Chicago has increased modestly (1%), while Detroit’s population has continued to decline. Figure 1 shows population trends for Chicago, Detroit, and other Industrial Belt cities, which have traditionally depended heavily on manufacturing for employment. While Chicago remains much larger than the others despite recent sluggish growth, Detroit has seen a dramatic change in its position.

det_chi_fig1

Due to worsening fiscal problems and a rising homicide rate, Chicago’s prospects have recently been equated with Detroit’s, at least by the popular press. LeDuff1 writes in The New York Times “So Detroit files for bankruptcy…Pay close attention because it may be coming to you soon…Chicago.”  An Investor’s Business Daily editorial notes that “Chicago appears to be following Detroit’s lead to financial disaster.”2 An article in the Financial Times suggests that Chicago’s problems are not too different from Detroit’s.3 And so on.

For one, both places have been severely challenged by loss of manufacturing activity. Detroit and Chicago have lost over 100,000 and 300,000 manufacturing jobs, respectively, since the late 1970s; other midwestern cities (Milwaukee, Cleveland) have not been far behind. The inverse relationship between an historic MSA concentration of manufacturing jobs and subsequent growth from 1969 onward is evident for the most prominent Great Lakes metropolitan areas. More broadly, the growth-retarding effect from manufacturing on U.S. metropolitan areas over the 1960–90 period has been documented in a statistical study by Harvard’s Edward Glaeser.4 As evidenced in figure 2, manufacturing employment losses and depopulation within the central city were contemporaneous in both Detroit and Chicago.

det_chi_fig2

Declines in manufacturing jobs are a result of improvements in manufacturing productivity as well as the movement of production elsewhere including both suburban areas and overseas. For example, data for Michigan indicates that vehicle production in 2015 was at about the same level as 1990. However, employment in producing vehicles over this period declined by about one-half.

Suburbanization has taken no less a toll on central city manufacturing employment in both Chicago and Detroit alike. In the Chicago metropolitan area, only 9% of jobs are now in the manufacturing sector, while manufacturing accounts for 13% of jobs in the Detroit area. In the city of Chicago, only 6% of jobs remain in manufacturing and 10% in the city of Detroit. As reported by John McDonald for Detroit circa 1950, 61% of the Detroit area’s manufacturing jobs were to be found in the city, with another 13% in adjacent Dearborn, domicile of Ford Motor Company.5 The entire range of the city-suburb split in manufacturing jobs for both MSAs can be seen in figure 3. The advent of controlled access divided highways pulled manufacturing jobs outward within metropolitan areas to take advantage of lower land prices and lower shipping costs.

det_chi_fig3

Although both Chicago and Detroit lost a large number of jobs in manufacturing, it is also evident from figure 2 that the city of Chicago withstood the manufacturing exodus more robustly than Detroit. Unlike Detroit, its population did not decline apace with manufacturing from 1950 onward. Similarly, it did not experience the same degree of job declines. More recently, for example, over the 2000 to 2010 period, metropolitan Detroit experienced a 21.2% decline in employment, while the Chicago metropolitan area lost 7.7% of its jobs. Indeed, the past decade was disastrous for Detroit relative to Chicago. About one in four workers were unemployed in the motor city by the end of the decade. In Chicago, the unemployment rate peaked at a little more than one in ten workers (see figure 4).

det_chi_fig4

The resident population of the city of Detroit has also come to be characterized by a much higher degree of poverty and minority population. The share of households in poverty approaches four in ten in the city of Detroit, compared with 23% in Chicago. According to the latest decennial Census, the Detroit population overwhelmingly identifies as “black” (83%), up from 29% in 1960. Owing to the city’s economic collapse and to the suburbanization of (mostly white) population, by 1990 Detroit had become one of the most racially divided metropolitan areas in the United States. Social and economic issues arising from racial polarization since early in the twentieth century have been cited as a major constraint on the growth and development of Detroit and its suburbs.

det_chi_tab1

Chicago’s racial/ethnic groups also tend to be highly segregated; however, the overall composition of the city’s population is more balanced. Approximately 32% of Census respondents identify as black (including those reporting Hispanic background); 45% report as non-Hispanic white; and 28% as Hispanic. More than 20% of Chicago residents are foreign born. Despite the impression of a balanced population that such figures suggest, racial isolation in Chicago is very similar to that in Detroit when measured on a block to block basis.

Chicago bright spots

Although Chicago has many of Detroit’s problems and more than twice the number of residents living in poverty, Chicago also has many positive features relative to Detroit.

One of the reasons that one might be more optimistic about Chicago’s future is that, in spite of declines in population growth, the city of Chicago has become increasingly attractive to non-Hispanic white college graduates, while the inner-ring of suburbs of Chicago have become more attractive to African-American and Hispanic college graduates. Further, within the city of Chicago, household locations along Chicago’s lakeshore (particularly on the north side of the city), have become particularly attractive to more affluent, college-educated households. Studies indicate that the attractiveness of the city of Chicago to college graduates is at least partly related to growth in skilled jobs in and around the central business district.

