May 16--The City Council Finance Committee on Monday recommended borrowing another $600 million -- a bond deal that could get even more expensive than usual for taxpayers if Mayor Rahm Emanuel doesn't come up with further plans to pay down the city's immense pension debt.
Chief Financial Officer Carole Brown said the administration anticipates an interest rate of less than 5 percent, which is already relatively high given the city's low credit ratings, when it goes to market in the third quarter of this year.
Bond rating agencies are keeping an eye on the city's precarious finances. Specifically, they want to see whether Gov. Bruce Rauner signs a bill that would stretch out the required contributions to police and fire pension funds, Brown said.
If the governor doesn't, the city would have to come up with $220 million before the year is out and more than $1 billion over the next four years. That, in turn, would leave the city looking to "identify a new revenue source," according to documents handed out to aldermen.
That's government jargon for new taxes, fines or fees, which would spell more pain for taxpayers. Last year, Emanuel and aldermen already approved the largest property tax hike in modern Chicago history to start paying down more than $10 billion in debt to police and fire pension funds.
Also overhanging the latest proposed bond issue is a warning from debt rating agencies that they could further downgrade the city's already low level of creditworthiness if the city does not come up with a plan to restore city worker and laborers pension funds to financial soundness. Each downgrade increases the cost of borrowing.
The agencies issued the warnings in March, after the Illinois Supreme Court struck down Emanuel's plan to fix the two pension funds, saying reductions in retiree cost-of-living increases was an unconstitutional diminishment of benefits.
As a result, the cost to taxpayers to prevent the two funds from going broke is expected to be much higher than it would have under Emanuel's plan, which called for pumping $473 million more annually into the funds by the fifth year.
Emanuel has said that he's looking for a new way to fix the funds -- which are $11.2 billion in the hole and could both go broke within 11 years -- without putting the entire burden on taxpayers, but many legal experts are skeptical that's possible, given the state Supreme Court ruling.
Brown said how the city handles the issues for all four pension funds could affect how well the city does on the bond deal. "That news will inform investors and will impact kind of where our (bond issue) sells, because it's all going to be happening around the same time," Brown said.
Aldermen balked at the bond issue in January. At the time, the council approved borrowing up to $650 million to restructure city debt but shelved an additional $600 million, saying it wanted more detail about how the city would spend the money.
In recent days, Brown and Budget Director Alexandra Holt have met with aldermen to lay out more details.
This year and next, the city plans to use about $100 million of the money to pay off legal settlements and judgments, split evenly in each year, Holt said. The rest would go to pay for equipment, like firetrucks and ambulances, and major construction projects during the two years, she said.
Bond rating agencies and financial analysts frown on borrowing for legal settlements because those payouts are considered annual operating costs that should be paid out of the revenue coming into the city each year. Emanuel has said he's working to eliminate routine borrowing for legal costs and has reduced the amount significantly in recent years.
The $650 million in borrowing authorized in January included about $335 million in scoop-and-toss borrowing over the next three years. Those proceeds would be used to pay off old loans coming due with money from new borrowing -- a technique that lowers the annual city spending in the short run but costs the city and taxpayers over the long haul. Emanuel has pledged to phase out that type of borrowing.
The full council is expected to approve the $600 million in borrowing on Wednesday.
Also on the agenda is an ordinance to require more council oversight of city borrowing at variable rates -- a reaction to the risky variable-rate borrowing undertaken by both former Mayor Richard M. Daley and, to a lesser extent, Emanuel.
City financial officials would have to provide much more detailed information about such deals, including the risks involved, well before they went to market.
Last week, Emanuel's City Hall took the last step in unwinding the bulk of those variable-rate deals, which were coupled with controversial interest rate swaps. They ended up being more costly than predicted, and it cost the city hundreds of millions of dollars to rid the city's debt portfolio of the deals.
But the market smiled about as much as it could on last week's conversion of variable rate debt to fixed rates, setting the interest rate on about $444.5 million in water system bonds at about 2.9 percent. Those bonds carry a higher interest rate than other type of city debt because the water system has a dedicated revenue service: fees charged for city water service.
hdardick@tribpub.com
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