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WEBER, Rachel. Selling City Futures - The Financialization of Urban Redevelopment Policy
WEBER, Rachel. Selling City Futures - The Financialization of Urban Redevelopment Policy
Rachel Weber
Urban Planning and Policy
This article examines the specific mechanisms that
abstract
Program
University of Illinois at have allowed global financial markets to penetrate
Chicago deeply into the activities of U.S. cities. A flood of
412 South Peoria MC 348 yield-seeking capital poured into municipal debt
Chicago, IL 60607 instruments in the late 1990s, but not all cities or
rachelw@uic.edu instruments were equally successful in attracting it.
Capital gravitated toward those local governments
that could readily convert the income streams of
public assets into new financial instruments and that
could minimize the risk of nonpayment due to the 251
Key words: actions of nonfinancial claimants. This article follows
public finance the case of Chicago from 1996 through 2007 as the
risk city government subsidized development projects
real estate with borrowed money using a once-obscure instru-
by financial markets altogether, while others have “paid to play,” becoming encumbered
by high-interest debt on usurious terms.
Thus, I start from the assumption that financial integration is both variegated and
locally embedded. But I also move beyond the truism of local embeddedness by exam-
ining the actual mechanisms through which local governments construct a nexus between
global financial circuits and local property markets. In contrast to the characterizations of
money as disembedding and alienating and of local governments as passive recipients of
directives from markets, I direct my attention to three aspects of urban governance that
influence the distinctively local character of finance.
First, local governments have the capacity to participate actively in the construction of
financial markets by manufacturing new investment instruments and the underlying assets
that form their collateral. Like Leyshon and Thrift (2007), I demonstrate how the ability
to create and monetize new asset classes is one of the most valuable functions in a
financialized economy. Unlike these authors, however, I argue that political power, not just
the computer software to aggregate these new income streams, is needed to establish their
legitimacy. Cities control some of the most opaque and idiosyncratic assets, in particular
private and publicly owned real estate (Clark and O’Connor 1997). The local state must 253
make these assets legible to distant investors and rating agencies if it is to attract financial
capital.
the entrepreneurial mode of urban governance described by Harvey (1989) and Jessop
(1998). For Daley, this model has included charter schools, corporate sponsorship of
public amenities, and the new “Chicago Model” of privatization, whereby the city’s
infrastructure has been leased to private investment consortia for periods ranging from 75
to 99 years, in exchange for up-front cash to fill short-term budget deficits (Koval et al.
2006).
Like other cities in the United States, Chicago has created new opportunities for policy
financialization through its use of a powerful redevelopment incentive, Tax Increment
Financing (TIF). TIF is an increasingly popular local redevelopment policy that allows
municipalities to designate a “blighted” area for redevelopment and use the expected
increase in property (and occasionally sales) taxes there to pay for initial and ongoing
redevelopment expenditures, such as land acquisition, demolition, construction, and
project financing. Because developers require cash up-front, cities transform promises of
future tax revenues into securities that far-flung buyers and sellers exchange through
global markets.
TIF is used by municipalities in all but one state and has funded everything from major
254 downtown entertainment centers to industrial expansions to public housing redevelop-
ment. In Chicago, the value of new property taxes generated within TIF districts consti-
tuted over half a billion dollars ($555 million) in 2007, or a tenth of the $5.5-billion budget
that year. Fiscal crises and interest in neoliberal policy fixes around the world have spurred
an interest in TIF, which is in the process of being exported to countries such as the United
Kingdom and Australia (see, for example, British Property Federation 2008 and Morrison
2008). In an article about the mayor of London entitled “Boris Johnson favours tax
increment financing method. Eh?” the Guardian singles out Chicago as a seasoned user
of this novel, but still unfamiliar, financing tool (Hill 2009).
The article proceeds as follows: in the first section, I provide a brief overview of the
financialization literature, pointing out its oversights and overstatements particularly
where the role of local government is concerned. In the second section, I unpack one of
the most important mechanisms knitting the interests of global financial markets and local
policy together: TIF. In particular, I discuss the ways in which TIF represents financialized
urban policy as well as the kinds of risks that emerge when cities embrace such tools. In
the third section, I focus on how Chicago used TIF to convert political control into fiscal
strength and to participate in the debt-fueled Millennial property boom (roughly 1996
through 2007). My analysis is based on an in-depth reading of the contractual agreements
governing the allocation of city TIF funds to developers, which detail the sources and uses
of funds as well as the complex financial arrangements devised to monetize the tax base.