Although there are recent indications to the contrary, Detroit has been less successful in attracting resident college graduates. Only 12% of the population twenty-five and older in the city of Detroit are college graduates. In the city of Chicago, 34% of the adult population has at least a bachelor’s degree. In popular areas of Chicago such as Lincoln Park, the vast majority of adults have at least a bachelor’s degree. Further, about half of the twenty-something college graduates in the Chicago metropolitan area live in the city of Chicago, while only 10% of college graduates in their 20s in the Detroit metropolitan area live in the city of Detroit. For college graduates with a school-age child, the percentage living in the city of Detroit is even lower (5%), versus 15% for Chicago. Of the college graduates working in the city of Detroit, only 22% live there. In the case of Chicago, the corresponding statistic is 61%.

Further, median household income in the city of Detroit is only a little over half of median income in Chicago. The poverty rate in Detroit is almost twice as high as Chicago’s, although the city of Chicago has almost twice as many poor residents. The city of Chicago employs about four times as many people as the city of Detroit. About 30% of the jobs in the Chicago metropolitan area are in the city of Chicago, while the corresponding statistic for Detroit is only 14%.

Why Are Chicago’s Prospects Brighter?

For one, Chicago began the era of de-industrialization with a more diversified economy with which to reinvent itself, especially in business services and financial services. In addition to its manufacturing (and goods transportation) prowess, Chicago has long been a purveyor of business and business-meeting services, retail, and financial services to the surrounding Midwest region and beyond. For example, Chicago’s large exchange-traded derivatives industry evolved from the city’s role as a nineteenth century market and wholesale distributor of grain, lumber, and meat. Its highly concentrated management consulting industry owes its twenty-first century success in part to the need of New York City financial houses to closely appraise the operations of Midwest manufacturing companies in the issuance of corporate debt. And the nexus of passenger railroad lines and (later) passenger air travel in Chicago cultivated one of the nation’s leading industries in business meetings and conventions. Accordingly, the profound exodus of manufacturing that occurred from almost all large U.S. cities did not devastate Chicago’s job base to the same degree as happened in Detroit and some other Midwest cities, although some parts of Chicago were hit hard. Admittedly, the Detroit area also maintains very strong business services industries, largely related to the auto industry, but for the most part these services are in suburban locations. In Chicago, many service businesses remain in the city.

Figures 2 and 3 show trends in population and manufacturing in Chicago and Detroit from 1900 to date. In both cities, one can see the spectacular rise in both manufacturing and population to 1950 followed by an equally spectacular decline. However, while population declines in Chicago have been profound, they diverge markedly from the Detroit experience. Nonetheless, much like Detroit, vast neighborhood areas of the city of Chicago were also impoverished by job and population flight to the suburbs, especially those neighborhoods that depended on the middle-income jobs associated with freight and manufacturing. Wages and jobs outside of the central area of Chicago have declined, even while the central area has prospered. Today, many Chicago neighborhoods find themselves challenged in the same ways as neighborhoods in Detroit and other industrial cities by poverty, violence, sub-standard housing, and a lack of immediate and accessible economic opportunities.

Chicago has arguably developed a stronger reputation as a city in which to do business than Detroit and some other midwestern cities. At the turn of this century, Chicago began positioning itself to be one of the emerging “global cities” that had successfully forged commercial connections to other cities of its kind around the world. Global cities are characterized by the most skilled occupations and activities in business services, finance, education, and technology; well-educated residents; forward-looking business leaders; and globally connected transportation and communications networks, among other attributes.

Owing to their strategic importance and global reach, corporate headquarters operations have become a hallmark of success for global cities. Early last decade, Chicago became the global headquarters of Boeing. Since then, the city has attracted Archer Daniels Midland, GE Healthcare, Oscar Mayer, and ConAgra, among others. Relocation of headquarters from the suburbs of Chicago to the central city has also taken place, including United (Air), Kraft Heinz, and Motorola Mobility.

In Detroit, both the IT software company Compuware and Quicken Loans have relocated operations from the suburbs to the downtown area (in 2003 and 2010, respectively). However, the scale of these moves falls far short of similar activity in Chicago.

Some argue that headquarters operations have downsized over time, representing far fewer direct jobs than in the past when headquarters often included back office, research, advertising, and payroll processing operations. However, the presence of headquarters is coincident with a much vaster nearby network of financial and business services, many of which are supported by colocation with the strategic headquarters of corporations.

