Selling City Futures:The Financialization ofUrban Redevelopment Policy

Rachel WeberUrban Planning and Policy

ProgramUniversity of Illinois at

Chicago412 South Peoria MC 348Chicago, IL 60607rachelw@uic.edu

Key words:public financeriskreal estateTax Increment Financingcapital switching

abst

ract This article examines the specific mechanisms that

have allowed global financial markets to penetratedeeply into the activities of U.S. cities. A flood ofyield-seeking capital poured into municipal debtinstruments in the late 1990s, but not all cities orinstruments were equally successful in attracting it.Capital gravitated toward those local governmentsthat could readily convert the income streams ofpublic assets into new financial instruments and thatcould minimize the risk of nonpayment due to theactions of nonfinancial claimants. This article followsthe case of Chicago from 1996 through 2007 as thecity government subsidized development projectswith borrowed money using a once-obscure instru-ment called Tax Increment Financing (TIF). TIFallows municipalities to bundle and sell off the rightsto future property tax revenues from designated partsof the city. The City of Chicago improved the appear-ance of these speculative instruments by segmentingand sequencing TIF debt instruments in ways thatmade them look less idiosyncratic and by exertingstrong political control over the processes of devel-opment and property tax assessment. In doing so,Chicago not only attracted billions of dollars in globalcapital but also contributed to a dangerous oversupplyof commercial real estate.ecge_1077 251..274

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Acknowledgments

The author would like tothank her interview subjectsfor their cooperation andAndrew Greenlee, JeremyThompson, and Joanne Millerfor their assistance with thisarticle. Philip Ashton, NikTheodore, three anonymousreviewers, and the editors ofEconomic Geography provideddeep insight and sage advice.

One of the central organizing principles of contem-porary capitalism is its dependence on the short-termflows of global finance, the “infrastructure of theinfrastructure” (Cerny 1993, 18). In this phase ofcapitalist development, accumulation occurs moreoften through financial channels than through com-modity production and trade (Boyer 2000a; Froud,Johal, Leaver, and Williams 2006; Duménil and Lévy2004; Krippner 2005). Income streams from a widerange of assets are converted into new investmentproducts for dispersed investors through techniquesthat disaggregate and continually reassign ownershipto allow for more and faster-paced exchanges. Finan-cialization is the term used to describe both this insti-tutional form and the processes that lead to it.

Financialization is also evident in public policyfrom international governance down to the sublocalscale. In this article, I focus on the financialization ofurban development policy in the United States. Thedegree of financial market penetration is reflected inthe increase in municipal debt, the privatization andsecuritization of public assets, the size and scope ofthe financial services available to city governments,and the investor-orientation of critical collective con-sumption decisions. Local governments have come torely heavily on financial markets, and not just throughtraditional forms of municipal indebtedness, for theprovision of standard public services.

Unfortunately, the means through which financialintegration has occurred in this sector have beenpoorly understood. Finance capital is often depictedas perpetually dynamic and naturally expansionary,while the institutions and instruments that connect itto place remain abstract and unexamined. Those whostudy how finance capital operates—for example,through the shareholder-orientation of corporations(Froud, Johal, Leaver, and Williams 2006; Weber2000) and market-monitoring institutions, such asbond rating and credit scoring agencies (Hackworth2007; Leyshon and Thrift 1999; Sinclair 2005)—imply that it thoroughly imposes its will fromabove, leaving little space for variation or agency onthe ground.

But a generalized pressure to attract capital doesnot mean that local governments have been equallyfinancialized across space. Some entrepreneurialcities have been able to convert their wealth intofreedom from financial market dependence, whileothers have used it as leverage for more borrowing.Some cash-strapped municipalities have been ignored

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by financial markets altogether, while others have “paid to play,” becoming encumberedby high-interest debt on usurious terms.

Thus, I start from the assumption that financial integration is both variegated andlocally embedded. But I also move beyond the truism of local embeddedness by exam-ining the actual mechanisms through which local governments construct a nexus betweenglobal financial circuits and local property markets. In contrast to the characterizations ofmoney as disembedding and alienating and of local governments as passive recipients ofdirectives from markets, I direct my attention to three aspects of urban governance thatinfluence the distinctively local character of finance.

First, local governments have the capacity to participate actively in the construction offinancial markets by manufacturing new investment instruments and the underlying assetsthat form their collateral. Like Leyshon and Thrift (2007), I demonstrate how the abilityto create and monetize new asset classes is one of the most valuable functions in afinancialized economy. Unlike these authors, however, I argue that political power, not justthe computer software to aggregate these new income streams, is needed to establish theirlegitimacy. Cities control some of the most opaque and idiosyncratic assets, in particularprivate and publicly owned real estate (Clark and O’Connor 1997). The local state mustmake these assets legible to distant investors and rating agencies if it is to attract financialcapital.

Second, local governments have varied abilities to protect the income streams of theassets underlying these instruments. The growing interdependency, complexity, anduncertainty of global economic activity not only creates more opportunities for specula-tion but also raises the premium paid for demonstrable control over the factors that mightthreaten repayment and cause owners to default on their obligations. Cities that exhibitmore local control—for example, over the timeframe for issuing debt or debt-basedsecurities, the real estate development process, or their political opponents—are oftenrewarded with relatively fast and easy access to global capital. In this sense, it is not justthe assets themselves or, contra Clark and O’Connor (1997), the degree of informationavailable about the asset that is commodified. I argue that the local state’s ability to controldevelopment and hold claimants other than investors at bay is also being priced andvalued.

Third, despite financial market integration, local governments have the capacity topreserve a realm of provision of public goods —although the nature of these goods andservices are often themselves transformed by the manner in which they are financed. HereI depart from Leyshon and Thrift (2007, 100), who argued that long-term “investments inpublic goods become subordinated to international financial imperatives,” and Hackworth(2007, 25), who asserted that the forced retirement of Fordist social welfare policies is “ade facto requirement of increasing a city’s exposure to capital markets.” Although it iscertainly harder to justify public investments that are not fiscally productive, some citieshave used their access to global financial markets as leverage to pressure other privateactors and public agencies into providing public goods, such as infrastructure andeducation.

