The Chicago Mercantile Exchange (CME) has been operating in the Loop since 1898, just 27 years after the Great Chicago Fire.
The exchange was part of the city’s rebirth and helped establish Chicago as a financial hub.
Now, we see the opposite of rebirth with Chicago’s population shrinking.
And the $66 billion CME may not be around to help with future renewal: The company has rewritten the terms of its lease so it can leave the city if politicians pursue “ill-conceived” public policy.
“We’re in a very strong position,” CME CEO Terry Duffy said in a recent interview. “If we had to leave, we could leave.”
Mayor Brandon Johnson was inaugurated May 15, becoming one of the most radical city leaders in the country.
He’s proposed new taxes worth about $800 million, including a financial transactions tax that would make it impossible for CME to do business in Chicago.
Johnson claimed the city would realize $100 million in revenue from taxing financial transactions at a rate of $1 or $2 for every “securities trading contract.”
In reality, a tax like that is not just “ill-conceived,” it’s the equivalent of killing the goose that laid the golden egg and then blaming the goose for dying. Without CME, the city of Chicago would lose significant revenue and thousands of taxpayers.
A financial-transaction tax would need to be approved at the state capitol, not Chicago; and fortunately Gov J.B. Pritzker shot down the idea publicly, saying it would drive out business.
Still, the harsh reality for Chicago’s economy is many of its landmark businesses can leave, at any time.
Many – such as the hedge-fund giant Citadel – already have.
Consider CME: The company sold its Aurora, Ill., data center in 2016.
It sold the Chicago Board of Trade building in 2012 and leases space back. The group also sold the Nymex Building in New York in 2013.
CME and firms like it are highly mobile.
They can move to another state in mere months.
They have a fiduciary responsibility to get the best possible return for their shareholders. Increased tax burdens make that harder.
This isn’t just a warning for Chicago.
It’s a message for other major cities, such as New York, Los Angeles and San Francisco.
All of them have flirted with hitting businesses with more taxes to balance unstable budgets and pay for pet projects.
San Francisco is even eyeing corporate tax breaks to fix its p.r. problems with businesses.
Serious crime problems also make it harder to choose to stay in big cities.
Duffy rightly points out crime fears are affecting many people’s decisions to return to the Chicago office.
Like New York, Chicago has seen a surge in crime in recent years – up 20% overall. This problem is highly personal: Duffy’s wife was recently carjacked in the middle of the afternoon.
Whether their decisions are based on taxes or crime, the departure of major businesses such as CME hit hard.
In 2016, Duffy said CME Group employed 1,800 Illinoisans directly and supported another 135,000 jobs. Duffy said CME pays almost $50 million in corporate taxes annually, making it one of the top five corporate taxpayers in Illinois.
“A number of other states have offered us incentives to move our business. It would be a financial and economic shame for Illinois to lose the jobs and tax revenues created by our industry if we were forced to move,” Duffy testified in 2016 before the Illinois General Assembly about a proposed financial transactions tax.
Companies need confidence in their home for Chicago to thrive.
Eroding that confidence are government pension liabilities. Chicago’s major pension systems are owed $48 billion in unfunded pension liabilities – more than 44 US states. Statewide systems owe $140 billion, though independent estimates put the debt far higher.
This puts pressure on taxes – and over the past decade, Chicago’s property tax levy has doubled to $1.7 billion annually.
Even liberal activist Warren Buffett said he would hesitate to invest in states like Illinois and New York due to high unfunded pension liability.
Former mayors Lori Lightfoot and Rahm Emanuel knew addressing pension costs was vital to Chicago’s turnaround. Both called on state lawmakers to pursue pension reforms, albeit at the ends of their terms.
Mayor Johnson must address Chicago’s pension crisis if he hopes to inspire businesses to believe the city can remain their home.
That means abandoning short-sighted and ill-conceived aspirations of raising revenue on select groups. Instead, he should leverage his position as one of the most powerful politicians in Illinois to get state lawmakers to support constitutional pension reform.
Chicago is the No. 2 financial center in the country after New York because of the CME. Exchange rate futures were invented here, in partnership with Milton Friedman.
The price of soybeans, corn, wheat and other commodities are set here on any given day.
The CME is as much a part of Chicago’s identity as the White Sox, the Cubs, Vienna Beef hotdogs and Lake Michigan. “Ill-conceived” policies are a risk the city can’t take. Neither can her peers on the East and West coasts.
Matt Paprocki is president and CEO of the Illinois Policy Institute in Chicago.