The upshot then is that, even though the older industrial neighborhoods of Chicago share many of the same challenges as those of Detroit, Chicago has been better able to withstand the decline of industrial production. Whereas the city of Chicago has about four times as many people as the city of Detroit, Chicago has ten times as many jobs in finance, eight times as many jobs in professional services, six times as many jobs in education, and five times as many jobs in accommodation and food services. Since 1998, the Chicago area has gained almost 60,000 jobs in business services, while Detroit has lost over 35,000 jobs in the sector. During this period, Chicago also gained more than 20,000 jobs in colleges and universities, while Detroit gained none.

It is clear that Detroit needs to diversify its legacy industrial clusters as well as to build on them. This focus on industrial rebirth includes further specialization in the auto industry—especially R&D, as well as logistics and transportation, engineering and design, technology start-ups, and business services and finance. Indeed, diversification to a technology-oriented industrial structure has raised fortunes of old industrial regions elsewhere, with the Boston area being a prominent example.

We would note that a number of Rust Belt cities with about as many jobs as Detroit, including Cleveland, St. Louis, Milwaukee, and Pittsburgh have significantly fewer people living in them. This implies that Detroit’s population may not yet have reached a floor. Unlike Detroit, the city of Chicago remains an attractive place to work and live, especially for young college graduates. This could change over time if Detroit can reinvent itself and make further improvements in the delivery of basic public services, especially basic education and public safety. Chicago faces many of the same challenges in improving public services, and in putting its underlying fiscal affairs on a sounder footing.

William Sander, Professor of Economics, DePaul University, Chicago.

William Testa, President and Director of Regional Programs, Federal Reserve Bank of Chicago

A preliminary version of this paper was presented at Inner City Economic Development Summit in Detroit, September 2015.

  1. LeDuff, Charlie. 2013. “Come see Detroit, America’s future.” The New York Times, July 24.
  2. Investor’s Business Daily. 2013. “Emmanuel’s Chicago is on the path to be the next Detroit.” August 7.
  3. Sender, Henny, Stephen Foley, and Richard, McGregor. 2013. “Descent into despair.” The Financial Times. July 26.
  4. Glaeser, Edward, Jose A. Scheinkman, and Andrei Shleifer. 1995.”Economic Growth in a Cross-Section of Cities,” Journal of Monetary Economics 36 (1): 117-143.
  5. McDonald, John F. 2013. “What Happened To and In Detroit?” unpublished paper.

Can Budget Rules Help Reduce Fiscal Troubles in Illinois?

Fiscal analysts and credit rating agencies have criticized Illinois government officials for their fiscal mismanagement, especially the shifting of debt obligations incurred to pay for current services onto future generations. The growth of unfunded public employee pension obligations has been the most egregious example. Moreover, state and local governments have allowed bills for current services to grow unabated, while existing debt outstanding for capital projects has been refinanced beyond the useful life of the projects themselves.1

At first blush, remedies to such behaviors might seem to be simply a matter of mobilizing the will to balance budgets through spending reductions and tax increases. In some cases, the electorate seeks to discipline elected officials to behave responsibly. However, election discipline and public oversight often fall short. Elected officials may fail to reduce spending because they don’t want to appear to renege on campaign promises; similarly, tax hikes are seen to be too unpopular with the voting public. Accordingly, a helpful alternative is to build in budgetary procedures and practices that assist the public to oversee and discipline the fiscal actions and behaviors of their elected officials.

Given the sorry state of fiscal affairs in many Illinois governments, structural regulatory changes should be considered in order to hold officials accountable and to provide the public with clear and consistent information regarding the state’s financial condition. Regulations constraining fiscal flexibility could force policymakers to act more responsibly and limit their ability to make unrealistic financial promises and disguise questionable fiscal decisions.

In a recent paper by Richard Dye, David Merriman, and Andrew Crosby, the authors describe four fundamental principles of sound budgetary practice – advance planning, sustainability, flexibility, and transparency – all important areas of improvement for Illinois. The authors then outlined five methods by which Illinois could break its bad habits and adopt more robust budgetary practices.

First, Illinois should refine and expand multiyear budget planning. Currently, Illinois does not have a budget plan that looks far enough into the future, or that covers a wide enough scope of projections to maximize its usefulness as a gauge of fiscal stability. Some improvements have been made; for example, budgetary projections by the Commission on Government Forecasting and Accountability (COGFA) and the Governor’s Office of Management and Budget (GOMB) now cover three years. But they would be more informative and useful if they covered five years. Plans would also better measure fiscal stability if they covered a broader scope of projections. Currently, the plans only cover the general funds, leaving out hundreds of special funds comprising over half of the state’s budget.

Budget planning for a given year could also be expanded to include projected spending from current services, even if it does not affect that year’s balance sheet. This would help the state improve its advance planning by forcing officials to look farther into the future and analyze a broader scope of areas affected by current fiscal decisions. Furthermore, it might help the state address its sustainability issue, by holding today’s politicians accountable for future payments incurred by current services, rather than deferring payment of today’s labor into the future, handing the debt to their successors.

