Mayor Rahm Emanuel’s plan to sell $600 million in general obligation bonds sailed through a City Council committee Monday, but the bonds will not be sold until the mayor outlines his alternative plan to save the Municipal Employees and Laborers pension funds.
Chief Financial Officer Carole Brown said the financial markets are eagerly awaiting Emanuel’s response to the Illinois Supreme Court ruling blocking his plan to save the two funds by increasing employee contributions by 29 percent and ending compounded cost of living adjustments for retirees ineligible for Social Security.
Likewise, the markets are waiting to see whether Gov. Bruce Rauner signs a police and fire pension bill on his desk that would save Chicago $220 million this year and $843 million over five years and avert the need for what Emanuel calls an “unnecessary tax increase.”
The bill would give Chicago 15 more years to reach a 90 percent funding level for police and fire pensions.
“One of the questions that has been raised by potential investors, the financial community and rating agencies is how the city plans to address all of its long-term obligations, one of which is our pension obligations,” Brown said.
“If Senate Bill 777 becomes law, then we have budgeted the appropriate amount for it. If there has been no resolution or if [the bill] is not law, the market’s gonna want to know what our plan is to fund the higher amount … and they’re going to assess whether or not that plan is a credible plan. We will see our borrowing rate reflected on how they view that, and we will see possibly our ratings reflected in how they view that.”
Ald. Harry Osterman (48th) noted that Rauner has until May 31 to sign the bill, veto it or do nothing, in which case the bill would automatically become law.
“Then you’ll inform us as to how you’re gonna proceed?” Osterman said.
Brown replied, “Absolutely. We anticipate going to the market [after that]. It will just be kind of where the market is based on what clarity we have around, not only Senate Bill 777 but also around our plan for our other pension funds.”
Emanuel has already raised property taxes by $588 million for police and fire pensions and school construction. He has also offered to raise property taxes by $170 million more for teacher pensions.
Osterman is preparing for the worst.
“Talking about Chicago Public Schools. Best case scenario, Chicago is gonna get an additional $300 million towards a $1 billion hole, which this body is gonna have to then figure out what to do between now and September. … All the borrowing that we’re doing that affects the operating budget and property tax owners — we have to scrutinize every nickel,” he said.
Budget director Alex Holt replied, “I don’t disagree with you at all. I just wanted to make it clear that this [general obligation bond sale] in particular is not necessarily resulting in a property tax increase. That will depend on how City Council votes in the fall and decides to apportion the payments that need to be made.”
In January, Emanuel agreed to cut in half his plan to sell $1.25 billion in general obligation bonds backed by property taxes under pressure from aldermen newly emboldened by the mayor’s weakened political state. At the time, aldermen balked at giving the mayor a virtual blank check.
“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,” Brown said then.
But the ordinance approved by the Finance Committee Monday included precious little detail.
Aldermen were simply told the general categories, including:
• $170 million for capital projects
• $70 million for the 2017 aldermanic menu program
• $100 million for legal settlements
• $150 million on new equipment purchases like ambulances, garbage trucks, bunker gear for firefighters and an upgrade to the so-called “computer-aided dispatch” system at the city’s 911 emergency center.
Last week, Brown told the Chicago Sun-Times the mayor’s backup plan would be presented within weeks along with the new revenue. She contended that “everything is on the table,” including another increase in the monthly tax tacked onto Chicago telephone bills — both cellphones and land lines.
Brown made the comment hours before the city sold $500 million in water bonds and borrowed an additional $100 million to follow through on its promise to convert the last of its variable-rate debt to fixed interest rates and close the book on interest rate swaps.
On Monday, Brown said it’s a “really good time for municipal issuers” with high demand. If the bonds were sold today, she said the interest rate would be “sub-5 percent.”
The maximum interest rate was 18 percent, but aldermen demanded that it be reduced to 10 percent prior to the final vote.
The city made the unprecedented decision to sell two years’ worth of general obligation bonds instead of one “to avoid increased costs due to potential downgrades and related increased interest rates,” according to documents distributed to aldermen.