This article examines one major city, Chicago, whose approach to financializationrepresents an extreme, but illustrative, case study. The city has been called “paradigmatic”for many reasons. It was the U.S. industrial metropolis, and then it was the postindustrialcity whose movement toward financial services, real estate, and tourism was lauded by thepopular press despite its association with a new and disturbing form of wage polarization(“A Success Story” 2006; for a critique, see Doussard, Peck, and Theodore 2009).Overseeing the transition has been Mayor Richard M. Daley, in office since 1989, who hasembraced a model of public “partnership” with the private sector that closely resembles

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the entrepreneurial mode of urban governance described by Harvey (1989) and Jessop(1998). For Daley, this model has included charter schools, corporate sponsorship ofpublic amenities, and the new “Chicago Model” of privatization, whereby the city’sinfrastructure has been leased to private investment consortia for periods ranging from 75to 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 policyfinancialization through its use of a powerful redevelopment incentive, Tax IncrementFinancing (TIF). TIF is an increasingly popular local redevelopment policy that allowsmunicipalities to designate a “blighted” area for redevelopment and use the expectedincrease in property (and occasionally sales) taxes there to pay for initial and ongoingredevelopment expenditures, such as land acquisition, demolition, construction, andproject financing. Because developers require cash up-front, cities transform promises offuture tax revenues into securities that far-flung buyers and sellers exchange throughglobal markets.

TIF is used by municipalities in all but one state and has funded everything from majordowntown 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 budgetthat year. Fiscal crises and interest in neoliberal policy fixes around the world have spurredan interest in TIF, which is in the process of being exported to countries such as the UnitedKingdom and Australia (see, for example, British Property Federation 2008 and Morrison2008). In an article about the mayor of London entitled “Boris Johnson favours taxincrement financing method. Eh?” the Guardian singles out Chicago as a seasoned userof this novel, but still unfamiliar, financing tool (Hill 2009).

The article proceeds as follows: in the first section, I provide a brief overview of thefinancialization literature, pointing out its oversights and overstatements particularlywhere the role of local government is concerned. In the second section, I unpack one ofthe most important mechanisms knitting the interests of global financial markets and localpolicy together: TIF. In particular, I discuss the ways in which TIF represents financializedurban policy as well as the kinds of risks that emerge when cities embrace such tools. Inthe third section, I focus on how Chicago used TIF to convert political control into fiscalstrength and to participate in the debt-fueled Millennial property boom (roughly 1996through 2007). My analysis is based on an in-depth reading of the contractual agreementsgoverning the allocation of city TIF funds to developers, which detail the sources and usesof 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 andfinancial market actors. The case material is used to develop new and to engage existingtheoretical propositions about how the integration of finance with city politics occurs.

The Financialization of Urban Development PolicyIn the build up to and aftermath of the 2007 meltdown, scholarly attention to finan-

cialization increased and took root in disciplines heretofore indifferent to the role playedby financial capital in the economy (Lee, Clark, Pollard, and Leyshon 2009). The literatureconsists primarily of accounts of the structural changes that have transformed capitalismin the last four decades (Arrighi 1994; Ashton 2009; Boyer 2000b; Brenner 2002;Duménil and Lévy 2004; Krippner 2005). In the 1970s, sharp declines in corporate outputand profit rates created a flood of restless capital seeking returns in an environmentprofoundly changed by the collapse of the international monetary management system.

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The task of guiding this capital through turbulent markets and switching it betweeninvestment circuits increasingly fell to the private financial sector. This sector, whichencompasses everything from diversified global investment banks to pension funds tolone day traders, grew in size and influence in the years following the profit crisis of the1970s. By the late 1990s, the value of financial corporations and funds dwarfed the networth of nonfinancial corporations (Duménil and Lévy 2004; Krippner 2005), and theperiod from 2001 through 2007 only intensified financial expansion (Crotty 2008). Thevalue of all financial assets in the United States grew from four times gross domesticproduct (GDP) in 1980 to ten times GDP in 2007 (Crotty 2009).

More volatility in asset prices and interest rates also created new opportunities forshort-term speculation, and the financial sector began to shift away from its previousmission of transferring capital between those who save it and those who use it forproductive purposes (e.g., to purchase equipment) (Orhangazi 2008). Instead, it began tofinance itself effectively through a plethora of increasingly complex instruments (LiPumaand Lee 2004; Bryan and Rafferty 2006). These instruments are intended to hedge ordisperse risks and to increase the liquidity of assets by pooling and repackaging theirincome streams. The ability of instruments such as securities and derivatives to connectglobal and local space, deterritorialize embedded assets, and absorb the savings ofhouseholds (through pensions and other funds) energized the study of financial geogra-phies (see, e.g., Clark and O’Connor 1997; French and Leyshon 2004; Martin 1999;Pryke and Allen 2000; Tickell 2000).

Accounts of the expanding role of finance have differed considerably, particularly in thenormative weight they assign to these changes. Heterodox economists and geographers seea playing out of Marx’s over-accumulation crisis whereby financialization manages thestructural crises of capitalism, that is, the fact that capital surpluses cannot find sufficientlyprofitable real investment outlets and that this demand inflates the prices of financial assets(Amin 2003; Harvey 2003). Some offer an explicitly class-based analysis, wherebyfinancialization represents the latest assertion of power by the owners of the means ofproduction. Duménil and Lévy (2004, 16), for example, suggest that finance tookadvantage of the crisis of the 1970s to “shift the course of history in its own interests.” Thepursuit of shareholder or financial value imposes an imperative to suppress wages andsocial spending, justifying the massive wealth transfer and polarization that results.

In contrast, mainstream economists and advocates, such as former Federal ReserveChairman Alan Greenspan, tend to read the wild growth of the financial sector as the keyto liberating capital so that it can more efficiently move around the globe in search of thoseplaces where it can generate its highest returns (see also Fama 1990). The financialsector’s extraction of profits from the productive economy is expected to disciplinemanagers, who must compete for shareholder attention, and disperse risks internationallyto those best able to manage them.

