The City of Chicago; A Summary

Chicago. It is not just a city; it is an economic powerhouse that boasts of a relatively balanced economy. It is the home to the former President of the U.S., Obama. In the State of Illinois, Chicago stands out and offers the platform from which the state derives its glory. In terms of population, it is the most populous city in Illinois and the entire Midwest. Nationally, the city compares to the likes of New York and Los Angeles. The industrial success of Chicago can be traced to the two world wars which spurred the local economy to produce steel and other industrial goods to be used in war. It has continued to evolve and become an economic hub complete with major industries running from manufacturing to information technology. 

The city, according to U.S. Census Bureau (2018), had an estimated population of 2.7 million people in 2017. Majority of the residents of Chicago City (About 60%) are between the ages 18-65 years which indicates that the population has a sizeable workforce. The population is multicultural, multiracial, and multiethic as many foreigners settle in the city. 83.1% of persons who are more than 25 years old in the city have a highschool diploma whole those of the same age and with a Bachelors degree or higher stood at 36.5% (U.S. Census Bureau, 2018). The median household income for the city stood at $50,434 and the per capita income for 2016 was $30,847 while persons living in poverty in the city was 21.7% for the same year (U.S. Census Bureau, 2018). Unemployent in the Chicago area improved from 4.5% in 2017 to 3.6% in 2017 (U.S. Bureau of Labor , 2018). Major employing industries include trade, transportation and utilities, professional and business services, educational and health services, and the government among others. 

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Cost-Benefit Analysis

Analysis and Decision Making with Regards to Expenditure

Decision making in public spaces is an activity that requires prudence and adherence to the rule of law. This is more pronounced especially when it comes to public finances. It is evident that the public expenditures in this question have to be looked at from two dimensions, the revenue dimension, and the expenditure dimension. Revenues are coming in since one cannot spend what they don’t have. 

From the analysis, it has been established that public revenues are not increasing with big margins. This means that public expenditures cannot be allowed to increase also. If it happens, a deficit in the budget is likely to arise, something that will constrain the future plans of the city. If there is a serious need for expansion, there should be a great evaluation of areas where the revenue net can be expanded further to ensure that it covers the projected increase. To do this, the City of Chicago can explore options beyond traditional methods of revenue collection. To do this, the City can look at long term investments, for instance, the purchase of Federal Government Bonds, trading in the stock market and conventional investments which will supplement the more stretched revenue. 

Schick (2015) emphasizes on the need for appraisal of objectives and alternatives in public expenditure. For every cost center, the City of Chicago should ensure that the cost center is appraised before and after injection of finances. This will ensure that the city makes decisions on how to spend its monies from a rational point of view. Consideration of alternative forms of expenditure should also be done to ensure that projects are competitive and the decision to settle on any one of them is as a result of careful consideration of other ways to spend the money and as such, only the project with the biggest impact is settled on. 

Role of Economic Theory

The economic theory has had an important role in this project. Different theories have been referred to and their decisions advice and implications taken into consideration. Some of the theories include, the marginal productivity theory of wages, the theory of taxation, and the theory of value. The marginal productivity theory of wages evaluates the impacts of employing additional workers. The theory asserts that wages should be paid at that level which equates the marginal revenue product of labor (Ehrenberg & Smith, 2016). It is an increment to revenues caused by an increment in one more laborer being employed. There above, it has been seen that there has been no increase in revenues in the city. following this theory, no more workers should be employed. 

Next is the theory of taxation. On this, the most important part is the part of the excess burden of taxation. When considering this theory, the economic losses suffered by the community due to increased taxation becomes a problem as evaluated by Atkinson & Stiglitz (2015). The community in Chicago is already taxed to the limit and as such, adding to the same tax burden would effectively hurt the economy. For this reason, I have made suggestions for the exploration of revenues away from the traditional sources of revenue which are predominantly taxes or licenses. 

