Chicago may sell even more than $10 billion in pension obligation bonds if there’s enough available city revenue to support it, and a final decision will be made as soon as next week, aldermen were told Thursday.
Chief Financial Officer Carole Brown “took the temperature” of the City Council on what would be the largest pension bond ever attempted by a municipality and found it to be “lukewarm,” as Hispanic Caucus Chairman Gilbert Villegas (36th) put it.
Aldermen emerged from closed-door briefings with the same questions asked by municipal finance experts.
If it’s such a great idea to issue billions in pension bonds to minimize the need for post-election tax increases, why did pension bonds default in Detroit, California and Puerto Rico?
What specific city revenue would be used to back the bonds now that Mayor Rahm Emanuel has isolated sales tax revenue in a special fund and used that “securitization” structure to refinance $3 billion in city debt?
And even though it sounds great to take a portion of Chicago’s $28 billion in pension debt and finance it at an interest rate considerably lower than the 7 to 7 1/2 percent annual rate of return assumed by the four city employee pension funds, what happens if the market tanks?
“How do I explain this whole financial scheme to Mrs. Rodriguez in my ward and have her understand what we’re trying to accomplish? The response was it’s similar to home refinance. But I’ve never seen so much scrutiny over someone refinancing their home. There’s a lot of questions to be answered. The temperature was lukewarm,” Villegas said.
“This is a huge responsibility. We need to do this in a careful manner so we’re not burdening future City Councils and mayors . . . It’s gonna be important to make sure there are safeguards in there so mistakes in other states are not repeated.”
Ald. Brendan Reilly (42nd), vice chairman of the City Council’s Budget Committee, said there are more questions than answers about the borrowing that can only be answered by an independent cost-benefit analysis.
“They haven’t pinpointed the total dollar amount of liability they’d want to refinance. They haven’t identified a revenue stream to service that new debt and do not yet have a sense of what kind of rate the bond market would set,” Reilly wrote in a text message to the Sun-Times.
Brown acknowledged that aldermen “had a lot of questions” but she expected nothing less.
“They understand we’re still developing an idea. They’re keeping their opinions open until they see the full plan — if there is a plan,” Brown said.
“It could be more than $10 billion if we had identified revenues that could support that. But we haven’t completed that analysis . . . We haven’t even determined what revenues are available and what that capacity is . . . I’m hoping I can have a recommendation to the mayor by the end of this month or by the early part of September.”
Brown was undaunted by defaults in Detroit and Puerto Rico, arguing that “every municipality has a different set of facts.” Chicago has $38 billion of long-term debt: $28 billion of that is pension debt.
“If I can create a structure that can re-fund some of my higher cost pension debt with lower-cost bonded debt, then I can save money for taxpayers,” she said.
Budget Committee Chairman Carrie Austin (34th) could not attend the briefings because of a family obligation.
But she’s all for the idea of lightening the load on Chicago taxpayers who have already endure a $2 billion avalanche of tax increases just to begin to solve the city’s pension crisis.
“If this will help eliminate some of the burden on the public, I’m for it,” Austin said.
“I’m trying to make it as painless as possible because, no matter what, we all will still have to bite the bullet on taxes. Is there another way? Do we have another revenue stream? How else do we do it? Borrowing at least minimizes it. Is it good? No. Is it bad? No. What other recourse do we have?”
Mayoral challenger Paul Vallas once again urged aldermen to stop the train from leaving the station to avoid putting taxpayers in a “financial straightjacket.” He wants the election to be a referendum on the pension borrowing.
But Brown said, “I haven’t recommended anything to the mayor yet. So, I’m not on a train. I’m still at the station.”