The literature also varies in terms of its scale and point of entry to the vast financialsystem. Many scholars make broad sweeps of the financial landscape, assuming a globalperspective and focusing on the macroeconomics of these system-wide shifts (Brenner2002; Duménil and Lévy 2004; Boyer 2000b). For them, financialization is a process thathas occurred in all realms of the economy, as well as in remote places far from tradingcenters. Their temporal horizons also tend to be broad, focused on the “longue durée” ofcapitalist crisis and transformation (Arrighi 1994).

Others narrow in on the operation of the financial sector itself, examining particularfinancial institutions (pension funds, bond rating agencies, and banks) in depth and atparticular points in time. In some accounts, these institutions are still driven by the“needs” of capital to move between different circuits of accumulation and to rout out the

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highest profits (Beitel 2000). In others, finance does not just act on social and spatialrelations 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 dynamicsthat 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 thetrading floor (Zaloom 2006) or the assumptions behind asset pricing models (MacKenzie2007), these scholars have focused on the ways in which market participants come tosome socially grounded consensus about the meaning of different financial instrumentsand 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 intoparticular sectors of the economy. Commercial real estate, for example, is a sector inwhich 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 sectorof production (Beauregard 1994; Beitel 2000; Charney 2001; Coakley 1994; Gotham2006; Harvey 1985; Leitner 1994; Smart and Lee 2003). Capital is switched to thedevelopment and acquisition of property, as real estate experiences erratic bursts ofhyperactivity when rates of profit from other investments are relatively low and falling.

With all the attention on the geographic and social embeddedness of financial marketbehavior and the integration of finance with real estate, it is therefore surprising to seescholars ignore the important role played by local governments in shaping and beingshaped by financial markets. If the public sector is evoked, it is mostly a nod to thosenational level policy shifts that have pushed households and corporations toward moredebt and helped pave the way for financial hegemony (Gotham 2006). With the exceptionof Hackworth (2007), few geographers have analyzed recent processes of financializationfrom 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; seeFuchs 1992; Monkkonen 1984; Sbragia 1996 for histories of urban public finance in theUnited States). In the last quarter of the twentieth century, certain changes stand out asmarking a new era of increasing integration between financial markets and the day-to-dayoperations of local governments. Local governments moved beyond simply financingcollective infrastructure and doing so with general obligation bonds, backed by their fullfaith and credit. Instead, cities and, increasingly, special authorities extended credit toprivately 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, auctionbonds, and derivatives—often with disastrous effects (see, e.g., the discussions by Tickell2000 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 BusinessAdministration) programs, and contracting out to specialized financial advisors (Fainstein1991).

The growing integration over the last four decades occurred for several reasons. Asfederal aid contracted and caretaking responsibilities were devolved to lower scales ofgovernment, the federal government encouraged the adoption of more “entrepreneurial”approaches to local economic development (Harvey 1989). It loosened eligible userestrictions on the remaining federal programs, such as Community Development BlockGrants, and encouraged these monies to be used to leverage matching funds in the privatesector (Clarke and Gaile 1998). Municipalities found themselves no longer wards of thefederal government but rather in a position to take on more risks and extend their reach to

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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 asCalifornia’s Proposition 13, which limited the revenues available to municipalities. In theface of a dwindling supply of federal block grants and voter-enacted caps on taxes andspending, municipalities looked simultaneously to the credit markets and to their propertyholdings for funding.

When municipalities sought assistance from the financial markets, they encounteredpurveyors of private capital with a new taste for public debt. Municipal debt instrumentspreviously had been viewed as marginal and low yield. But in the late 1990s, investmentbanks were flush with cash from global capital surpluses (mainly from Asia, the UnitedStates, and Europe), with relaxed underwriting criteria and low interest rates adding to thevolume of money. Institutional investors developed a penchant for urban real estateinvestments 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 startedto increase as early as the late 1980s (Hackworth 2007). Moreover, downtownproperty values, the basis for the bulk of municipal revenue streams, rapidly appreciatedduring the late 1990s due to growing interest by finance capital and massive amounts ofnew construction in those international “gateway” cities (e.g., New York City,Boston, Dallas, Chicago, and Atlanta). After a temporary decline following September 11in 2001, the ascent of real estate prices reached historic levels in 2005 (Standard & Poor’s2009).

Municipal debt tracked this rise in capital volume and real estate values. After holdingsteady and even declining for most of the 1990s, outstanding state and local debt in theUnited States increased by 55 percent between 2000 and 2005 to $1.85 trillion, of whichapproximately $1.13 trillion was local debt (Federal Reserve 2006). Between 2001 and2005, municipalities raised an average of $230 billion annually in new funds (up from anannual average of $152 billion between 1996 and 2000).

During this period, local governments were not only the beneficiaries of capitalswitching, but they were also active agents of financial liberalization and integration. Inthis sense, they performed the work of knitting together the global and the local. Throughzoning, permitting, and subsidies, local governments facilitated capital switching intocommercial real estate and created the conditions under which this property could befinancialized. Liquid markets and local policy liberalization were mutually reinforcing;public subsidies and lax zoning regulations, for example, allowed the private sector tobuild increasingly larger and riskier projects (which commanded price premiums in hotmarkets), while inflated sale prices kept tax assessments high, minimizing the risk ofnonrepayment for property tax-secured debt.

Municipalities extended the power of financial markets throughout the economy byissuing and purchasing vast amounts of debt. They also developed new domains ofgovernance (e.g., special districts), new instruments, and new asset classes thatcould be bought, sold, and securitized. They financed and lent their legitimacyto the creation of new secondary markets where assets once thought to be valued only fortheir uses (infrastructure, pensions, and tax revenues) were converted into securities andtraded at a distance. Under conservative central administrations in the 1980s and early1990s, for example, local governments built markets for off-budget tax expenditureprograms such as the federal 1986 Low Income Housing Tax Credits in the United Statesand the 1992 Private Finance Initiative in the United Kingdom (Leyshon and Thrift 2007).And, with the blessing of state governments, they created instruments through whichanticipated revenue streams could be sold off to investors, such as public asset leases andTIF.