I supplement this exercise in forensic accounting with interview data from key policy and
financial market actors. The case material is used to develop new and to engage existing
theoretical propositions about how the integration of finance with city politics occurs.
The task of guiding this capital through turbulent markets and switching it between
investment circuits increasingly fell to the private financial sector. This sector, which
encompasses everything from diversified global investment banks to pension funds to
lone day traders, grew in size and influence in the years following the profit crisis of the
1970s. By the late 1990s, the value of financial corporations and funds dwarfed the net
worth of nonfinancial corporations (Duménil and Lévy 2004; Krippner 2005), and the
period from 2001 through 2007 only intensified financial expansion (Crotty 2008). The
value of all financial assets in the United States grew from four times gross domestic
product (GDP) in 1980 to ten times GDP in 2007 (Crotty 2009).
More volatility in asset prices and interest rates also created new opportunities for
short-term speculation, and the financial sector began to shift away from its previous
mission of transferring capital between those who save it and those who use it for
productive purposes (e.g., to purchase equipment) (Orhangazi 2008). Instead, it began to
finance itself effectively through a plethora of increasingly complex instruments (LiPuma
and Lee 2004; Bryan and Rafferty 2006). These instruments are intended to hedge or
disperse risks and to increase the liquidity of assets by pooling and repackaging their
income streams. The ability of instruments such as securities and derivatives to connect 255
global and local space, deterritorialize embedded assets, and absorb the savings of
households (through pensions and other funds) energized the study of financial geogra-
highest profits (Beitel 2000). In others, finance does not just act on social and spatial
relations but is also constituted by them. The “culture of finance” tradition, for one,
underscores how elements of the financial system have their own intrinsic social dynamics
that are shaped not only by the force of capital but also by the power of ideas and actors
(Pryke and du Gay 2007; Thrift 2001). Whether analyzing social differentiation on the
trading floor (Zaloom 2006) or the assumptions behind asset pricing models (MacKenzie
2007), these scholars have focused on the ways in which market participants come to
some socially grounded consensus about the meaning of different financial instruments
and abstractions, such as the concept of risk, that are involved in their exchange.
Still other studies, including the present one, analyze the penetration of finance into
particular sectors of the economy. Commercial real estate, for example, is a sector in
which financial and property markets are highly integrated, as this so-called “secondary”
sector provides an outlet for surplus reserves of money capital fleeing the primary sector
of production (Beauregard 1994; Beitel 2000; Charney 2001; Coakley 1994; Gotham
2006; Harvey 1985; Leitner 1994; Smart and Lee 2003). Capital is switched to the
development and acquisition of property, as real estate experiences erratic bursts of
256 hyperactivity when rates of profit from other investments are relatively low and falling.
With all the attention on the geographic and social embeddedness of financial market
behavior and the integration of finance with real estate, it is therefore surprising to see
scholars ignore the important role played by local governments in shaping and being
shaped by financial markets. If the public sector is evoked, it is mostly a nod to those
national level policy shifts that have pushed households and corporations toward more
debt and helped pave the way for financial hegemony (Gotham 2006). With the exception
of Hackworth (2007), few geographers have analyzed recent processes of financialization
from the perspective of city governments.
This absence is unfortunate given that local governments have long been entwined in
“loops of codetermination and coevolution” with financial markets (Taylor 2004, 2; see
Fuchs 1992; Monkkonen 1984; Sbragia 1996 for histories of urban public finance in the
United States). In the last quarter of the twentieth century, certain changes stand out as
marking a new era of increasing integration between financial markets and the day-to-day
operations of local governments. Local governments moved beyond simply financing
collective infrastructure and doing so with general obligation bonds, backed by their full
faith and credit. Instead, cities and, increasingly, special authorities extended credit to
privately owned development projects with nonguaranteed debt, such as revenue bonds
(Cropf and Wendel 1998; Hackworth 2007). Municipalities added new, risk-laden instru-
ments to their debt portfolios, including variable rate debt, interest rate swaps, auction
bonds, and derivatives—often with disastrous effects (see, e.g., the discussions by Tickell
2000 and Pryke and Allen 2000 of the foray by Orange County, California, into swaps).
