The cash-strapped city of Chicago paid $74.7 million in fees last year to banks, law firms and other businesses that helped it borrow money — a record tab that will rise as more fees get tallied and one that comes as the city pays higher costs to dig itself out of its deep financial hole.
Altogether, City Hall borrowed $4.6 billion through the municipal bond market in 2015, with firms that worked on those deals netting $28.3 million in fees, a Chicago Sun-Times examination of city records found. On top of that, City Hall paid $46.4 million in other borrowing-related fees through the first three quarters of the year; fees for the fourth quarter have yet to be disclosed.
Most of the firms that help the city with borrowing and other financial transactions have long done business at City Hall. Some also have been political supporters of Mayor Rahm Emanuel, whose plan to fix the city’s finances relies in part on ending costly and risky financial deals from the past.
But, to do that, the city keeps borrowing. And many of the fees associated with borrowing have gone up, a consequence of the city’s credit rating dropping to “junk” status in May. The downgrade also is resulting in the city paying higher interest rates on long-term borrowing deals — costs that can add up over decades.
It’s a trend Chicago taxpayers might have to get used to: Emanuel is planning another $4.15 billion in bond sales in 2016, starting with a $500 million deal this month, according to documents he’s shared with aldermen.
Next up will be another $3.1 billion in bond sales that he’ll seek City Council authorization for this week, the Sun-Times reported Friday. The mayor also is planning two more bond deals totaling $600 million in the second half of the year.
Emanuel, who worked in investment banking for two and a half years before running for Congress in 2002, defended his borrowing strategies last week, saying, “It’s actually what the rating agencies wanted to see us do — to strengthen Chicago’s finances rather than leaving it vulnerable.”
The city’s need to borrow money, as well as the costs associated with borrowing it, has grown partly because Moody’s Investors Service and other financial ratings agencies have downgraded city debt ratings multiple times since 2013. In May, Moody’s — citing uncertainty over how the city will continue to pay for police, firefighter and other city worker pensions — lowered Chicago’s credit rating to its current level: junk bond status.
In the wake of that downgrade, City Hall used bond proceeds to refinance existing city debt and end financial transactions that had grown costlier because of it. The deals that have been eliminated include so-called interest rate swap agreements engineered under Emanuel’s predecessor, Richard M. Daley, as well as Daley’s 2002 decision to sell the land and tracks beneath the city-owned Orange Line.
The city also has borrowed about $2 billion to bankroll runway and other major construction projects at O’Hare Airport, as well as refinance some of the airport’s debt.
In October, Emanuel and aldermen took steps to shore up police and fire pensions by approving a record $543 million property-tax increase. But the city remains saddled with the junk bond label and the additional costs of borrowing that ensued.
“Moody’s downgraded us, and inside all of our lending documents and all of our swap documents are provisions that say we are in default or had to pay higher [interest] rates because we are below investment grade,” said Carole Brown, the city’s chief financial officer.
As a result, City Hall last year negotiated deals to end 18 different swaps, paying the financial institutions involved a total of $255 million, which came out of bond proceeds.
City Hall hired a consulting firm to assist in those negotiations, Brown said. The city paid the company, Swap Financial Group, $879,088 in fees through the end of July, records show.
The credit-rating nosedive has also resulted in the city paying more in so-called credit enhancement fees because banks consider Chicago a greater financial risk.
Through the first three quarters of 2015, those fees totaled $42.7 million. That’s more than all of 2014, when credit enhancement fees totaled $35.4 million. In 2013, credit enhancement fees totaled $29 million.
The city spent a total of $23 million in underwriting fees for its five big bond sales in 2015 — the highest yearly total by far in the 12 years the city has tracked such fees. Nearly three dozen financial institutions, led by Wall Street giants JPMorgan Chase and Morgan Stanley, were paid for such work.
Another $5.2 million went to law firms, financial advisers, credit-rating agencies, auditors and others who worked on those bond sales.
Many of the financial and law firms tapped by the Emanuel administration have been working on city bond deals for years. Some have been political supporters of the mayor or have executives who serve alongside him on the board of World Business Chicago, a city-funded economic development agency he chairs. Other firms have ties to Daley, Emanuel’s predecessor.
City Hall doesn’t have a formal competitive bidding process for bond business, though it does seek information on financial institutions’ qualifications and community involvement. Only a limited number of financial firms have the expertise to do such work, and the fees City Hall pays appear to be in line with those paid by other municipalities and government agencies.
Among the firms that do borrowing-related business with City Hall:
- JPMorgan Chase: The banking giant received the most borrowing-related fees of any firm, totaling more than $15 million. J.P. Morgan Securities, an affiliated firm, received another $3.8 million. Its current Midwest director — former U.S. Rep. Melissa Bean, a Democrat who served alongside Emanuel in Congress — now serves on the board of directors of World Business Chicago, the economic development organization chaired by the mayor. William Daley, former chief of staff to President Barack Obama and brother of the former mayor, previously served as a top JPMorgan Chase executive. “Yeah, I worked at JPMorgan,” William Daley said. “What does that have to do with bond deals the city’s done in 2015?”
- Morgan Stanley: The financial firm collected $4.7 million in borrowing-related fees from the city in 2015 and was the lead underwriter for a $1.1 billion bond issue in July. One of the firm’s officials is William Daley Jr., son of the former White House chief of staff. In addition to its bond work, Morgan Stanley has been involved in major city privatization deals, serving as the lead investor in the $563 million privatization of the parking garages under Millennium Park and Grant Park in 2006 and in the $1.15 billion privatization of the parking meter system in 2009. Company vice chairman Hugh Sullivan serves on the World Business Chicago board.
- Bank of Montreal: The bank was paid $2.9 million in borrowing-related fees, most of them for credit enhancements. Employees of its Chicago-based subsidiary, BMO Harris, contributed $5,700 to Emanuel’s campaign funds in the days before the mayoral runoff election in April and another $1,500 soon after. David Casper, the president and CEO of BMO Harris, also sits on the board of World Business Chicago.
- Katten Muchin Rosenman: The law firm was paid $726,000 for its work on city bond deals last year. Soon after leaving office as mayor, Richard M. Daley became “of counsel” to the firm, whose partners include his good friend Terry Newman. Newman has donated $12,100 to Emanuel’s campaign committees, including $6,800 last year. Other partners have donated $53,500 to Emanuel. As outside counsel for the city, Katten drafted the legal framework of the parking meter deal.
- William Blair: The investment banking and financial services firm got about $975,000 in bond-related fees from the city in 2015. The company has previously been an adviser to the city for some of its biggest privatization deals, collecting $2.1 million for its work on the sale of downtown parking garages in 2006 and $4.3 million for the parking meter deal.
The financial crisis facing the Chicago Public Schools also has prompted billions of dollars in borrowing over the years. The Sun-Times reported in July that CPS had paid $18.1 million in fees on bond deals since 2011.
Like their counterparts at City Hall, CPS officials are planning more long-term borrowing — more than $1 billion worth — for early this year. Moody’s last month downgraded CPS credit rating, already at junk status, even further, virtually assuring higher interest rates on future borrowing.