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Tax Increment FinancingAs mentioned earlier, TIF is a local economic development policy that allows munici-

palities to designate a “blighted” area for redevelopment and securitize the expectedincrease in property taxes from the area to pay for initial and ongoing redevelopmentexpenditures there (for more details about the mechanics of TIF, see Weber 2003). Oncedesignated, taxpayers in that area pay real estate taxes on the value of their property priorto the creation of the TIF district, as well as on any increase in its value. However, for thelife span of the district (which in most states is about 20 years), all taxes on any new valuein the district are directed into a fund to pay for public redevelopment expenditures, suchas debt service on bonds floated for infrastructure or private acquisition costs.

This urban redevelopment policy can be viewed as financialized in several senses. First,TIF is the governance mechanism (or the “system” according to Leyshon and Thrift 2007)that allows the income stream (property tax revenues) generated from locally embeddedassets (property) to be converted into financial instruments and exchanged in the globalmarketplace. Before the use of TIF, municipalities had three options to stimulate invest-ment. They could abate or defer property taxes to encourage private investment; theycould fund projects out of their own general funds, special assessments, or user fees; orthey could commit their full faith and credit to paying back a general obligationbond. With TIF, municipalities instead repackage the rights to a stream of futureproperty tax revenues into fungible bundles and sell these rights to investors as debtinstruments. Municipalities perform like other secondary market transformers, such asFannie Mae, but in the case of TIF, they are selling off slices of their tax bases instead ofmortgages.

More specifically, a developer who wants to undertake a project in a designated TIFdistrict will apply for funding from the local government or redevelopment agency. If thecity is supportive of the project, it will grant a portion of the project’s development costsas a “TIF allocation,” a commitment of future property taxes generated within the district.However, developers require the funds to start construction immediately, so municipali-ties fund projects upfront by pledging future property tax revenues as security for currentborrowing. To pay for these development expenditures, municipalities often float revenuebonds, which are secured by a dedicated stream of property taxes generated by and aroundthe new development instead of by the sponsoring government’s full faith and credit.These bonds are sold through negotiated sales and allow municipalities to avoid state-imposed constitutional and statutory debt limitations and voter referenda (Sbragia 1996).In this way, cities obtain capital by turning the rights to their own heterogeneous propertytax base into standardized, tradable assets—often without the knowledge of the individualproperty owners paying their tax bills.

Second, the timing of TIF coincides with the dramatic expansion of capital markets andthe global savings glut of the late 1990s and early 2000s. Even though the mechanism hadbeen in existence since 1955, its early use was restricted to a handful of states on the westcoast. Interest in TIF spread east only after the federal government cut its urban renewalassistance to cities in the 1970s (Clarke and Gaile 1998). Even then, TIF was usedsparingly, as municipalities were slow to develop the legal and accounting infrastructurenecessary to bundle the revenue streams (see Leyshon and Thrift 2007 for their accountof the technological innovations required to pool and capitalize income streams). Evenduring the commercial construction boom of the 1980s, the municipal market remaineda backwater ignored by most investors. On the asset side, developers had easy access tobank financing as lenders were more than willing to absorb the risks of dangerouslyoverleveraged projects (Beitel 2000). As such, from 1960 through approximately 1995,

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TIF debt comprised a small and unrated segment of the tax-backed bond market in theUnited States (Johnson 1999).

The uptick in TIF use was tied primarily to capital supply as investors sought out moreexotic instruments and opportunities to “release” the value that lay embedded in the urbanproperty base. Returns in competing private securities markets had been driven down bythe volume of capital from Europe, the United States, East Asia, and the Middle Eastseeking above-average returns (Ashton 2009). Restless, yield-seeking capital switchedfrom other investment opportunities to the property sector and to riskier, nonguaranteedmunicipal debt as property values started their wild ascent in the late 1990s (Charney2001). The growing interest of pension funds, banks, and life insurance companies gavemunicipalities the confidence to float more TIF debt, and this once-obscure policyinstrument grew in size and repute.

Figure 1 shows that between 1996 and 2006 (arguably the beginning and peak of thelast cycle), the number of Standard & Poor’s-rated TIF issuances increased, as did thecredit worthiness of the bonded debt. The average issue size also increased (Hitchcock2006). Coupled with incentives to buy on the capital supply side, the increasing amountof bonded debt secured by TIF was also fueled by incentives to build on the developmentor asset side and to take some credit for the local articulations of the global property boomon the municipal side.

Third, TIF places local governments and their ability to control the value of theunderlying assets of these securities—that is, rateables—at the center of a fragile archi-tecture of interlinked financial arrangements that is beset by a variety of risks. One of thekey attributes of financialization—along with the attendant global economic integration,deregulation, and liberalization—is a system-wide increase in the number and magnitudeof risks (Ashton 2009; Vogel 1996), and TIF is fundamentally a risky instrument.

WithTIF, municipalities are gambling on future appreciation in the value of the land andbuildings within a small geographic area; it is the incremental taxes on properties within thedistrict that are securitized and pledged as repayment for whatever debt has been issued.Indeed, the process of risk production begins when municipalities designate TIF districts.The local state is, in effect, constructing stigma by labeling the area as blighted and difficultto develop. However, the primary credit risk presented byTIF is that the future appreciationin the project area will not materialize at the pace required by investors, causing themunicipality to default on its debt service obligations. The fact that the main drivers ofproperty value appreciation lie mostly outside the control of the municipality issuing the

1996 (Total number of public ratings = 158)

A 10%BBB- 5%

Other 4%

A - 26%

BBB+ 18%

BBB 37%

2006 (Total number of public ratings = 351)

BBB- 5%

Other 3%

A 16%

A- 37%

BBB + 20%

BBB 18%

Figure 1. Comparison of Standard & Poor’s distribution of publicTIF ratings in the United Statesfor 1996 and 2006. Source: Hitchcock 2006.