The theory of value requires that value creation and dissemination should be equally distributed across the entire city, a concept well enumerated by Quah & Haldane (2007). All communities in the city should be pushed to create value and the same value they create should be distributed fairly among them. It is on this premise that this analysis has surfaced the concept of appraisal of objectives and alternatives. There should be sufficient consideration of the objectives the city has with regards to financial management. The objectives should ride on the concept of full value which should be distributed to the entire community. Projects that have the maximum value to the most population should be evaluated. To do this, various alternatives should be looked into. 

Influence of Economic Theory on CBA

The influence of economic theory on this cost-benefit analysis cannot be underestimated. Economic theory informs actions and potential effects of the same. On this light three theories have been mentioned there above; the marginal productivity theory of wages, the theory of taxation, and the theory of value. The marginal productivity theory of wages has been instrumental in the evaluation of whether more hiring should be done with the current increase in productivity. The theory advices against continued hiring especially if the same is not showing improvement especially in terms of revenue. The city should evaluate other means of stimulating productivity with its current workforce. 

The theory of taxation has made it possible to give a thought to the effects of increasing taxes, levies, and license fees to the community. By following the maxims of this theory, it has been demonstrated that the City has exhausted its revenue streams and expanding the same will be detrimental to the economy of the city. Last is the theory of value. This theory provides that there be maximum value from the population, and the value should be distributed effectively and fairly. As such, the concept of appraisal of objectives and alternatives should be done effectively. 

Sources of Funding

The city of Chicago has been known to use public-private partnerships as a source of funds. This is achieved through asset lease agreements. It is indicated that under Mayor, Richard Daley, the City of Chicago was the first local government to run successful innovative lease for the toll road, underground parking system and a metered larking system. It has been noted that in 2017, this source of fund provided to the residents of Chicago approximately $3.6 billion. It has been indicated that these long-term leases of infrastructure assets are only used where there is expected potential financial returns for the city residents. The areas that have been put forward for this kind of management are the non-core competencies areas and those areas where introduction of experienced and professional operators is bound to improve efficiency, quality of service and improvement in the capital investments. Key requirement by the City of Chicago in each public-private partnership is on fair treatment of employees, upholding safety levels, strong performance, and maintaining engineering standards.

The City of Chicago also acquires grants funds from federal and state agencies, private functions, other non-profit organizations. This is managed through the Office of Budget and Management which manages, monitors and enforces the grant management process.  Such grants are used to cater for fee of supporting the city services, programs, and capital projects.

The city of Chicago is noted to at times issue bonds as a means of relieving financial pressure. Among the bonds issued is the taxable bonds that are characterized by high interest rates which makes their price much higher. Most cities prefer to use the tax-exempt bonds which are cheaper but comes with restriction on how to spend them. However, the city of Chicago sought to gain funds that would allow it to pay for its operating expenses such as cater for daily expense without increasing property tax or reducing prices drastically. In 2015 it was noted that the city issued a bond of $743 million at a rate of 8%. This money was to be used to cater for costs such as repayment of debts, bank fees and penalty payments. The cumulative cost in interest for this bond would be more than $500 million over a span of three decades. 

The City of Chicago also raises another bond referred to as General Obligation Bonds. This is to be used in construction and development of municipal facilities, acquisition of real property, stimulate economic development, cater for cash flow needs, fund judgment implications against the city, provide grants to not-for-profit organizations, improve infrastructure, and acquisition of personal property (City of Chicago, 2017). In 2017, the City of Chicago issued a general obligation bond worth $3 million to be used in school development. In January 2017, the city of Chicago had also raised general obligations amounting to $1.2 billion that would be split into two series, with series A covering $887 million for tax-exempt and refunding bonds, and series B being comprised of $275 million in taxable project bonds. 

Effects of Taxation

The residents of the city of Chicago have been always subjected to heavy taxation which causes financial strain. It has been observed that the 2015 Chicago property hikes had cost implication to an average homeowner amounting to $500 a year. It is noted that even in the wake of increased violence in the city, weak job expansion and incompetence of the government, the residents of Chicago have been subjected to higher taxations. One noticeable effect of this course is the reduction of the population living in the city as people seek areas with more favorable tax regimes. The population in Chicago is noted to have reduced between 2000 and 2010. Also, the Chicago metro area has experienced a reduction in population size for the second year in a row (Dabroski & Klinger, 2017).