Second, the state of Illinois should require that meaningful fiscal notes accompany any legislation with a significant impact on future revenue flows or spending obligations. Fiscal notes, which are rarely used in Illinois, would include any cost estimates for legislation over a designated period of time. These would help Illinois better document time-shifting in its revenue and expenditures and identify nonrecurring revenue in budget documents. It is much easier for government officials to justify expensive programs or policies when the revenue flow is ambiguous and when one-time revenue sources, such as asset sales, are not disclosed.

Third, the authors suggest that the state should modify cash-only budget reporting to better track significant changes in liabilities and assets. Currently, Illinois relies on single-year, cash-basis accounting, which reports only receipts and payments in the current budget year. Accrual accounting, on the other hand, also covers changes in assets or liabilities that are attributable to that budget year, but not actually implemented until a future year. A cash-only budget allows the state to disguise time-shifting consequences of current fiscal actions. Moving away from this practice would make government spending more transparent by revealing deceptive fiscal actions, such as making payments with temporary revenue sources or promising to return loans in the future without continuous revenue sources to guarantee they’ll be paid.

Along those lines, the authors’ fourth suggestion is that Illinois should identify non-sustainable or one-time revenue sources in its budget reports, allowing the public to gain a better understanding of the time horizons of various revenue sources. Additionally, if the government must label one-time revenue sources, they might be compelled to put more continuous revenue sources toward a stronger “rainy day fund,” which would enable officials to be more flexible in responding to fiscal emergencies.

Finally, the authors argue the state should adopt a broad-based budget frame with meaningful spending and revenue categories consistently defined over time. Inconsistent terminology and accounting techniques make it difficult to track financial conditions and changes over time. For example, it can be challenging to tell how much of a year-to-year change in budget is real versus due to a change in accounting practices.

The state must not only clearly communicate a fiscal plan stretching farther into the future than it currently does, but must also make information more accessible to the public. Fiscal information should be readily available on a timely basis, and online information should routinely provide budget reports, with budget components consistently defined and explanations included when there are transfers between budget categories.

While these five practices would ideally lead to a much more sustainable financial position for Illinois, there are clearly roadblocks preventing Illinois’s government from adopting them, such as political frictions and the momentum of embedded spending and programs. For elected officials, it is often the case that in order to actually deliver upon the programs or actions they campaigned upon, they would need to generate even more debt, for example by borrowing from future budgets to pay off promised pensions today. And because Illinois’s politicians have been accumulating more and more debt for decades, it is unappealing for any of them to be the first to adopt more frugal behavior, perhaps by reducing benefits or scaling down public programs.

In the end, there is no painless path out of Illinois’s current debt crisis for citizens or politicians. But implementing these fiscal practices might serve as a way to ease the transition to better fiscal management, by giving politicians no other option and by providing the public with a more complete picture of where Illinois really stands.

  1. The issues surrounding Illinois’s fiscal conditions, as well as proposed solutions, were discussed at a December 2015 conference, Transparency and Accountability in State Budgeting: Challenges for Illinois and Other States, held at the Union League Club of Chicago. The conference was summarized in a recent Chicago Fed Letter.

2015 Civic Research Forum: Finding New Approaches to Analyzing Urban Data

In partnership with World Business Chicago, the Federal Reserve Bank of Chicago hosted the Civic Research Forum on March 17, 2015. The forum was attended by researchers from a wide range of organizations and agencies throughout Chicago. It offered attendees an opportunity to discuss their current research and their positive and negative experiences with collecting and using data. Rob Paral of Rob Paral and Associates addressed the gathering, discussing his research on demographic trends in Chicago. Moreover, he described his research challenges given the  lack of some key historical data series, as well as the structure of available data sets and surveys. He also encouraged the audience to brainstorm innovative ways of using the accessible data.

Paral explained that his firm helps strengthen relationships between organizations and the broader communities they serve by providing data on the city’s social and economic conditions. He also shared that his firm gathers information on residents’ activities and attitudes. In his presentation, Paral focused on the income data he uses to study demographic trends in Chicago. While socioeconomic and demographic U.S. Census data are available for the 77 Chicago community areas (see map below) dating back to 1930, the data necessary to calculate median household income only go back to 1970. The limitations of these historical data hinder the potential to analyze income developments in Chicago over time (both at the neighborhood level and across demographics).

comm_areas_image

According to Paral, constructing income data for Chicago became even more difficult when the U.S. Census Bureau’s geographic grid, which includes the boundaries of blocks, tracts, and Public Use Microdata Areas (PUMAs) changed for the 2010 U.S. Census. The boundaries for these geographic units were redesigned in such a way that researchers could no longer aggregate PUMAs to match Chicago’s geography. Furthermore, beginning with the 2009–13 American Community Survey, it was no longer possible to select the Chicago-portions of census tracts for the few tracts that cover areas both inside and outside of the city limits, like it had been in previous versions. This change made it impossible to construct precise data for some individual community areas by combining data on the component census tracts.