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debt, and hence outside the terms of the individual TIF deal, makes the instrument evenmore risky. In particular, appreciation may not occur because of three sets of unanticipatedfactors: those associated with completion, valuation, and taxation.

Completion risk. A TIF district will not generate the expected property tax revenuesif 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 willincrease the risk of noncompletion rather than speed it along. Moreover, in theory, themagnitude and number of development risks are greater in TIF districts by virtue of thefact that these areas are purported to be more difficult to develop.

Valuation risk. Incremental tax revenues, the security for any debt issuedwithin the TIF district, are based on two elements: the assessed values of all parcelswithin the district and the tax rates (discussed later) that are applied to those values. Evenif the publicly assisted project meant to catalyze appreciation in the TIF district iscompleted, assessed property values may still not increase at the rate expected. Appre-ciation depends on underlying relationships in the local real estate market, such asabsorption 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 TIFdistricts, they are “passive” tax revenue receivers because, in most states, tax rates arecontrolled by other taxing jurisdictions (e.g., state and county governments and schooldistricts) and not by the municipality or the TIF district itself. Each of these jurisdictionshas some degree of autonomy to set its rates according to its own budget needs and thevalue of the properties within its legal boundaries. Similarly, the behavior of the stategovernment, if it decides to alter the TIF-enabling law or pass other legislation related toproperty taxes (e.g., tax extension limitations) or property tax-backed debt, can impingeon these revenue streams in an unanticipated manner. Therefore, the risk exists that theseother governments will alter their rates in ways that will diminish the increment promisedto investors by the municipality.

The consequences of these three set of risks can be dire. If property values in the TIFdistrict fail to increase or do not appreciate at a fast enough rate, the financial obligationswill fall back on the municipality, which will then have to increase tax rates or reduceservices.Although only a fewTIF bonds defaulted during the construction boom of the late1990s and 2000s, several high-profile fiascos in locations as varied as Arvada, Colorado,and Battle Creek, Michigan, revealed the downside associated with monetizing both timeand 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 outother kinds of public expenditure.When cities accept the risks associated with financializedpolicy instruments, their ability to stay solvent and fund basic government operations, suchas public safety, basic sanitation, and education, are potentially compromised.

Commodifying Political Control:The Case of ChicagoChicago’s use of TIF began during a transitional period in urban policy, the early 1980s,

when federal and state support for urban development was waning and when this

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increasingly postindustrial city was engaged in fierce battles with its neighboringsuburbs to pin down commercial investment, particularly in the central businessdistrict (the Loop). Its roots lay in the urban renewal statutes that allowed municipalitiesto clear sites and develop areas that were dragging down property values, as well as in thedecline of Fordist modes of production that had made Chicago the manufacturer to theworld.

The first TIF district, the Central Loop TIF, was designated in 1984. Shortly after MayorRichard 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 withproperty tax hikes. In concert with local industrial councils and their aldermanic repre-sentatives, he encouraged the designation of several large-scale commercial and industrialTIF districts in areas with severe infrastructure needs. Another wave of TIF districts weredesignated in 1998, many of which were anchored by residential or mixed-use projectsand initiated by private developers. During both waves, TIF was used to pay for infra-structure, land acquisition, land assembly and preparation, and subsidized financing. TIFhas provided public subsidies for hundreds of high-profile real estate deals. By the end of2008 (see Figure 2), Chicago was home to 160 TIF districts that covered more than 30percent 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 Cityof Chicago to manage the TIF process in the interests of financial markets. I base myanalysis on a close reading of approximately 20 individual TIF redevelopment agreements(RDAs) that govern allocations of incremental property taxes and formalize the financialobligations of all parties to the contract.1 I also conducted a series of interviews with cityfinance officials and private consultants (e.g., bond counsel and financial advisors)between 2005 and 2007 to determine the extent to which the commonalities in financialstructure that I identified in the RDAs were generalizable across projects in Chicago.Additional interviews with journalists, representatives of professional associations, andwatchdog organizations confirmed that Chicago was out ahead of the curve in terms of itsdependence on TIF and creativity in front-funding real estate projects. Because Chicagorepresents an extreme but very possible trajectory for other U.S. cities, the single-city casestudy method is appropriate. I posit that the strategies Chicago adopted allowed the Cityto facilitate capital switching into local real estate, but to test this hypothesis empirically,a study of multiple cities that varied in both the extent of their political control and theirfinancial integration would be in order.

The Sequencing and Segmenting of TIF-Backed NotesInitially, the City of Chicago shouldered the risks associated with relying solely on

revenue growth internal to the TIF by floating general obligation bonds (often taken outby nonrated bond issuances) to front fund the first TIF districts (Shields 1998a).2 It also

1 RDAs are 100-plus page contracts approved by the city council and signed by the project developer. Thebulk 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 whichthe City and the developer can be held. The RDAs that I reviewed were approved between 1996 and 2007and 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 (forwhich the City had issued $346.6 million of debt) generated 94 percent of the incremental tax revenuescollected in all of Chicago’s TIF districts in 1998 (Neighborhood Capital Budget Group 1998).

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Figure 2. Map of Chicago TIF districts by use, 2008. Source: City of Chicago (2008).

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issued TIF revenue bonds, which often carried with them secondary pledges of both thelocal government’s credit and insurance.3

In the mid-1990s, as the pace of TIF designations quickened and property marketsrecuperated from the commercial real estate crash earlier that decade, then chief financialofficer Walter Knorr declared that the City would use its bonding authority, particularly itsability to pledge its general obligation, more sparingly. The City did not want the risksassociated with TIF to tarnish its bond ratings. Starting in 1996, Chicago began testing anew instrument: developer notes (also called “tax anticipation notes”). Notes are higher-risk debt; they are not typically rated and are provided to developers as short-term (aboutfive years), higher-interest instruments secured by the incremental property taxes from theproject or larger project area. I found that Chicago front-funded TIF projects using notesin approximately 63 of the 171 deals that it undertook between January 1997 and June2006.4

In practice, notes allow the City to engage in riskier, more idiosyncratic deals and toexternalize these risks to other players—namely to developers and investors. The projectdeveloper becomes the legal owner of the notes and is then responsible for the expense ofhiring counsel and underwriters. Developers can choose to hold the notes and be repaidover time with interest from the City, obtain a loan against the notes from a bank, or“monetize” the notes by selling them in larger denominations to investors throughthird-party intermediaries (see Figure 3). Proceeds from the loan or sale provide animmediate infusion of cash into the project that can be used for the acquisition and hard

3 Almost all of Chicago’s early TIF bonds sold uninsured and unrated. However, it became easier for the Cityto secure insurance and hence lower interest rates as it relied more on notes and resisted additional bondissuances. A TIF bond issuance in 1998, for example, carried the A-rated backing of ACA FinancialGuaranty 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 NeighborhoodImprovement Funds.

