Chicago’s chief financial officer will sound out aldermen Thursday on the possibility of issuing $10 billion in pension obligation bonds amid widespread skepticism from municipal finance experts about Mayor Rahm Emanuel’s plan.
Mayoral challenger Paul Vallas has urged the City Council to stop that train from leaving the station to avoid putting Chicago taxpayers in a “financial straightjacket” — though CFO Carole Brown has insisted no final decision has been made.
Richard Ciccarone, president of Chicago-based Merritt Research Services LLC, shares Vallas’ skeptical view.
He called the plan to minimize the need for another punishing round of post-election tax increases “not the solution I wanted to see” from Chicago. Not even after dedicated funding sources have now identified for all four city employee pension funds.
“We just cannot continue to defer this problem to future generations. You have to step up in taxes and revenues to some extent, even if it’s a compromise,” Ciccarone said. “It could be done partly by some financing. But not entirely.”
Ciccarone noted that pension bonds have “not been viewed in a positive light for some time because there’s been a series of them that have defaulted dealing with distressed credit” in recent years. He pointed to California, Detroit and Puerto Rico as negative examples.
By 2023, the city’s contribution to all four funds will nearly double — from $1.2 billion this year to $2.1 billion, according to the city’s annual financial analysis.
“To some extent, the rating agencies and the markets, through the signal of the bond rates, were showing some improvement on Chicago” amid confidence that Chicago will make the tough choices necessary to handle the “steep upward climb,” Ciccarone said.
“There’s a danger that this might actually be a … back-step on that, as more debt is taken on. You take a soft liability and take it to a hard liability,” he said.
“More debt on the books right now will make it harder for the city to issue additional debt for other purposes, including infrastructure, because it’ll be that much more official debt on the books.”
Ald. Pat O’Connor (40th), the mayor’s City Council floor leader, said it’s easy for municipal finance experts to sit around with their arms folded, talking about how risky a $10 billion pension bond issue would be.
Aldermen don’t have that luxury; they must determine how much more beleaguered Chicago taxpayers can realistically absorb.
Emanuel has already imposed a $2 billion avalanche of tax increases, just to begin to solve Chicago’s $28 billion pension crisis.
Chicago taxpayers have endured a parade of property tax increases for police, fire and teacher pensions; two increases in the monthly tax tacked on to telephone bills; and a 29.5 percent surcharge on water and sewer bills.
“They’re not making a judgment as to how much people can tolerate. They’re just making a judgment between finance vehicles. We have to make a judgment about what people can tolerate and keep their investment in their home. Something they can recoup and sell as opposed to crippling them with taxes that make homes unsaleable,” O’Connor said.
“We should look at all opportunities to infuse cash into our liabilities short of raising property taxes. This is one of those vehicles. Are we gonna pass it? I don’t know. Are we gonna look at it? Absolutely,” he said.
Brown could not be reached for comment on the closed-door briefings she has arranged for aldermen.
Last week, Brown said she hoped to make a quick decision — possibly in time for a City Council vote in September — to take advantage of a favorable market.
She argued it would be irresponsible not to at least consider a plan with the potential to minimize — but not eliminate — the need for post-election tax increases.
“If you had a mortgage on your house and you knew that he could refinance that mortgage and save two percent, woudn’t it be kind of dumb not to do that?” Brown said in response to Vallas.
“What’s the risk? Tell me what the risk is. All I’m trying to do is pay less for the debt I’m already on the hook for. If we didn’t do it, he’d be standing up saying, `How could they not be trying to turn every stone to make sure that they are paying as little for the debt as they possibly could?’ “
Brown emphatically denied that Emanuel is entertaining the pension borrowing to avoid talking about how he plans to meet a $1 billion pension obligation that will come due after the election.
“He’s instructed his financial team to look and see if there’s a way to lower the cost of the $28 billion in pension debt that he inherited and addressed head-on, instead of kicking the can. That’s what the mayor instructed us to do,” Brown said.
Civic Federation President Laurence Msall said he, too, has “significant concerns” about the $10 billion in pension obligation bonds.
“Such issuances have had a poor track record in Illinois, and the Federation would like to see a lot more publicly available details on this matter,” Msall wrote in an email, urging “maximum transparency” as well as public hearings.
“This is an enormous amount of borrowing, and the city has acknowledged that even with such borrowing, taxes will still have to be increased in order to meet all of its pension obligations,” he said.