April 9, 2019 | By Fritz Kaegi

How Corruption Holds Back a Global Chicago, and How to Fix It

With a new Mayor and City Council coming into office, Chicago has a critical opportunity to reinvigorate its global reputation and attractiveness as an investment destination. Fairness, ethics, and transparency are intricately tied to our reputation as a place to do business. Voters have spoken clearly to break from practices of the past.

In January, after the federal indictment of Alderman Ed Burke, The Economist ran a story with the headline, “Chicago’s political system is set up to produce corruption.” It followed a 2017 Economist story about the Assessor’s race and the Cook County assessment system. The headline? “How Cook County’s Democratic Machine Works.”

When I asked how a humble county race made the pages of The Economist, the editor replied “this is what readers around the world want to know about Chicago.”

We have a pivotal opportunity to change these headlines and transform Chicago’s reputation.

How Corruption Impedes Investment

When all of our great strengths as a global city are obscured by a cloud of suspicion about corruption and cronyism, we all pay the price via what the Chicago Tribune has referred to as the “corruption tax.” Whether it’s actual corruption, a lack of transparency, arbitrariness, favoritism, or unpredictability, it all looks the same to outside investors.

As a former investor, I know that investors fear uncertainty and risk, and have to be compensated for taking on that risk. When this happens, we miss out on the value creation and investment that all of us deserve, and that our peer cities get instead.

Attendees over the years at the Council’s annual Forum on Global Cities have heard panel after panel elaborate on how our peers have used transparency, open data portals, rule of law, and ethics reforms to bring light to and root out corrupt practices, thereby attracting investment.

In Chicagoland, our property tax assessment system has been a serious source of risk, uncertainty, and reputational concern.

Investors in Europe and Asia, not to mention the rest of the United States, are well aware of these problems.

For investors, risk and uncertainty are like sand in the gears of commerce, giving outsiders a universal excuse for inaction and disinterest. Investors that choose to come here anyway hedge their exposure to uncertainty in varied ways: banks over-escrow borrowers, cut back lending, and stay only in familiar parts of town; property owners have trouble getting top dollar in net rents and when they seek to sell their buildings; developers cut back risk-taking and need extra compensation to take on the unpredictable assessment and property tax risk, often through avoiding investment in most parts of the Chicago area.

The only way to “de-risk” the system is through transparency. For example, at the Cook County Assessor’s Office we’ve implemented a number of reforms to the assessment system, including releasing all of our valuation assumptions to the public, maintaining a public visitors’ log to our office, anonymizing the identity of law firms handling appeals (so analysts can work without favoritism), initiating an audit with the International Association of Assessment Officers, and advocating for a Data Modernization Bill in the state legislature.

Transparency Starts with Data

Mass appraisal is all about data. To ensure accurate and fair assessments, our office requires that data be of the highest quality.

Critically important is that large rent-earning property owners to annually submit basic rent and property expense data. By collecting income and expense data up front, our modeling and valuations teams will be able to take current market rents, vacancy rates, and other trends into account to deliver more fair, accurate and transparent assessments. Seventeen other states have adopted legislation to provide assessor offices with the kind of data they need and cities would benefit if every state required this type of information to be shared. A bill that would require income-generating properties to submit this data recently passed the Illinois State Senate and will soon be before the House.

With this approach, not only will the data lead to more accurate assessments, but just as importantly, it will dramatically increase predictability in the real estate market. The data will be annually published on a bulk and anonymized market level, allowing investors and market participants to plan, organize financing, and transact with much less risk. This is especially true for out-of-town and publicly-traded real estate investors, who are increasingly important in this globalizing market, and who have been burned by and detest our local property tax idiosyncrasies.

These are the kinds of actions global investors need to be comfortable investing in a global city like Chicago.

Creating A Progressive Financial Future

During the Chicago mayoral runoff, both candidates underlined a very important point: enacting these reforms is absolutely necessary for us to address the huge fiscal challenges on the horizon. Chicagoans need to have more faith in the integrity of the system that will be demanding more financial sacrifices of them.

Our fiscal problems represent the other big weakness to our global profile. During the Mayoral campaign, the candidates advanced some proposals to improve the city’s financial condition. But the city is not going to be able to solve these on its own. The General Assembly took an important step by reforming the state’s school funding formula last year.

In Illinois, we also need to have a robust debate about how much of government should be financed by property taxes that fall heavily on ordinary people and bricks and mortar structures, while other wealth and income are taxed much more lightly. Our status quo places a heavy burden on the real physical economy, at the cost of deterring neighborhood vitality and construction investments. Governor J.B. Pritzker’s proposed Fair Tax Amendment is a key part of this conversation, and will be one of the most important debates we have over the next two years to address Chicago’s global reputation.

A hopeful vision of our future is emerging. But to build the Chicago that works for its residents and that commands the international reputation it deserves, we must prioritize a more transparent system of governance. There is no better time for city, county and state leaders to achieve these goals.

Fritz Kaegi is the Cook County Assessor. Prior to assuming office in December 2018, Assessor Kaegi was an international investor and Portfolio Manager at Columbia Wanger Asset Management, where he visited more than 1000 companies in more than 40 countries around the world.

About

The Chicago Council on Global Affairs is an independent, nonpartisan organization that provides insight – and influences the public discourse – on critical global issues. We convene leading global voices and conduct independent research to bring clarity and offer solutions to challenges and opportunities across the globe. The Council is committed to engaging the public and raising global awareness of issues that transcend borders and transform how people, business, and governments engage the world.

The Chicago Council on Global Affairs is an independent, nonpartisan organization. All statements of fact and expressions of opinion in blog posts are the sole responsibility of the individual author(s) and do not necessarily reflect the views of the Council.

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