Figure 3. Typical flow of funds using TIF notes.

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or soft costs of development. When the notes are monetized, the risk that the taxincrements will not materialize is passed on to investors in exchange for promises ofhigher yields.

During the development boom, the City of Chicago arranged the sequencing of notesand TIF payouts in such a way as to force developers to assume the bulk of the completionrisks. Chicago held the notes in escrow or did not even issue them until an individualproject was complete and occupied, at which time it released them to the developer—whohad 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. Bythat time, however, the developer had already spent millions of dollars in construction andsoft 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-imposedrequirements.

To both accommodate the investment market and control the developer, the City tookthe unusual step of segmenting the developer notes and issuing them as two discreteproducts. The first category of notes resembled a standard financial instrument with fewquirks; Chicago was committed to paying a certain amount of principal and interest fromthe property tax increment upon completion of the project. These notes, which were oftentaxable 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 obligationsplaced on the asset owner: the developer. These included “public benefit” types ofrequirements related to aesthetics (e.g., design guidelines that stipulated the use ofwrought-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 negotiationsbetween the City and individual developers.5 The purchasers of this second category ofnotes tended to be the developers themselves (who held on to them as a kind of IOU) orlocal 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 investmentopportunities 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 financializationis always partial (Boyer 2000a); despite the neoliberal rollback of the local state, someU.S. cities have found ways to provide public goods—although, as in this case, they arerelatively small in magnitude and must be negotiated on a project-by-project basis asopposed 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 throughpublic 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, themayor vetoed what became known as the “Big Box Ordinance.” This law would have required large-scalechain retailers to pay “living” wages (a minimum hourly wage of $10 and fringe benefits of $3 an hour). Atthe 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 Targetand allowed the TIF projects to continue, albeit off schedule.

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committed to pay, on average, an interest rate of 8.3 percent for its notes, which isnoticeably higher than the rates of bonds during the same time (which averaged 6.7percent between 1991 and 2006).6 Moreover, the City refinanced several of the developernotes with longer-term tax-exempt bonds once the projects had stabilized after three tofive years. This process relieved the developer of some responsibility, but it riled the notepurchasers because prepayment deprived them of expected interest income. The practiceof refinancing also involved significant transaction costs. Although the City reduced itsinterest payments, any restructuring of the debt, according to one source, cost 4 to 6percent of the original face value of the note.

Spatial StrategiesTIF 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 andsold 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 inappreciation 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 otherhand, bonds also come with significant coverage and debt service requirements, and the issuance costs canbe higher than those for notes.

Figure 4. Annual percent change in median sale price for residential properties and new TIFdistrict designations in Chicago, 1987 to 2005. Source: City of Chicago and the Cook CountyAssessor.

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property value spikes occurred following the 2003 assessments. The ability to designateTIF districts when values were low allowed Chicago to capture subsequent revenuegrowth from the building boom.

Chicago planning officials tightly controlled the size and location of each TIF district toprovide some assurance that future revenue streams would be sufficient to pay off note andbond holders. In general,TIF districts that were diversified and large in area and value weremore attractive to investors because revenues spun off by parcels outside of the pledgedincome stream could be tapped if a developer’s individual project was not fiscallyproductive.

The City also minimized the risks of nonrepayment by targeting previously disinvesteddistricts in the city’s growth zones, that is, areas where rent gaps were widening but hadnot yet peaked (Smith 1996). In this sense, TIF revealed the local state as an active agentin the city’s gentrification, a relationship that has been documented in Chicago (seeWeber, Bhatta, and Merriman 2007) and elsewhere (Hackworth 2007). The most fiscallyproductive TIF districts were originally in and around the Loop, where property valueshad been depressed since the 1970s, and around the north, south, and western perimetersof the central area. These areas had previously been devalorized due to industrial uses andphysical impediments like rail lines, rivers, and highways. A value “moat” had separatedthe rest of the City from the Loop and was gradually filled in with TIF-subsidized officeand residential towers.

Increasing the number of TIF districts that bordered an existing district wasanother way in which Chicago tried to exercise some control over the repaymentstreams. The City was legally enabled to transfer increments generated in one TIFdistrict to a directly adjacent district (the City calls this “porting”). Between2000 and 2005, Chicago transferred over $35 million between districts, whilein 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 Quigley2007). 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 wouldappeal to the private market—those with more market-rate, owner-occupied units (asopposed to affordable rentals), more retail space (as opposed to residential), and morerevenue-generating uses (as opposed to green space) and ownership structures. Publiclyowned property and public uses that would have required operating costs paid from theTIF were less desirable, with the exception of the high-profile case of covering costoverruns associated with the development of the Loop’s Millennium Park (Shields2006a).