They also added the personnel necessary to execute these complex transactions, increas-
ing the size of their comptrollers’ offices, hiring graduates of MBA (Master of Business
Administration) programs, and contracting out to specialized financial advisors (Fainstein
1991).
The growing integration over the last four decades occurred for several reasons. As
federal aid contracted and caretaking responsibilities were devolved to lower scales of
government, the federal government encouraged the adoption of more “entrepreneurial”
approaches to local economic development (Harvey 1989). It loosened eligible use
restrictions on the remaining federal programs, such as Community Development Block
Grants, and encouraged these monies to be used to leverage matching funds in the private
sector (Clarke and Gaile 1998). Municipalities found themselves no longer wards of the
federal government but rather in a position to take on more risks and extend their reach to
Vol. 86 No. 3 2010
new areas of activity, such as equity participation in market-rate real estate development.
Moreover, state-wide property tax revolts resulted in legislation to cap taxes, such as
California’s Proposition 13, which limited the revenues available to municipalities. In the
face of a dwindling supply of federal block grants and voter-enacted caps on taxes and
spending, municipalities looked simultaneously to the credit markets and to their property
holdings for funding.
When municipalities sought assistance from the financial markets, they encountered
purveyors of private capital with a new taste for public debt. Municipal debt instruments
previously had been viewed as marginal and low yield. But in the late 1990s, investment
banks were flush with cash from global capital surpluses (mainly from Asia, the United
States, and Europe), with relaxed underwriting criteria and low interest rates adding to the
volume of money. Institutional investors developed a penchant for urban real estate
investments as a way to balance their portfolios of corporate equities and bonds
(Hagerman, Clark, and Hebb 2007), even though their share of municipal debt had started
to increase as early as the late 1980s (Hackworth 2007). Moreover, downtown
property values, the basis for the bulk of municipal revenue streams, rapidly appreciated
during the late 1990s due to growing interest by finance capital and massive amounts of 257
new construction in those international “gateway” cities (e.g., New York City,
Boston, Dallas, Chicago, and Atlanta). After a temporary decline following September 11
1996 (Total num ber of public ratings = 158) 2006 (Total num ber of public ratings = 351)
Other 4% Other 3%
A 10%
BBB- 5% BBB- 5% A 16%
BBB 18%
A - 26%
BBB 37% A- 37%
BBB + 20%
BBB+ 18%
Figure 1. Comparison of Standard & Poor’s distribution of public TIF ratings in the United States
for 1996 and 2006. Source: Hitchcock 2006.
TIF debt comprised a small and unrated segment of the tax-backed bond market in the 259
United States (Johnson 1999).
The uptick in TIF use was tied primarily to capital supply as investors sought out more
debt, and hence outside the terms of the individual TIF deal, makes the instrument even
more risky. In particular, appreciation may not occur because of three sets of unanticipated
factors: those associated with completion, valuation, and taxation.
Completion risk. A TIF district will not generate the expected property tax revenues
if the development projects planned for the area are never built. Real estate is a notori-
ously conflict-ridden enterprise, and adding layers of public management to a deal will
increase the risk of noncompletion rather than speed it along. Moreover, in theory, the
magnitude and number of development risks are greater in TIF districts by virtue of the
fact that these areas are purported to be more difficult to develop.
Valuation risk. Incremental tax revenues, the security for any debt issued
within the TIF district, are based on two elements: the assessed values of all parcels
within the district and the tax rates (discussed later) that are applied to those values. Even
if the publicly assisted project meant to catalyze appreciation in the TIF district is
completed, assessed property values may still not increase at the rate expected. Appre-
260 ciation depends on underlying relationships in the local real estate market, such as
absorption rates, most of which the city cannot fully control. Municipalities may overes-
timate property value growth, other developers’ interest, or revenues from land sales.
Cash flows may be highly irregular, and underlying economic conditions may unexpect-
edly change for the worse.
