City Council’s Finance Committee OKs $3 billion refinancing plan

Chicago will refinance $3 billion in debt in a way that could dramatically reduce borrowing costs, under a mayoral plan advanced Thursday to create a “special purpose corporation legally independent” from the City Council.

During a nearly three-hour hearing that preceded the Finance Committee vote, the elephant in the room was the widely-despised parking meter deal.

Aldermen got burned by asking too few questions about that 2008 deal negotiated by former Mayor Richard M. Daley that turned out to be a lemon for the city.

They were determined to ask plenty of questions this time around because the stakes are so high and the commitment so long.

Mayor Rahm Emanuel plans to place $661 million in state sales tax revenue into a the “special purpose corporation” and use that vehicle to refinance $3 billion in existing debt and possibly future debt for infrastructure projects.

The so-called “securitization” structure is expected to dramatically reduce borrowing costs because bondholders would get paid first, even if the worst happens and the city goes bankrupt.

Only after debt service is paid would sales tax revenue start to flow back to the city.

“What are the protections that money over and above what covers debt service will come back to the city whole or will the corporation take initiative to do other things with it?” said Ald. John Arena (45th), who cast one of only two dissenting votes.

“Those are the things we have to be cautious of when we create an entity like this that’s gonna be very difficult to walk back from five, ten years down the road because debt will be incurred that’s long-term debt. This is a new idea that has only been vetted in a very few cities outside Illinois. What are the pitfalls we might land in?”

Ald. Scott Waguespack (32nd), chairman of the City Council’s Progressive Caucus, added: “There’s a better way to scrutinize these deals…Perhaps that goes back to the process of the parking meter deal. But, it’s an improvement for the Council to ask very tough questions.”

Downtown Ald. Brendan Reilly (42nd) agreed.

“It’s natural for us as legislators to be cautious, having been burned on a few deals in the past,” he said.

Well aware of the parking meter hangover, Chief Financial Officer Carole Brown insisted the goal of the new corporation “is not to, in any way, usurp the oversight or authority of the City Council.”

In fact, changes were made to appease aldermen, including oversight by the inspector general and making the corporation comply with the Freedom of Information and Open Meetings Acts.

Brown said her hope is to refinance debt at a rate at least two full percentage points below the 6.25 percent attached to the last general obligation bond issue because the city’s bond rating remains “below investment grade.”

“I am not increasing the risk profile of the city at all. … Every day that we wait costs taxpayers more money,” Brown said.

Chicago’s junk bond rating has already saddled taxpayers with tens of millions of dollars in penalties and added borrowing costs.

Brown said the new financing scheme — already used in New York City, Philadelphia and Washington D.C. — could ultimately pave the way for the city to raise a bond rating that now ranges from BBB-plus to junk with Moody’s Investors.

The chief financial officer bristled at the suggestion that current bondholders and retirees who live off under-funded city pensions would have to stand in line behind this new category of bondholders because that new group would have “statutory lien” on sales tax revenue.

“The city doesn’t have the legal ability to file for bankruptcy. Nor does it have any intention of filing … or seeking the legal ability to file for bankruptcy,” Brown said.

“I also remind you that the mayor has spent the last four years establishing recurring revenue for each of the pension funds, going to Springfield and getting each of the pension funds put on actuarial funding.”

The five-member board that will oversee the special purpose corporation includes the chief financial officer, budget director and comptroller along with chairmen of the Finance and Budget Committees.

That’s at least part of the reason why always outspoken Budget Committee Chairman Carrie Austin (34th) was on board the train that will create nearly $16 million worth of pinstripe patronage.

“I wouldn’t care if it was a dollar. If we’re saving, how do you object to that?” Austin said.

“It may be an intricate plan that you have here, but others have used it. If it’s been beneficial in those states, why would it not be beneficial for us?”