Paral went on to discuss some of the questions related to income trends in Chicago that he is currently probing. He said his research focuses largely on the period between 1990 and 2010. Over this span, Illinois’s household income increased and then fell rapidly—a trend that was seen nationwide, though not to the degree it was within the state. According to Paral, the average household in Chicago earned 10% less income in 2010 than in 2000. Moreover, while nine out of every ten community areas had less income in 2010 than they did in 2000, some lost much more income than others. For instance, average household income declined by as much as 45% in some community areas, while other areas have seen an increase in income.

Looking at income trends of individual neighborhoods over time reveals interesting patterns about how wealth and poverty shift and consolidate geographically, Paral explained. In 1990, the wealthiest community areas were located in the far Northwest Side, the far Southwest Side, and the downtown and near-north areas. So, Chicago’s wealthiest neighborhoods were fairly dispersed back then. However, wealth became more geographically concentrated over time. In 2000, Chicago’s wealthiest areas were near the North Side and along the lakefront. And in 2008–12, this remained the case. In 1990, the poorest areas were largely consolidated in an area just west and south of the Loop (Chicago’s central business district). But over time, the poor moved farther away from the city center. In 2000, Chicago’s areas of greatest poverty were on the West and South Sides. And in 2008–12, this was still the case. The greatest income losses between 2000 and 2008–12 occurred on the far South Side, while the greatest income gains over that period happened in the “inner ring” areas near downtown (primarily just west and south of the Loop).

Paral said that while median income is the principal indicator he uses to analyze many trends, he also takes advantage of other measures of wealth provided by the U.S. Census Bureau—such as average and total household income—to get more robust views of wealth patterns and distribution across Chicago. Paral explained that by taking the ratio of average income to median income, he is able to assess the extent to which income distribution is skewed in an area—that is, how great the disparities are between the wealthiest and poorest residents in a given neighborhood. For example, a very high ratio of average income to median income suggests that there are some very wealthy residents pulling up the average (even if a majority of that neighborhood’s residents are poor).

As Paral shared, using innovative ways of combining available data, such as this method of studying the ratio of average to median income, has allowed him to examine potential weaknesses in current policies that are based on more-conventional income data and analysis. For example, he questioned the use of census tracts to determine how children are placed into public Selective Enrollment High Schools within Chicago. The current policy assigns each census tract to a socioeconomic tier, where 1 is the poorest and 4 is the wealthiest. The policy is designed to give children of poorer tiers a better opportunity of enrolling in a strong public school. However, some very poor children live in the same tract as very wealthy children. This means the average income is skewed up by these wealthy families, decreasing the chances the poor children have of being accepted into a strong public high school. Paral mentioned several census tracts where this pattern is especially problematic, such as those where there are large public housing buildings nearby very wealthy homes. In such tracts, the gap in median income between one (poor) subsection and another (rich) one can be over $100,000. Yet, because both poor and wealthy households are located in the same census tract, their children have an equal likelihood of entering the city’s best public schools.

The forum ended with the attendees sharing the research they are working on, the data they use, and any challenges they are facing. This portion of the program gave researchers the opportunity to learn of new data sources and approaches to analysis and to meet others in the Chicago research community. The forum sponsors hoped that innovation and collaboration among the attendees would eventually yield more-productive research in the coming years.

Chicago City Trends

By Bill Sander and Bill Testa

The fortunes of the city of Chicago have become clouded in recent years as concerns over its weakening finances and heavy debt obligations have grown. The tally for the unfunded public employee debt obligations of Chicago’s overlapping units of local governments (including those for public schools, parks, and county services) is now approaching $30 billion. Moreover, the city government has been criticized for its practices of funding current public services with proceeds from the issuance of long-term debt and the long-term leases of public assets (such as its parking meter system). However, faith in Chicago’s ability to address its debts has not fallen so far as that in Detroit’s, chiefly because the Windy City’s economic trends display more vibrancy.

Population change is a prominent indicator of the health of an urban economy because it reflects a city’s ability to hold on to its residents (as opposed to losing them to the suburbs or other locales). Over the past few decades, similar to other central cities, Chicago has experienced an erosion in its population share of the broader metropolitan statistical area (MSA);[1] in contrast, the surrounding suburbs have seen their share climb. According to the U.S. Census, Chicago held 38% of the MSA’s population in 1980, with this share falling to 35% by 1990; in the subsequent 20 years, Chicago’s population share of the MSA decreased another 3 percentage points per decade, reaching 29% by 2010 (see table below). During the 1980–2010 period, Chicago lost a total of over 300,000 residents. At the same time, suburban Chicago gained close to 2 million in population. Since 2010, the city of Chicago’s population and population share of the MSA have strengthened somewhat, though the (off-Census year) estimates are probably not as reliable.

