Chicago will end the costly practice of scoop-and-toss borrowing in 2018 — one year earlier than promised — under a mayoral budget that pleased a taxpayers watchdog group, but not quite as much as Mayor Rahm Emanuel would hope.
Scoop-and-toss is the dubious practice of refinancing existing debt in a way that saddles future generations of taxpayers with borrowing costs instead of paying off the principal.
Emanuel had promised to end the practice in 2019. Instead, it will end next year.
Civic Federation President Laurence Msall said he would be more impressed if Emanuel ended scoop-and-toss at the Chicago Public Schools and stopped several other financial practices at City Hall that are equally troubling.
“A structural deficit still looms over city finances. The pension funds are going to require increasingly large contributions, even with the funding schedule approved by the Legislature. Within five years, very significant increases. And the city does continue to borrow for operational costs, such as [legal] judgments,” Msall said Monday.
“The Chicago Public Schools have also been using scoop-and-toss an extensive amount,” he said. “Borrowing and pushing out your principal when you’re not making payments on your debt has a very expensive impact on the cost of the government. . . . We’ll be impressed when . . . everyone stops doing it, rather than talking about plans to stop doing it.”
Ald. Brian Hopkins (2nd) recalled the debate that surrounded Emanuel’s original plan to phase out scoop-and-toss borrowing over four years.
“If we’re gonna do it, take the Band-Aid off, deal with the short-term pain and get it over with, rather than drag it out,” Hopkins said. “We’re slowly trying to claw back from the depths of junk, but we’re locked into some of these long-term deals at high rates and we’ve got to get out of it.”
The mayor’s office pegged the amount of scoop-and-toss borrowing still outstanding and due to be retired early at $250 million.
Last week, the City Council approved the mayor’s plan to borrow $3 billion in a way that could dramatically reduce interest rates and save Chicago taxpayers tens of millions of dollars a year.
The plan calls for the city to place $661 million in state sales tax revenue into a “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.
Earlier this year, Chicago sold $1.16 billion in general obligation bonds, but paid a heavy price for a school financial crisis made worse by Gov. Bruce Rauner’s veto of a bill promising $215 million in pension help for CPS.
The “spread” between Chicago’s interest rate and the interest rate the city would have paid if it had a AAA bond rating ranged from 3.3 percent to 3.5 percent, according to Matt Fabian, a partner at Municipal Market Analytics.
Fabian called it the “worst spread” in recent memory on a city bond deal.
Even more surprising was the fact that the interest rate on Chicago’s general obligation bonds was a “full percentage point” higher than it was a year ago, before the City Council approved Emanuel’s plan to slap a 29.5 percent tax on water and sewer bills to save the largest of four city employee pension funds.
Market factors beyond the city’s control were working against the city. But the overriding factors were the financial crisis at CPS and the borrowing itself. It included $440 million in “scoop-and-toss” borrowing, $105 million more than previously planned, that extended for another generation debt that should be retired today.
It also included $225 million to bankroll settlements and judgments against the city, $100 million more than previously planned.
“The fact that this bond sale was still funding scoop-and-toss and that . . . they’re borrowing to pay interest on the these bonds, those are not the things that healthy cities do,” Fabian said then.