Small Networks, Closed SystemsAnother critical component of the local state’s ability to make markets and financialize

its property tax base has been in place for more than a century: the municipal practice ofestablishing close ties with an inner circle of developers and financial intermediaries(Miller 1996). The City of Chicago worked only with those developers that it could trustto build quickly and to its specifications, claiming that the need to complete projects andgenerate increments within TIF districts as soon as possible placed pressure on them to doso. On the developer’s side as well, uncertainty about the amount of their individual TIFallocation, combined with an involved and politicized application process, discouragedall but the most connected from participating in TIF deals. One developer in Chicagoestimated that it took up to four years to negotiate the terms of a single redevelopmentagreement. Because the City relied so heavily on entrenched networks of relationships, itcreated barriers to entry for new developers who were hoping to break into the local real

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estate market and reinforced older systems of patronage and crony capitalism. Thisdependence revealed itself when, in order to ensure completion, developers extractedadditional monies from the City beyond those specified in their individual TIFagreement.7

Just as Chicago’s need for a rarefied skill set and its confidence in the performance ofa small group of developers created a tight-knit community with access to TIF dollars sotoo did the City’s need for success in financial intermediation tie it to a small group ofadvisors. As the TIF notes and bonds were initially very hard to sell, specialized under-writing boutiques such as Kane McKenna and William Blair & Company becameimportant agents in the networks of urban fiscal governance, assuring dispersed investorsof the security of locally embedded assets. They promoted themselves as “objectivebeacons in a stormy sea of financial volatility” (Green 2000, 86), turning abstract riskrelationships 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 notesales in Chicago between 1996 and 2006, although the volume of TIF debt grewsubstantially during this time. Some intermediaries purchased the notes themselves (at anamount lower than their face value), others sold them to consortia of local banks, and stillothers sold them to larger and spatially dispersed institutional investors seeking morestandardized assets. Intermediaries profited from interest-rate spreads, that is, the differ-ence between what the municipality pays and what they have promised their investors, aswell as various underwriting fees. They also charged for monitoring the project over theinstrument’s term. These charges partly explain the explosion in soft costs that one findsin the TIF budgets. Again, control, or the illusion thereof, is expensive to maintain, and thepublic sector, and indirectly all city taxpayers, pay for the privilege of accessing “easy”money.

The market-making work of these financial intermediaries was particularly importantin the early years of Chicago’s TIF use. Every TIF deal was experimental, althoughfinancial intermediaries had to make them appear as ordinary and as nonlocally specificas possible in order to raise funds from investors. During the 1990s, local banks inChicago were wary of participating in TIF deals because they doubted the City’s abilityto pay them back on the basis of the promises of increased tax revenues. As such, thefinancial intermediaries hired by the City went further afield, primarily to states that hadmore experience with TIF, such as California and Minnesota, to find banks and institu-tional investors willing to purchase Chicago’s TIF notes. They were helped along both bythe passage of the Interstate Banking and Branching Efficiency Act of 1994, whichallowed nonlocal banks to purchase local assets, and by Chicago’s solid reputation as along-time financial trading center.

In the late 1990s, however, the attitude of local banks shifted as their inability tocompete in the areas of mortgage lending and consumer services forced them to seek outnew means of keeping their capital circulating. Local banks became active partners in theTIF apparatus as they aggressively sought to capture more City of Chicago business, evengoing so far as to purchase the less fungible notes loaded down with City obligations. Inthe deeply entrenched network of rent-seeking known as Chicago development politics(Miller 1996), these banks hoped that their participation in the mayor’s favored develop-

7 For example, the City increased its commitment from $41.6 million to $52 million in a $150.9-millionmixed-use project on Chicago’s North Side, called WilsonYards, after the project experienced costly designchanges, higher construction prices, and the loss of initial investors and retail tenants (Roeder 2008).

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ment program would lead to more business with Chicago. The City’s ability to control theTIF process and switch its own capital around at whim kept local banks on a short leash.

The New Old MachineBecause they rarely control the property tax assessment process, cities must exercise

political power to enroll other potentially oppositional government agencies and privateactors. Municipalities may pressure tax assessors to increase the value of parcels in TIFdistricts; indeed, there is some (albeit weak) empirical evidence that assessors, especiallyin more rural counties, bias their valuations upward to promote the growth of incrementswithin TIF districts (Ritter and Oldfield 1990). Or cities may sign “minimum assessmentagreements” with the local tax assessors that attest to the likelihood that values will notfall below a certain amount based on a review of the project appraisal, constructiontimetable, site plans, and leases. Some municipalities prohibit the developers within TIFdistricts from appealing their property value below a certain threshold.

The City of Chicago, however, followed a ruling that held that if debt instruments weretax exempt, such behavior was prohibited. Moreover, for the last decade, the Cook CountyAssessor has retained a modicum of independence from Chicago’s long-standing andpowerful Mayor Daley. Nonetheless, the City worked with the Cook County Clerk tocreate separate tax codes for parcels in TIF districts that declined in value, such as thosewhere improvements were demolished or where property was purchased by tax-exemptentities like universities. In “quarantining” low-value segments of the TIF district,Chicago guarded against the possibility that changes in the built environment wouldreduce the total increment available in the TIF and jeopardize the cash flows promised toinvestors.

Taxing jurisdictions, such as school districts or counties, can also threaten paybackschemes by lowering their property tax rates or (re)claiming portions of the incrementstream through lawsuits, contracts, or legislation. The City of Chicago prevented chal-lenges from these entities by enrolling them in the project of increment maximization,cutting deals with them and pressuring them into concessions. Both tactics require civiccapacity, which the City of Chicago exercised through a strong, development-orientedmayor and a compliant and TIF-supporting city council. The Chicago Board of Education,as the jurisdiction with potentially the most to lose from TIF, has been run effectively byCity Hall since Mayor Daley’s takeover in 1995 and was allowed to borrow from thefuture windfall of tax dollars that would occur when the lucrative Central Loop TIFexpired in 2009 (Shields 2006b). In exchange for the school district’s support, the mayorauthorized $800 million (most of which would come from TIF) to pay for the constructionof new public school buildings, against the wishes of many elected council members(Spielman 2008). The City also used TIF to finance the redevelopment of high-rise publichousing and transportation infrastructure.

Local officials controlled opposition by compromising some of the democratic prin-ciples to which citizens hold their representatives. Officials actively discouraged publicparticipation in the TIF designation process. And, for the most part, project planningdecisions were made without transparency or disclosure. Critical decisions about TIFallocations became public only when the consultants, developers, and financial interme-diaries were already lined up.