While population trends can be telling for a city’s prospects, they can also belie changes in its residents’ wealth and income. Despite the city of Chicago’s population loss over the past few decades, its economic trends have been generally more encouraging.[2] Household income is an important indicator of Chicago’s fortunes relative to those of its suburbs. In 1990, median household income in the city was just 67% of the median household income in suburban Chicago. By 2010, this income ratio had climbed to 73% (see table below). Decomposing household income statistics by (self-reported) racial/ethnic group reveals that this trend was pervasive for the three largest groups: non-Hispanic white, black, and Hispanic. The ratio of city median income to suburban median income among white households experienced the greatest change; it rose from 77% in 1990 to 98% (near parity) in 2010.

These robust trends are echoed by Chicago’s rising share of adults aged 25 and older who have attained at least a bachelor’s degree. In 1990, among adults aged 25 and older, 19% of those residing in the city had attained a four-year college degree versus 28% of those residing in the suburbs (see table below). By 2010, Chicagoans in this age demographic had almost reached the same share in this regard as their suburban counterparts (33% for city residents versus 35% for suburban residents). The non-Hispanic whites again experienced the greatest change among the three largest racial/ethnic groups. In 1990, 29% of the white city population aged 25 and older had a four-year college degree—the same percentage as the white suburban population in this age demographic; however, by 2010, 55% of such white city dwellers had a bachelor’s degree, while 39% of their white suburbanite counterparts did. Between 1990 and 2010, the city’s black population also made substantial gains in education, as evidenced by the share of black adults aged 25 and older with a bachelor’s degree having risen from 11% to 17%.

By “drilling down” through the data to examine specific neighborhoods, we can see how geographically concentrated the city’s gains in college-educated adults aged 25 and older have been. These gains have been highly concentrated in Chicago’s central business district (“the Loop”) and the surrounding areas, as well as the neighborhoods west of Chicago’s northern lakeshore. As shown in the table below, dramatic gains in the college-educated population were seen in the Loop and the neighborhoods just south, west, and north of it. For example, the Near South Side saw an increase in the share of adults with a four-year college degree climb from 9% in 1980 to 68% in 2010. No less dramatic were such gains in Chicago’s neighborhoods west of its northern lakeshore: The shares of the college-educated population there typically doubled or tripled between 1980 and 2010 (in the case of the North Center neighborhood, this share increased sixfold—from 11% in 1980 to 66% in 2010).

As one might expect, many college-educated Chicago residents work in proximity to their residence. Of those living in the Central Area and Mid-North Lakefront, an estimated 57% work in the Central Area of Chicago and 79% work somewhere in the city.[3] Of those who do work in the Central Area, an estimated 19% travel to work by driving alone (as opposed to walking, public transit, bike, and carpooling); this percentage is much smaller than the nearly 70% of metropolitan Chicago workers who travel to work by driving alone.[4] The trends highlighted thus far point to the fact that the city of Chicago draws and retains many jobs. By one count, the city of Chicago’s Central Area is the domicile of over half a million jobs. As seen below, job counts in the Central Area have remained fairly constant over the past 13 years, even while job levels in the remainder of the city and in the remainder of Cook County have been falling.

Meanwhile, compensation levels per job have continued to climb in Chicago’s Central Area, reflecting a work force with greater skills and education. Annual compensation per worker on the payroll in Chicago’s Central Area exceeds that of the overall MSA by 50%.

Many of the trends shown here bode well for the city of Chicago, despite the fiscal challenges it currently faces. To be sure, many large central cities in the Midwest, including Detroit, are experiencing strong growth of both jobs and households centered around their central areas and downtowns. In this, the central Chicago area enjoys a strong start. ________________________________________

[1] Current and historical delineations of MSAs are available at www.census.gov/population/metro/. (Return to text)

[2] This is not to say that all parts of the city have been on the economic upswing. Several Chicago neighborhoods have seen severe deterioration in wealth and income, as well as in living conditions, as evidenced by increasing incidences of homelessness and crime in certain areas in the past few decades; see, e.g., http://danielkayhertz.com/2013/08/05/weve-talked-about-homicide-in-chicago-at-least-one-million-times-but-i-dont-think-this-has-come-up/. (Return to text)

[3] This statement covers 113,000 workers living in these areas as of the year 2000. Estimates were pulled from www.rtams.org and are based on the Census Transportation Planning Package (CTPP), “which is a special tabulation of the decennial U.S. Census for transportation planners” and “contains detailed tabulations on the characteristics of workers at their place of residence (‘part 1’), at their place of work (‘part 2’), and on work trip flows between home and work (‘part 3’)” (see www.rtams.org/rtams/ctppHome.jsp). Workers who work at home are excluded. See also http://definingdowntown.org/wp-content/uploads/docs/Defining_DowntownReport.pdf; this report ranks Chicago second among major U.S. cities in terms of the percentage of residents living within one mile of downtown who work downtown (figure 3 in the report), and ranks Chicago first in terms of population growth in the downtown area over the period 2000–10 (figure 4 in the report). (Return to text)

