Mayor Lori Lightfoot’s administration is counting on a massive refinancing to bankroll more than half the cost of a $600 million police contract that will give rank-and-file officers a 20% pay raise over eight years, more than half of it retroactive.
One day after Lightfoot announced the agreement with the Fraternal Order of Police — a deal reached weeks ago — the mayor’s office acknowledged the need to refinance to pay for it.
Chicago police officers have waited four years for a raise. The 10.5% portion of the pay raise retroactive to June 30, 2017 will cost $365 million. The deal’s overall price tag will top $600 million.
“The financial cost of this contract was an anticipated cost that the City has been accounting for since Mayor Lightfoot took office in 2019. Approximately $103 million of these monies were set aside during the 2021 budget. The rest will come from future refinancing for interest savings and from taking advantage of current low interest rates,” the mayor’s office said in a statement.
“The eight-year term is one of the longest terms for a police contract in Chicago’s history, and will provide enormous financial stability to the City’s budget going forward and is structured to maximize savings to the taxpayers. As for the increase in cost for 2022 due to the raises, those increases were anticipated in last year’s outyear gap estimates and will be included in the 2022 gap to be solved for in this upcoming budget cycle.”
Ald. Pat Dowell (3rd), chairman of the City Council’s Budget Committee, said the $600 million contract and $365 million lump-sum payment for retroactive pay presents the latest in a series of financial challenges.
Dowell was asked if it’s a sound financial practice for the city to rely on refinancing to cover more than half the cost.
“You’re not borrowing anything more. You’re just refinancing existing debt, right, to take advantage of a lower interest rate. And you take the savings from that and you apply it elsewhere. It’s what you do with a house,” Dowell told the Sun-Times.
“I will certainly have to see the details. Because we still have, what is it, $965 million of debt out there. We need to figure out what we’re gonna do with that, since we have this [federal coronavirus relief] money,” Dowell added.
“This has to be discussed within the context of what we already owe and how we’re contemplating using the [American Rescue Plan] money. Because remember, we never really went out to the market with that extra $500 million. We have to figure all of that out. This is just an additional component of that.”
Wouldn’t it be better to have the entire cost salted away instead of having to rely on refinancing and, perhaps, lengthening the timetable for retiring the newly-refinanced debt?
“Theoretically, yes. I mean, there was some forethought given to this issue by socking away that $103 million in the 2021 budget,” she said.
“This is definitely a hurdle to get over — another one, I will say.”
Civic Federation President Laurence Msall has significant concerns about the city’s plan to bankroll the new police contract.
“This is now the second idea that’s come forward on how to use the refinancing of our debt. Hopefully, the city’s plan will not be extending the length of the debt and they won’t be using scoop-and-toss. But at a certain point, they’re gonna have to pull the rabbit out of that hat and show that, in fact, the savings is real and it’s not going to have an increased cost to the taxpayers. And even still, that money is going to be a one-time revenue source. It’s not a continuing revenue source,” Msall said.
“It’s good news that this sword-of-Damocles threat of not having a police contract for so many years has been resolved. The expensive news is that it’s gonna be — not just the $365 million in retroactive pay that has to be accounted for. There’s another $300 million in annual increased cost to the city. So they’re gonna have to find ways to either make cuts or identify new revenues to pay for that going forward.”
Lightfoot had planned to use more than half of the $1.9 billion avalanche of federal relief headed to Chicago to retire $465 million in scoop-and-toss borrowing and cancel plans to borrow $500 million more.
But her plan was put in jeopardy after the Treasury Department issued initial guidelines stating the money couldn’t be spent on tax cuts, pension funds, debt services, legal settlements or judgments or be deposited in rainy day funds.
The city has sought clarification on the guidance. A 60-day window for the city to submit its stance on the matter to the Treasury Department ended July 16.