Mayor Rahm Emanuel is asking the City Council to authorize $1.1 billion in borrowing to enable cash-strapped Chicago to convert short-term debt used to cover swap terminations, court judgments and legacy costs into long-term debt.
Aldermen briefed on the mayor’s plan in preparation for Monday’s Finance Committee vote were somewhat concerned about adding to the mountain of debt piled onto Chicago taxpayers.
But they were also realistic.
When the city’s bond rating fell below investment grade and into junk-bond status, Chicago could have faced paying nearly $2.2 billion to bankers under a series of complex deals dating back to former Mayor Richard M. Daley’s tenure.
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Refinancing became a necessity, even though it will make the long-term problem even worse.
The $1.1 billion in borrowing is in addition to the $674 million in variable-rate city debt converted to fixed-interest rates late last month at a heavy price tied to Chicago’s junk bond rating.
The legacy costs include Daley’s $91 million purchase of the 37-acre site of the former Michael Reese Hospital to house an Olympic Village only to have Chicago flame out in the first round of the 2016 Olympic sweepstakes.
“They’re doing this to refinance debt payments. They were put in this position because of the downgrade and the need to clean up all the swaps and switch from variable- to fixed-interest rates,” said Ald. Scott Waguespack (32nd), one of Emanuel’s most outspoken City Council critics.
“They kept saying, `Mayor Daley got us into this situation.’ But they were vague on every question. What are the long-term risks to the city and what are the long-term costs? We’re not being shown the full scope of the problem and what the costs will be to taxpayers in the future for doing this.”
Asked whether he’s willing to sign off on the borrowing, Waguespack said, “Not yet. I don’t think we have the full picture of what they’re really doing. It seems to me to be passing the buck to future taxpayers, making payments higher and the ultimate solution worse.”
Other aldermen were more willing to go along.
“We slowly need to get out of the mess we’re in, and this is a good tool to do that,” said Ald. Deb Mell (33rd), an Emanuel ally.
Ald. James Cappleman (46th) said he doesn’t think the City Council has much choice but to sign onto the new round of borrowing.
“I’m worried about having any collection on our current debt right now. We can’t do it. We have to get a fixed rate. Otherwise, they can collect on our debt right away. And we can’t do that. So, it’s picking the best of the worst choices available,” Cappleman said.
A statement from the Emanuel administration on Thursday noted: “The city’s difficulties can’t be reversed overnight. It took decades to build the mountain of debt and substantial structural budget deficit that Mayor Emanuel inherited. The upcoming issuance – which converts bad deals from the past from short-term debt into more stable, long-term debt – is one more step toward getting the city’s fiscal house back in order.”
A top mayoral aide, who asked to remain anonymous, portrayed the refinancing as the “next step” in the plan Emanuel unveiled in late April to end or move away from four risky financial practices that his predecessor and political mentor, former Mayor Richard M. Daley, used to “mask” the true cost of city government.
That plan called for:
- Terminating a combined, $915 million in so-called “swaps” in the city’s portfolio of general obligation and sales tax debt and converting all general obligation debt from variable- to fixed-interest rates. The $230 million penalty will be folded into the refinancing to avoid putting added pressure on the city budget.
- Implementing a four-year phase-out of “scoop-and-toss,” the practice of paying short-term obligations by saddling Chicago taxpayers with long-term debt. That will add $75 million to an operating shortfall in the city’s 2016 budget that’s already pegged at $300 million.
- Gradually ending the practice of using borrowing to bankroll costly legal settlements and judgments against the city by covering those settlements in the city’s operating budget.
- Continuing to build back a rainy day fund that Daley raided to the tune of $1.2 billion to balance his last four budgets after selling off valuable city assets, including the Chicago Skyway, city parking meters and downtown parking garages.
Municipal finance expert Matt Fabian said the $1.1 billion refinancing is “not the optimal policy choice.” But it’s understandable.
“The city has its political constraints on raising revenue and cutting spending. From a Wall Street perspective, we’ll take what we can get. We want the city to transition to a balanced budget. But doing it all in one year may create too much political upset,” he said.
“Chicago has a long legacy of borrowing. That legacy can’t go away overnight. It may be better for the city to continue to use gimmicks for the next few years, assuming it is transitioning to a fully balanced budget.”