[4]Estimates are from www.rtams.org and are based on the Census Transportation Planning Package (CTPP). (Return to text)

Economic Development in Chicago

By Rick Mattoon

This last blog in our series on the largest cities in the Chicago Fed’s District focuses on Chicago. (For a complete profile of all five cities, see Industrial clusters and economic development in the Seventh District’s largest cities.) Chicago holds a different place in the urban hierarchy than the other large cities in the District. More than just a large midwestern city, Chicago has obtained global city status and competes with other global cities in the U.S. (New York, Los Angeles, Washington and San Francisco) and abroad (London, Paris, Tokyo, and Hong Kong to name a few) for investment and reputation. Chicago is the home to world-class museums, cultural institutions and universities, as well as corporate headquarters and one of the busiest airports in the world. Importantly, one of Chicago’s primary advantages is its ability to attract human capital. Recent work by Bill Testa and Bill Sander highlighted the ability of Chicago’s downtown core to attract educated young adults.[1] As this survey of city economic strategies has shown, human capital accumulation is a primary strategy for growth, and Chicago appears to have advantages in attracting and retaining skilled workers.

Chicago’s economy underwent a profound shift in the 1990s. As manufacturing jobs began to decline, the Chicago-area economy shifted toward business and professional services. These sectors provided the city with high-paying jobs and helped lift its economy relative to other manufacturing-dependent Midwest cities. As we can see in the data (table 1), Chicago has a highly diversified economy, which closely mirrors the structure of the U.S. economy. Chicago does have challenges. The fiscal condition of the city (and the state) is precarious, highlighted by large underfunded public pension obligations. Also, the city has struggled to emerge from the Great Recession, as highlighted by slow job growth (figure 1).

Chicago’s Industry Structure

As figure 1 shows, Chicago has eight industries with higher employment and location quotients (LQs than the U.S. average.)[2] They are: manufacturing (LQ 1.04), wholesale trade (1.14), professional and technical services (1.13), management of companies (1.28), administrative and waste services (1.20), educational services (1.44), transportation and warehousing (1.24), and finance and insurance (1.16). This provides a highly diverse mix of high-end professional services (accounting, consulting, and advertising) with retained strength in manufacturing and logistics and warehousing.

Economic Development Strategy in Chicago

In 2012, Chicago unveiled a new economic development strategy that was based on a study conducted by World Business Chicago (WBC), which is the city’s public–private economic development agency. The study was based on a series of reports by subcommittees that focused on the recent strengths and weaknesses of Chicago’s economy. In the end, the report identified ten strategies, which included a focus on specific industry clusters—advanced manufacturing, professional services, and headquarters operations—as well as infrastructure improvements. The strategies are as follows:

• Support advanced manufacturing—high-value-added manufacturing.

• Increase the region’s attractiveness for business services and headquarters.

• Enhance the city’s competitive position as a transportation and logistics hub.

• Make Chicago a premier destination for tourism and entertainment.

• Make the city a leading exporter—support export activities, particularly for small and mid-sized businesses.

• Develop a work force in a demand-driven and targeted manner.

• Support entrepreneurship and innovation in both mature and emerging sectors (with an emphasis on product commercialization).

• Develop next-generation infrastructure and new models of public–private funding.

• Support neighborhood vitality that supports regional growth (small and medium-sized enterprises).

• Develop a good business climate. This includes streamlining regulation and providing businesses with a supportive infrastructure.

To implement the plan, WBC has created a series of task forces to develop specific metrics to measure progress toward each goal. As figure 2 shows, part of the desire to articulate a new development plan for the city came from the sluggish job growth that occurred coming out of the Great Recession. While Chicago had grown faster than the District as a whole leading up to the recession, its performance from 2010 to 2012 was lackluster and is still somewhat sluggish.

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[1]William A. Testa and William Sander, “Household Location and Economic Development in the Chicago Metropolitan Area,” mimeo. (Return to text)

[2]The U.S. Bureau of Labor Statistics (BLS) defines LQs as “ratios that allow an area’s distribution of employment by industry to be compared to a reference or base area’s distribution”. (Return to text)

Hog Butchers and Mad Men?

Some local policy leaders remain optimistic about the growth prospects for manufacturing in the Chicago area. For example, a recent development strategy from the Mayor’s office and World Business Chicago proclaims that “Chicago can preserve its competitiveness in manufacturing, a key component of the region’s economy, by capitalizing on the shift into high-tech products and processes underway in the manufacturing sector nationwide.”[1] Such optimism follows a recent rebound in manufacturing employment in the Chicago area, which has added 11,000 jobs since 2009. And against a broader backdrop, the five-state Midwest region surrounding Chicago, ranging from Ohio west to Wisconsin and Illinois, has added 260,000 manufacturing jobs over the same period.