Taxation risk. Even though cities are obligated to repay the debt issued in TIF
districts, they are “passive” tax revenue receivers because, in most states, tax rates are
controlled by other taxing jurisdictions (e.g., state and county governments and school
districts) and not by the municipality or the TIF district itself. Each of these jurisdictions
has some degree of autonomy to set its rates according to its own budget needs and the
value of the properties within its legal boundaries. Similarly, the behavior of the state
government, if it decides to alter the TIF-enabling law or pass other legislation related to
property taxes (e.g., tax extension limitations) or property tax-backed debt, can impinge
on these revenue streams in an unanticipated manner. Therefore, the risk exists that these
other governments will alter their rates in ways that will diminish the increment promised
to investors by the municipality.
The consequences of these three set of risks can be dire. If property values in the TIF
district fail to increase or do not appreciate at a fast enough rate, the financial obligations
will fall back on the municipality, which will then have to increase tax rates or reduce
services.Although only a few TIF bonds defaulted during the construction boom of the late
1990s and 2000s, several high-profile fiascos in locations as varied as Arvada, Colorado,
and Battle Creek, Michigan, revealed the downside associated with monetizing both time
and space (Ward 1999). In these cases, municipalities were unable to cover their outstand-
ing debt service and were looking to tap their general funds to make payments, edging out
other kinds of public expenditure. When cities accept the risks associated with financialized
policy instruments, their ability to stay solvent and fund basic government operations, such
as public safety, basic sanitation, and education, are potentially compromised.
increasingly postindustrial city was engaged in fierce battles with its neighboring
suburbs to pin down commercial investment, particularly in the central business
district (the Loop). Its roots lay in the urban renewal statutes that allowed municipalities
to clear sites and develop areas that were dragging down property values, as well as in the
decline of Fordist modes of production that had made Chicago the manufacturer to the
world.
The first TIF district, the Central Loop TIF, was designated in 1984. Shortly after Mayor
Richard M. Daley came to office in 1989, he saw TIF as a way of encouraging develop-
ment in the central area despite the loss of federal funds and general displeasure with
property tax hikes. In concert with local industrial councils and their aldermanic repre-
sentatives, he encouraged the designation of several large-scale commercial and industrial
TIF districts in areas with severe infrastructure needs. Another wave of TIF districts were
designated in 1998, many of which were anchored by residential or mixed-use projects
and initiated by private developers. During both waves, TIF was used to pay for infra-
structure, land acquisition, land assembly and preparation, and subsidized financing. TIF
has provided public subsidies for hundreds of high-profile real estate deals. By the end of
2008 (see Figure 2), Chicago was home to 160 TIF districts that covered more than 30 261
percent of the area of the City (City of Chicago 2008).
In the remainder of this article, I identify several of the key strategies used by the City
1
RDAs are 100-plus page contracts approved by the city council and signed by the project developer. The
bulk of RDAs are standard legal provisions governing the conduct of parties doing business with Chicago,
but they also contain individualized terms for project financing as well as performance standards to which
the City and the developer can be held. The RDAs that I reviewed were approved between 1996 and 2007
and represent about 12 percent of the total RDAs signed during this period.
2
These TIF districts tended to be initiated by the City (as opposed to developers), including the Stockyards,
Reed Dunning, Goose Island, and the Sanitary and Ship Canal districts. The 15 bonded TIF districts (for
which the City had issued $346.6 million of debt) generated 94 percent of the incremental tax revenues
collected in all of Chicago’s TIF districts in 1998 (Neighborhood Capital Budget Group 1998).
ECONOMIC GEOGRAPHY
262
Figure 2. Map of Chicago TIF districts by use, 2008. Source: City of Chicago (2008).
Vol. 86 No. 3 2010
263
Figure 3. Typical flow of funds using TIF notes.
3
Almost all of Chicago’s early TIF bonds sold uninsured and unrated. However, it became easier for the City
to secure insurance and hence lower interest rates as it relied more on notes and resisted additional bond
issuances. A TIF bond issuance in 1998, for example, carried the A-rated backing of ACA Financial
Guaranty Corporation, which analysts agreed boosted the TIF bonds to “investment grade” (Shields 1998b).
Insurance expands the universe of investors because some of the stigma of the unrated issuance is lifted.
4
This figure does not include projects financed by the Small Business Investment and Neighborhood
Improvement Funds.
ECONOMIC GEOGRAPHY
or soft costs of development. When the notes are monetized, the risk that the tax
increments will not materialize is passed on to investors in exchange for promises of
higher yields.