Another effect of taxation that can be assessed is whether tax increment financing contributes to expansion in growth. It has been indicated that there is variation in the impact of spending. Subsidies offered for the purpose of commercial development have indicated a positive relationship between expenditure and property value in Chicago. On the other hand, the infrastructure spending indicated a negative effect between expenditure and property value in Chicago (Kane & Weber, 2015).

Income Redistribution and the Local Economy

Income redistribution can have either positive, negative, or zero effects on the local economy especially in the long run. Income redistribution can take different forms. For instance, the government can use taxes or measures that will hand the poor some economic advantages. when the poor are handed economic advantages, for instance, the food STAMPS, and unemployment benefits, benefits are mostly accrued in the short term. The programs are also not sustainable as they are financed directly from the government coffers, which also means that the government must have obtained the money from somewhere. As such, authorities might raise taxes to finance such activities, something that has a net negative effect to the local economy as examined by Dabla-Norris et al., (2015). When authorities use taxes to redistribute income then the effects change. Consider a situation where taxes for the poor are reduced or a reduction in taxes for activities that affect capital investments by companies. In these situations, the propensity of investment in activities that create wealth exist and as such there are positive effects to the local economy.

Welfare Spending in the City and the Effect on Employment Market

The City of Chicago has different measures that are aimed at checking on the welfare of residents in the city. The City of Chicago has been experiencing a reducing unemployment rate as shown in the graph below. The city has been subjected to intense tax reduction and the effects have been felt. The city has instituted measures to ensure that some of the welfare spending is sustainable. For instance, the unemployment welfare has been reshaped to save the city huge amounts by ensuring that employed people are insured against unemployment. This ensures that they can contribute to the welfare when they have the means and when they fall into problems, they can thus be helped. The city spent about $584 million on community services in 2015 and it reduced to $580 million in 2016. This showed that the city reduced its expenditure on welfare services by 4 million. It shows that a decrease in expenditure on welfare leads to an increase in employment rate in the short run. 

References

Atkinson, A. B., & Stiglitz, J. E. (2015). Lectures on public economics. Princeton University Press.

City of Chicago. (2017). Chicago General Obligation Bonds. Retrieved from https://www.cityofchicagoinvestors.com/generalobligationbonds/i1398

Dabroski, T., & Klinger, J. (2017). The Damaging Effects of Chicagoland’s Latest Tax Hikes. Retrieved from https://www.illinoispolicy.org/the-damaging-effects-of-chicagolands-latest-tax-hikes/

Dabla-Norris, M. E., Kochhar, M. K., Suphaphiphat, M. N., Ricka, M. F., & Tsounta, E. (2015). Causes and consequences of income inequality: A global perspective. International Monetary Fund.

Ehrenberg, R. G., & Smith, R. S. (2016). Modern labor economics: Theory and public policy. Routledge.

Kane, K., & Weber, R. (2016). Municipal Investment and Property Value Appreciation in Chicago’s Tax Increment Financing Districts. Journal of Planning Education and Research36(2), 167-181.

Pierog, K. (2017). Chicago Touts New Debt Structure Aimed at Saving Money . Retrieved from https://www.reuters.com/article/us-chicago-bonds/chicago-touts-new-debt-structure-aimed-at-saving-money-idUSKBN1AP2O5

Quah, E., & Haldane, J. B. S. (2007). Cost-benefit analysis. Routledge.

Schick, A. (2015). The road to PPB: The stages of budget reform. In Public Budgeting (pp. 39-56). Routledge.

U.S. Bureau of Labor . (2018, March 10). Chicago Area Economic Summary. Retrieved from U.S. Bureau of Labor : https://www.bls.gov/regions/midwest/summary/blssummary_chicago.pdfU.S. Census Bureau. (2018). Quick Facts: Chicago city, Illinois. Retrieved from U.S. Census Bureau Website : https://www.census.gov/quickfacts/fact/table/chicagocityillinois/PST045217

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