DiscussionAs 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

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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 ofdevelopers and financial intermediaries, and bare-knuckled control over the politics ofproperty valuation, the City found ways to harness the power of financial markets andfacilitate capital switching into local real estate. As a result, TIF coffers overflowed withcash during the boom. Even including three heavily debt-laden downtown districts, thecity’s TIF districts had net assets of $271 million in 2005, which was both more thanthe City spent on capital improvements that year and more than the average budget of theentire Department of Streets and Sanitation (Hinz 2005). Tapping TIF revenues, and notthe general fund, as a source of repayment also helped the City to avoid defaults on itsobligations, maintain healthy general-fund reserves (4 percent of expenditures in 2005),and avoid dipping into those reserves (Shields 2006a). The ratings agencies rewarded theCity for its financial savvy and control over the TIF process, improving its credit rating tomid-double A in 2006 (Shields 2006b).

However, such strategies were also the source of new costs and risks. Control isexpensive in regimes where “value in the built environment depends on the circulation offast, fictitious money and an unruly web of politicized and marketized relationships”(Weber 2002, 539). The City’s efforts to harness the power of financial markets whilesimultaneously exerting power over the intermediation process caused carrying costs toballoon. The private investment market also capitalized on the perception of added risksby charging a risk “premium” for its capital, reflected in the higher interest rates for TIFbonds. Dependence on a small number of financial intermediaries allowed them to extractnear monopsony rents for their services, and enrolling potential opponents placed expen-sive, competing demands on the City’s TIF accounts.

Some of these costs were ultimately passed on to taxpayers and residents. Between1997 and 2005, property tax rates declined at a slower rate than that at which theunderlying property values grew (Thompson, Liechty, and Quigley 2007), and in 2007,the City suddenly instituted a property tax rate hike to try to close a $217-million budgetdeficit. Although the City insisted that the rate hike and subsequent personnel and servicecuts were unrelated to TIF, popular opinion was that public funds had been overcommittedto paying off TIF expenses (Joravsky 2007). Outrage about the mechanism and the City’sstrategy of keeping the public out of TIF decision making began to surface. As the case ofTIF in Chicago reveals, managing a process of capital accumulation that is sizeable,deal-driven, and secretive—even in an autocratically run large city where the mayor’spower is often described as “hegemonic”—may call the legitimacy of the local state intoquestion (O’Connor 1973).

Lending its good ratings to less-tested TIF debt allowed Chicago to improve theappearance of what were essentially speculative instruments and, in doing so, madeinvestors overconfident about the future. To satisfy the appetite of these investors for newassets, developers continued to bring new product to market, even as appreciation wasslowing and vacancy rates were rising. As such, TIF contributed to a dangerous oversup-ply of space, the implications of which no amount of political strong-arming couldcontain.

By 2007, the property bubble in Chicago, and elsewhere across the United States, hadburst. Falling assessed values and tighter credit for development and building acquisitionsreduced the increment that was available to pay back existing bond and note holders. Withinvestors more wary, the amount of credit available to cities constricted, and interest ratesincreased. And yet the flaws inherent in the local state’s financialization practices have notbeen confronted or rectified. Despite high commercial vacancies, fiscally strained agen-cies, and embittered residents, the City of Chicago is reluctant to give up its favorite urban

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development tool. Several more TIF districts were designated even after the recessionbegan, and ambitious development plans for them continued to be discussed.

ConclusionSince the 1970s, a growing surge of global capital has sought out new instruments,

impatiently switching between sectors and locations as risk-return ratios changed. Citieswere not just arbitrarily selected for investment as a result of a game played far above theirheads; their local government representatives played a critical role in constructing theconditions under which capital could be channeled into locally embedded assets, namelyreal estate. Not all succeeded, but some municipalities were able to steer capital towardwhat was formerly a backwater of the financial markets: government revenue-backeddebt.

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 insecuritized equity and debt instruments that channel savings into commercial real estateinvestments (Beitel 2000). During the Millennial boom of the late 1990s and the firstdecade of the 2000s, many U.S. municipal governments acted as the kind of innovatorsthat we associate with private market actors. They assisted capital in finding profitableinvestment outlets by devising new ways to monetize their own assets and create newsecurities. They turned income streams from their existing and future tax bases, infra-structure, and pension funds into fungible securities and helped build secondary marketsfor their exchange, both of which momentarily took some pressure off of the global capitalglut.

But not all assets and income streams were equally attractive to finance capital. The saleof instruments secured by public assets depends on the perceptions of distant investorsand rating agencies who seek some security in uncertain, volatile environments. Struc-tural or political impediments to the real estate development process, rigid revenuestructures, and fiscal policymaking institutions that involve multiple agencies withdiverse interests can lower ratings and threaten repayment schemes. This research dem-onstrates how converting deeply embedded and otherwise opaque real estate assets intomore standardized and less locally contingent financial instruments requires that citygovernments exercise more than a modicum of control over the processes of assetcreation, valuation, and securitization. In the context of initially less-tested instrumentssuch as TIF, selling the rights to a speculative income stream therefore required a largedose of political control to ensure that market actors accepted these virtual commoditiesas legitimate and the promises of the issuer as credible.

Not all cities have to go as far as the City of Chicago in suppressing orco-opting interest group activity, but I am suggesting that there is a correlation betweencentralized political authority and the financialization of local policy, particularly whenthe political administration is unabashedly entrepreneurial. As this study focused only ona single case, further research is needed to determine whether city administrations thathave the political power to structure the financial instruments, control the developmentprocess, and protect the value of their underlying assets have easier access to globalcapital.

With the exception of a few recent analyses (Hackworth 2007; Ranney 2002), we knowlittle about the politics of financialization at the local level. The deliberate policy choicesthat encouraged financialization at the global and national scales have been betterdocumented (Ashton 2009; Gotham 2006), such as the Federal Reserve’s sudden raising

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of interest rates in 1979 (Duménil and Lévy 2004). We also know about the financialsector’s lobbying efforts to liberalize and deregulate their industry at these scales. Thisresearch suggests that more conventional accounts of urban governance, emphasizingregimes, power, and formal legal arrangements, can assist critical geographers in theirstudies of the place-based articulations of global finance.

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