During the development boom, the City of Chicago arranged the sequencing of notes
and TIF payouts in such a way as to force developers to assume the bulk of the completion
risks. Chicago held the notes in escrow or did not even issue them until an individual
project was complete and occupied, at which time it released them to the developer—who
had already made arrangements to sell them or obtain a loan against their value. As such,
the process of financial intermediation did not start until the project was completed. By
that time, however, the developer had already spent millions of dollars in construction and
soft costs. In order to be reimbursed for a portion of its development costs from the TIF,
the developer had to complete the agreed-upon project and adhere to any city-imposed
requirements.
To both accommodate the investment market and control the developer, the City took
the unusual step of segmenting the developer notes and issuing them as two discrete
products. The first category of notes resembled a standard financial instrument with few
264 quirks; Chicago was committed to paying a certain amount of principal and interest from
the property tax increment upon completion of the project. These notes, which were often
taxable and had recourse to the developer’s assets, were typically purchased by institu-
tional investors.
The second category of notes was weighed down with more locally specific obligations
placed on the asset owner: the developer. These included “public benefit” types of
requirements related to aesthetics (e.g., design guidelines that stipulated the use of
wrought-iron fencing, for which Mayor Daley had a proclivity), environmental sustain-
ability (e.g., the construction of “green roofs” or vegetated building cover), job creation
(e.g., numbers of construction and full-time employees), contracting practices (e.g.,
bidding out rather than sole sourcing), and job opportunities for women and minorities.
These obligations were not generic but rather were the result of protracted negotiations
between the City and individual developers.5 The purchasers of this second category of
notes tended to be the developers themselves (who held on to them as a kind of IOU) or
local banks angling for more city business.
Both categories of notes are what Clark and O’Connor (1997) would consider highly
“opaque” financial instruments in that they are built around idiosyncratic investment
opportunities and require specialized, local information. But this second category of note,
in particular, reflects an earlier, almost-Keynesian form of welfare-oriented fiscal gover-
nance that was not especially fast and fluid. It is also a reminder of how financialization
is always partial (Boyer 2000a); despite the neoliberal rollback of the local state, some
U.S. cities have found ways to provide public goods—although, as in this case, they are
relatively small in magnitude and must be negotiated on a project-by-project basis as
opposed to being provided as a right across the board.
The City’s desire to control both the financial and development markets came at a price.
Not only did the City risk alienating property developers by making them jump through
public benefit hoops, but it also paid for the privilege of using notes. I found that the City
5
While laudable, city administration resisted additional public benefit obligations such as when, in 2006, the
mayor vetoed what became known as the “Big Box Ordinance.” This law would have required large-scale
chain retailers to pay “living” wages (a minimum hourly wage of $10 and fringe benefits of $3 an hour). At
the time, the retailer Target was the anchor tenant in several TIF-funded projects that were not yet complete,
and it threatened to pull out of these deals if the ordinance became law. The mayor’s veto placated Target
and allowed the TIF projects to continue, albeit off schedule.
Vol. 86 No. 3 2010
265
committed to pay, on average, an interest rate of 8.3 percent for its notes, which is
noticeably higher than the rates of bonds during the same time (which averaged 6.7
percent between 1991 and 2006).6 Moreover, the City refinanced several of the developer
notes with longer-term tax-exempt bonds once the projects had stabilized after three to
five years. This process relieved the developer of some responsibility, but it riled the note
purchasers because prepayment deprived them of expected interest income. The practice
of refinancing also involved significant transaction costs. Although the City reduced its
interest payments, any restructuring of the debt, according to one source, cost 4 to 6
percent of the original face value of the note.
Spatial Strategies
TIF offers local government new ways to switch capital into local real estate assets,
which inflates the value of properties whose tax streams have already been securitized and
sold off to investors. The dependence of the system on this tautological loop—investment,
securitization, appreciation, investment—leads to certain spatial planning practices,
including increasing the number of TIF districts and developing areas that would maxi-
mize the incremental property tax return and minimize valuation risk. Figure 4 demon-
strates that the number of new TIF district designations mirrored general trends in
appreciation and that the greatest wave of designations occurred around 1998, before the
6
These figures are based on data provided by the Neighborhood Capital Budget Group (2006). On the other
hand, bonds also come with significant coverage and debt service requirements, and the issuance costs can
be higher than those for notes.