Looking beyond recent growth trends for signs of resurgence, falling energy prices are expected to assist particular manufacturing sectors such as chemicals and plastics. More generally, a possible re-shoring of manufacturing activity is expected to unfold due to rising production costs in low-cost Asian countries, along with mounting concerns from some manufacturers about intermittent disruptions to extensive Asian-American supply chains.

But the fact that manufacturing remains a key part of the regional economy lies at the core of strategies to bolster the sector. The Chicago metropolitan statistical area (MSA) remains a bulwark of manufacturing in the U.S. economy. While the manufacturing share of Chicago’s economy is close to the national average, Chicago’s size vaults its manufacturing rank to third among U.S. metropolitan areas in manufacturing output. And as measured by employment, Chicago ranks first in the following subsectors: Electrical Equipment, Fabricated Metal Products, Food, and Plastics & Rubber. The table below indicates those subsectors in which employment is more concentrated (or less) in Chicago than in the U.S. overall.

Still, we can see from the chart below that workers directly employed in manufacturing in Chicago have fallen dramatically as a share of the work force. In 1969, 30 percent of workers were employed in manufacturing in the Chicago area, well above the national level of 23 percent. By 2012, however, Chicago’s manufacturing job prominence had fallen to near-parity with the nation—to around 7 or 8 percent.

The absolute number of manufacturing workers in the Chicago MSA has also fallen—by 432,000 since 1947, which represents more than half of the 1947 employment size.

Much of the employment loss is due to productivity gains in the manufacturing sector rather than to falling output. For example, as estimated by the U.S. Department of Commerce (BEA), real (inflation-adjusted) manufacturing output in the Chicago region rose by 10 percent from 2001 to 2011, even while employment fell by 30 percent (180 thousand).[2]

The location of Chicago’s manufacturing employment has shifted significantly toward the suburbs. From a city peak of 668,000 in 1947, manufacturing employment had fallen to just 65,000 by 2012, representing just 6 percent of the city’s total payroll employment across all sectors.

While suburban manufacturing jobs have also been falling (since the mid-1990s), in 2012 there were more than four suburban manufacturing jobs for every one that remained in the city.

Given such dramatic and ongoing declines in the manufacturing work force, it may be puzzling to find that economic development plans and strategies continue to focus on the sector’s growth prospects. In addition to the optimism surrounding reshoring prospects for the manufacturing sector itself, the broader cluster of economic activity that is linked to manufacturing may also promote economic growth. Manufacturing establishments purchase many services from local companies, including management consulting, R&D, advertising, accounting, and transportation and logistics. Manufacturing establishments have tended to increase their use of these services over time, as well as tending to purchase the services from outside companies rather than producing them in-house.

The Chicago area economy specializes in such service industries, which are in turn sold to manufacturing clients in town, as well as in the surrounding Great Lakes region and further afield. The city of Chicago’s manufacturing interests, then, are evident in that Chicago’s central area, “The Loop,” remains a thriving job center of these related service sectors. Meanwhile, the outlying city neighborhoods continue to directly depend on manufacturing for jobs. According to the U.S. Census Bureau, of the manufacturing jobs that remain in the city, 62 percent of the workers also live in the city. Of the manufacturing jobs that are located in Chicago’s suburbs, only 25 percent are held by workers who live in the city. However, since there are many more manufacturing jobs in the suburbs, this means that there are twice as many manufacturing job commuters travelling from city to suburb as there are from suburbs to city.

The Chicago area, and even the central city itself, then, are motivated in several ways to preserve and build on the local and regional manufacturing base, even in the face of stark and ongoing declines in the number of paychecks that are directly generated from production activities. A policy focus on so-called advanced manufacturing is one such direction—one that may require the training of a work force with advanced skills. As documented in the recent report by World Business Chicago, a number of local efforts (link http://www.worldbusinesschicago.com/files/downloads/Plan-for-Economic-Growth-and-Jobs.pdf) are underway to build a local work force with needed skills.[3] Another strategic policy focus for Chicago is transportation—many manufacturing operations continue to require intensive transport of materials and intermediate goods, and efforts to maintain and enhance surface transportation infrastructure will also benefit the economy. Finally, all manufacturing—advanced or not—will likely need to stay abreast of ever-rising standards in process and product technology in order to compete in the global marketplace.

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[1] See World Business Chicago, Plan for Economic Growth and Jobs, pg. 36. See also the 2013 report from Cook County, Partnering for Prosperity: An Economic Growth Action Agenda for Cook County, which puts forward a strategy of “Increase the productivity of Cook County’s manufacturing clusters,” p. 12. (Return to text)

[2] The BEA reports GRP on a broad geography; the Chicago MSA is defined to include Cook County, DeKalb County, DuPage County, Grundy County, Kane County, Kendall County, McHenry County, and Will County, Illinois. (Return to text)

[3] Op cit, pp. 36-37. (Return to text)