Emanuel exploring pension bonds to minimize need for future tax hikes
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Mayor Rahm Emanuel’s administration is exploring the possibility of issuing “pension fund stabilization bonds” to minimize — but not eliminate — the need for another punishing round of post-election tax increases.
Emanuel has already imposed a $2 billion avalanche of tax increases, just to begin to solve Chicago’s $30 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, both cell phones and land lines; and a 29.5 percent surcharge on water and sewer bills.
More tax increases are on the way, but not until after the 2019 mayoral election.
That’s when the five-year ramp-up to actuarial funding will end and taxpayers will be on the hook to keep city employee pension funds on the road to 90 percent funding.
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.
Now, top mayoral aides are providing the first hint about how they intend to meet that daunting obligation.
Chief Financial Officer Carole Brown calls it “pension fund stabilization bonds.”
With dedicated funding sources now identified for all four city employee pension funds, the city would take a portion of its $28 billion in pension debt and finance it at an interest rate considerably lower than the 7-to-7.5 percent annual rate of return assumed by the four city employee pension funds.
“It wouldn’t eliminate the need to raise any more revenue for pensions. What it would do is greatly decrease the amount of additional new money we would have to raise,” Brown said.
“If I could say to Council and the mayor, `We should do this because we can do it at 5.5 percent,’ then I just saved the city 2 percent. … It would change the unfunded liability and change how much more [in] future payments the city would have to make. We would be paying that debt at a rate of 5 or 6 percent versus 7.5 percent.”
The idea of issuing pension bonds was first raised last week by Michael Sacks, the CEO of Grosvenor Capital Management who serves as Emanuel’s close friend, business adviser and largest campaign contributor.
It happened during an investors conference.
Sacks was making the same argument that Emanuel had already made to investors: That Chicago has more work to do to solve its pension crisis, but it’s manageable and the city is not getting the credit it deserves for its financial turnaround.
Sacks then walked investors through a solution to the post-election problem that has taxpayers bracing for the other shoe to drop: The leap in pension payments that will slap the city in the face shortly after the 2019 election.
“Properly and responsibly executed, a securitization for pensions does not incrementally increase risk and it isn’t additional debt. We owe that money today. To argue against considering this is to argue for massive tax increases or skipping pension payments,” Sacks wrote in an email to the Chicago Sun-Times.
“If we commit those pension payments to a lower cost securitization, we save billions, avoid massive property tax increases, and get our pensions to 50% funded, all while making sure we don’t skip out on the payments again in the future. It would be silly not to explore the possibility.”
Brown said the Sacks presentation — using a “back-of-the-envelope” estimate of bonding out $10 billion in pension debt — left investors “a little surprised and a lot more comfortable that we’re gonna address the issues in a manageable way.”
“I don’t think people are looking at it like the world is gonna come crashing down in 2020,” Brown said.
“We raised a bunch of revenue to make the pension payment. That same revenue that we raised would back the bonds because we’re just refinancing it. But, we would need less revenue to make that same dollar payment because that interest cost is gonna be less.”
Mayoral challenger Paul Vallas, a former city budget director, said a pension bond that exceeds the size of the city’s annual budget would be “staggering.”
Vallas noted that Chicago “already has by far the highest per capita bonded indebtedness with junk-rated credit,” at least according to Moody’s Investors.
“Taxpayers in Illinois should well know pension obligation bonds are usually just another way of kicking the financial can down the road,” Vallas wrote in an email to the Chicago Sun-Times.
“Is Rahm really now proposing to use the Rod Blagojevich financial playbook on steroids? For a mayor who claims to be dealing head on with the City’s financial mess, this looks to be only adding to the City’s problems.”
Vallas accused Emanuel of “wasting five years pursuing a pension bailout plan that everyone knew would be rejected the Illinois Supreme Court.”
“His fumbling on this issue has already added untold millions to taxpayer’s obligations. Pension obligation bonds could well add even more to that tab,” he wrote.
Emanuel is already hoping to generate $94 million in savings both this year and next by isolating sales tax revenue in a special fund and using it to refinance $3 billion in city debt.
The “securitization” structure dramatically reduces borrowing costs because bondholders 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.
Vallas doesn’t think much of that idea, either.
He argued that the “desperate structure” has only been used “in times of major distress” in New York City during the 1970’s and in 2013 in Detroit.
“He has had to take these desperate measures because he has NOT solved our problems,” Vallas wrote.