ECONOMIC GEOGRAPHY
property value spikes occurred following the 2003 assessments. The ability to designate
TIF districts when values were low allowed Chicago to capture subsequent revenue
growth from the building boom.
Chicago planning officials tightly controlled the size and location of each TIF district to
provide some assurance that future revenue streams would be sufficient to pay off note and
bond holders. In general, TIF districts that were diversified and large in area and value were
more attractive to investors because revenues spun off by parcels outside of the pledged
income stream could be tapped if a developer’s individual project was not fiscally
productive.
The City also minimized the risks of nonrepayment by targeting previously disinvested
districts in the city’s growth zones, that is, areas where rent gaps were widening but had
not yet peaked (Smith 1996). In this sense, TIF revealed the local state as an active agent
in the city’s gentrification, a relationship that has been documented in Chicago (see
Weber, Bhatta, and Merriman 2007) and elsewhere (Hackworth 2007). The most fiscally
productive TIF districts were originally in and around the Loop, where property values
had been depressed since the 1970s, and around the north, south, and western perimeters
266 of the central area. These areas had previously been devalorized due to industrial uses and
physical impediments like rail lines, rivers, and highways. A value “moat” had separated
the rest of the City from the Loop and was gradually filled in with TIF-subsidized office
and residential towers.
Increasing the number of TIF districts that bordered an existing district was
another way in which Chicago tried to exercise some control over the repayment
streams. The City was legally enabled to transfer increments generated in one TIF
district to a directly adjacent district (the City calls this “porting”). Between
2000 and 2005, Chicago transferred over $35 million between districts, while
in many of these cases, the borders between the two districts were miniscule (e.g.,
only 400 feet in the case of one pair of districts) (Thompson, Liechty, and Quigley
2007). The City approved larger-sized development projects because, it argued,
soft costs could be less painfully spread over them. It also favored site plans that would
appeal to the private market—those with more market-rate, owner-occupied units (as
opposed to affordable rentals), more retail space (as opposed to residential), and more
revenue-generating uses (as opposed to green space) and ownership structures. Publicly
owned property and public uses that would have required operating costs paid from the
TIF were less desirable, with the exception of the high-profile case of covering cost
overruns associated with the development of the Loop’s Millennium Park (Shields
2006a).
estate market and reinforced older systems of patronage and crony capitalism. This
dependence revealed itself when, in order to ensure completion, developers extracted
additional monies from the City beyond those specified in their individual TIF
agreement.7
Just as Chicago’s need for a rarefied skill set and its confidence in the performance of
a small group of developers created a tight-knit community with access to TIF dollars so
too did the City’s need for success in financial intermediation tie it to a small group of
advisors. As the TIF notes and bonds were initially very hard to sell, specialized under-
writing boutiques such as Kane McKenna and William Blair & Company became
important agents in the networks of urban fiscal governance, assuring dispersed investors
of the security of locally embedded assets. They promoted themselves as “objective
beacons in a stormy sea of financial volatility” (Green 2000, 86), turning abstract risk
relationships into feasibility reports, forecasts, coverage ratios, and cash flow projections,
which made risks more legible to investors and therefore seemingly more surmountable.
A handful of financial intermediaries were responsible for the bulk of the bond and note
sales in Chicago between 1996 and 2006, although the volume of TIF debt grew
substantially during this time. Some intermediaries purchased the notes themselves (at an 267
amount lower than their face value), others sold them to consortia of local banks, and still
others sold them to larger and spatially dispersed institutional investors seeking more
7
For example, the City increased its commitment from $41.6 million to $52 million in a $150.9-million
mixed-use project on Chicago’s North Side, called WilsonYards, after the project experienced costly design
changes, higher construction prices, and the loss of initial investors and retail tenants (Roeder 2008).
ECONOMIC GEOGRAPHY
ment program would lead to more business with Chicago. The City’s ability to control the
TIF process and switch its own capital around at whim kept local banks on a short leash.
