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Under Council fire, Rahm cuts general obligation bond issue in half

Mayor Rahm Emanuel agreed Monday to cut in half his plan to issue $1.25 billion in general obligation bonds backed by property taxes under pressure from aldermen newly emboldened by the mayor’s weakened political state.

Chief Financial Officer Carole Brown signaled Emanuel’s surprise political retreat at the end of a marathon Finance Committee hearing that dragged on for hours and saw aldermen question just about everything about the kitchen-sink borrowing.

Emanuel’s original plan called for issuing $1.25 billion in general obligation bonds that would have included $350 million to bankroll the city’s annual capital program for 2016 and 2017.

General obligation bonds were also be used to eliminate the costly practice of “scoop-and-toss” borrowing, with those restructurings totaling $125 million this year, $115 million next year and $95 million in 2018.

But, after aldermen balked at giving Emanuel a virtual blank check, the general obligation bond issue was reduced to $650 million.

“What we would propose is a substitute ordinance that delays the new money portion of the general obligation transaction. We would recommend still proceeding with the re-funding for savings and the restructuring,” Brown said.

“We will come back to Council when we have more detail around the capital projects with a proposal to do general obligation new money capital later in the year.”

Ald. Joe Moore (49th), one of Emanuel’s staunchest City Council supporters, applauded the quick response to “some concerns among some of my colleagues about not knowing exactly how the money is going to be spent.”

Turning to Brown, he said, “So, you’re going to come back later on with more of a list of items that it’s going to be spent on so that we can all haggle with each other about which” projects are going to be funded?

The CFO replied, “Yes. Generally the [general obligation bond] transaction is done later in the year. So, we have time to come back to you without jeopardizing the plan with more details around the new money portion and more discussion around those projects.”

Moore countered, “It’s not going to jeopardize your ability to take advantage of interest rates before they increase?”

Brown replied, “No. I don’t believe so.”

Downtown Ald. Brendan Reilly (42nd) said he, too, appreciates the mayoral retreat.

“That was an issue a number of us were concerned about. It was just the lack of specificity,” Reilly said.

Last week, Ald. John Arena (45th) questioned Emanuel’s kitchen sink approach to borrowing at a time when the city’s junk bond rating has already cost Chicago taxpayers tens of millions of dollars in added borrowing costs.

On Monday, Arena pushed hard for a go-slow approach to give the financial markets an opportunity to react to the $543 million property tax increase for police and fire pensions approved by the City Council in late October.

“We’re at the bottom of the pendulum … on what our ratings are. Why not let the pendulum continue to swing up? If these moves we’ve made are positive for the market, then let’s see some of those results,” Arena said.

“They want authority for everything for a full year. And I’m not that trusting of a guy. The [lesson] we should take from the fact that we have to buy out of all these things is that we weren’t doing that ten years ago. We weren’t asking enough questions as a Council.”

Ald. Scott Waguespack (32nd) was asked whether the mayor’s abrupt retreat would have been possible before Emanuel’s handling of the Laquan McDonald shooting video weakened the mayor politically.

“No. Probably not. … We did ask questions before and they never backed off,” Waguespack said.

“This is a broader issue of people looking at this administration and saying, ‘You need to start answering more questions across the board on every issue — not just when you feel like it.’… A lot more aldermen are asking questions. That’s a good thing. They’ve been burned before on some of these bond offerings. … They’re getting more heat from constituents saying, ‘You need to ask more questions.’

During the marathon hearing, Brown pegged the cost of terminating swap agreements entered into by former Mayor Richard M. Daley at $100 million. That’s on top of the $250 million in similar penalties paid over the last five years.

Ald. Susan Sadlowski Garza (10th) argued that Chicago taxpayers cannot afford to keep paying “astronomical” termination fees. She urged the Emanuel administration to consider suing the banks.

But, Budget Director Alex Holt said the swap contracts were “knowingly” entered into by Daley administration officials who “understood the risks.” And a city attorney disclosed that the Law Department examined the possibility of suing the banks and found there was “no legal basis under securities law or state law” for such a challenge.

Even with the mayor’s retreat, the Finance Committee still signed off on a ton of borrowing. It includes:

  • $900 million in Midway Airport bonds to refund existing debt, restructure bonds used to build a rental car facility and to bankroll Emanuel’s plan to confront the Southwest Side airport’s biggest weaknesses and passenger annoyances: parking, security and concessions.
  • $200 million in sales tax revenue bonds that includes $75 million for the treasured menu program that allocates $1.32 million yearly to each of the city’s 50 wards to spend on infrastructure repairs of the local alderman’s choosing. It’s the first time that the menu program has not been financed by property taxes and it could be part of a new trend. “We have a lot of debt on the property tax. I’d like to diversify our portfolio,” Brown said last week.
  • $700 million in water revenue bonds that, Brown said, mark the “last variable rate conversion” involved in terminating complex deals known as swap contracts dating back to Daley’s tenure. When its bond rating was reduced to junk status, Chicago could have faced paying billions bankers under terms of those complex deals.