Discussion
As a result of these different strategies, financial advisors and ratings agencies cheered
on Mayor Daley’s control of the TIF process in Chicago. One financial consultant noted,
“The majority of TIF bonds are not rated because they are highly speculative. But market
Vol. 86 No. 3 2010
interest is increasing because of the successes, especially in urban areas like Chicago”
(Shields 1998a). In its use of two-tiered TIF notes, reliance on an inner circle of
developers and financial intermediaries, and bare-knuckled control over the politics of
property valuation, the City found ways to harness the power of financial markets and
facilitate capital switching into local real estate. As a result, TIF coffers overflowed with
cash during the boom. Even including three heavily debt-laden downtown districts, the
city’s TIF districts had net assets of $271 million in 2005, which was both more than
the City spent on capital improvements that year and more than the average budget of the
entire Department of Streets and Sanitation (Hinz 2005). Tapping TIF revenues, and not
the general fund, as a source of repayment also helped the City to avoid defaults on its
obligations, maintain healthy general-fund reserves (4 percent of expenditures in 2005),
and avoid dipping into those reserves (Shields 2006a). The ratings agencies rewarded the
City for its financial savvy and control over the TIF process, improving its credit rating to
mid-double A in 2006 (Shields 2006b).
However, such strategies were also the source of new costs and risks. Control is
expensive in regimes where “value in the built environment depends on the circulation of
fast, fictitious money and an unruly web of politicized and marketized relationships” 269
(Weber 2002, 539). The City’s efforts to harness the power of financial markets while
simultaneously exerting power over the intermediation process caused carrying costs to
development tool. Several more TIF districts were designated even after the recession
began, and ambitious development plans for them continued to be discussed.
Conclusion
Since the 1970s, a growing surge of global capital has sought out new instruments,
impatiently switching between sectors and locations as risk-return ratios changed. Cities
were not just arbitrarily selected for investment as a result of a game played far above their
heads; their local government representatives played a critical role in constructing the
conditions under which capital could be channeled into locally embedded assets, namely
real estate. Not all succeeded, but some municipalities were able to steer capital toward
what was formerly a backwater of the financial markets: government revenue-backed
debt.
This research supports the notion that, at the local scale as well as at the national one
(Gotham 2006), the capitalist state plays a critical role in temporarily resolving over-
accumulation crises. Real estate cycles are historically accompanied by innovations in
270 securitized equity and debt instruments that channel savings into commercial real estate
investments (Beitel 2000). During the Millennial boom of the late 1990s and the first
decade of the 2000s, many U.S. municipal governments acted as the kind of innovators
that we associate with private market actors. They assisted capital in finding profitable
investment outlets by devising new ways to monetize their own assets and create new
securities. They turned income streams from their existing and future tax bases, infra-
structure, and pension funds into fungible securities and helped build secondary markets
for their exchange, both of which momentarily took some pressure off of the global capital
glut.
But not all assets and income streams were equally attractive to finance capital. The sale
of instruments secured by public assets depends on the perceptions of distant investors
and rating agencies who seek some security in uncertain, volatile environments. Struc-
tural or political impediments to the real estate development process, rigid revenue
structures, and fiscal policymaking institutions that involve multiple agencies with
diverse interests can lower ratings and threaten repayment schemes. This research dem-
onstrates how converting deeply embedded and otherwise opaque real estate assets into
more standardized and less locally contingent financial instruments requires that city
governments exercise more than a modicum of control over the processes of asset
creation, valuation, and securitization. In the context of initially less-tested instruments
such as TIF, selling the rights to a speculative income stream therefore required a large
dose of political control to ensure that market actors accepted these virtual commodities
as legitimate and the promises of the issuer as credible.
Not all cities have to go as far as the City of Chicago in suppressing or
co-opting interest group activity, but I am suggesting that there is a correlation between
centralized political authority and the financialization of local policy, particularly when
the political administration is unabashedly entrepreneurial. As this study focused only on
a single case, further research is needed to determine whether city administrations that
have the political power to structure the financial instruments, control the development
process, and protect the value of their underlying assets have easier access to global
capital.
With the exception of a few recent analyses (Hackworth 2007; Ranney 2002), we know
little about the politics of financialization at the local level. The deliberate policy choices
that encouraged financialization at the global and national scales have been better
documented (Ashton 2009; Gotham 2006), such as the Federal Reserve’s sudden raising
Vol. 86 No. 3 2010
of interest rates in 1979 (Duménil and Lévy 2004). We also know about the financial
sector’s lobbying efforts to liberalize and deregulate their industry at these scales. This
research suggests that more conventional accounts of urban governance, emphasizing
regimes, power, and formal legal arrangements, can assist critical geographers in their
studies of the place-based articulations of global finance.
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