Following a marathon six hour meeting, the Council’s Finance Committee approved a reduced borrowing plan that calls for the issuance of $650 million in general obligation bonds to pay off old debt come due, as well as $200 million in new sales tax revenue bonds to refinance old debt and pay for the 2016 Aldermanic Menu program, $1 billion in bonds to refinance old debt and pay for capital improvements at Midway Airport, and $800 million in water and sewer bonds. The new borrowing plan for 2016 comes as the city prepares to sell half a billion dollars today in previously approved general obligation bonds.
Committee Members Present: Chairman Ed Burke (14), Joe Moreno (1), Pat Dowell (3), Will Burns (4), Leslie Hairston (5), Roderick Sawyer (6), Gregory Mitchell (7), Michelle Harris (8), Patrick Daley Thompson (11), George Cardenas (12), Marty Quinn (13), Toni Foulkes (16), Matt O’Shea (19), Willie Cochran (20), Howard Brookins, Jr. (21), Rick Munoz (22), Michael Zalewski (23), Danny Solis (25), Walter Burnett (27), Jason Ervin (28), Ariel Reboyras (30), Scott Waguespack (32), Marge Laurino (39), Pat O’Connor (40), Brendan Reilly (42), Tom Tunney (44), John Arena (45), Harry Osterman (48), Joe Moore (49)
The original borrowing plan proposed by Mayor Rahm Emanuel’s administration included up to $1.25 billion in general obligation bonds funded by property tax receipts with $700 million in new money to pay for capital improvements for fiscal years 2016 and 2017. But following vocal concerns from aldermen, the city’s Chief Financial Officer Carole Brown reduced the authorization request to $650 million in general obligation bonds, all of which will go towards restructure existing debt, with $400 to $450 million to pay for “scoop and toss” and $50 to $250 million for savings.
“We will come back to the Council when we have more details around the capital projects with a proposal to do general obligation new money capital later in the year,” Brown explained.
In his 2016 budget, Mayor Emanuel promised to phase out by 2019 the practice of issuing long-term debt to pay down short-term debt payments come due. This new bond offering would expedite that plan by paying off that debt this year instead of dividing the payments by issuing new debt over the next three years.
The decision to phase out scoop and toss earlier than planned is based on three factors, according to an analysis of the bond deal conducted by Ben Winick of the Council’s new Office of Financial Analysis. In his report sent to aldermen last Friday, Winick argued it’s in the city’s best interest to phase out scoop and toss earlier than planned because: (1) the Federal Reserve’s decision in December to increase interest rates could make it costlier down the line; (2) issuing the debt now rather than over the next two years would reduce the payment schedule from 17 to 15 years; and (3) “unforeseen budgetary pressures” could make it harder to phase out the practice in stages.
While there was no dissent on the general obligation bond authorization–it was approved unanimously by voice vote–three aldermen asked to be recorded as “no” votes on a sales tax revenue bond package worth $200 million. The sales tax bonds would raise $70 million in new money to pay for the Aldermanic Menu Program, which gives each alderman $1.3 million a year to spend local improvement projects of their choosing, in addition to another $130 million to refund outstanding payments on existing sales tax revenue bonds. Aldermen Scott Waguespack (32), John Arena (45), andMike Zalewski asked to be recorded as the sole “no” votes. Ald. Roderick Sawyer(6) abstained from the vote under provisions of Rule 14.
While this would not be the first time the city has borrowed money to pay for the annual aldermanic menu program–which costs the city an annual $6 million in administrative fees alone–this is the first time the city would be using sales tax receipts to pay for the program, according to CFO Brown and Budget Director Alex Holt. Historically, sales taxes have been used for city operations, while property taxes have been used for capital spending, and pension and debt payments.
“One of the concerns we had heard from the rating agencies and from investors is they would like to see the city diversify more the sources of support for our debt,” CFO Brown told aldermen. She said even after the Council approved a historic property tax increase last year, the city’s current property tax levy is maxed out and the junk rating on the city’s general obligation bonds would have made it too costly to borrow.
When pressed to explain how this bond offering would impact the city’s general fund, since sales tax revenue supports 18% of city operations, CFO Brown said yesterday’s package would be a test run to determine if sales tax revenue in place of property tax revenue for future debt payments is more cost-effective.
“So, we have to continue to make sure that we protect the sales tax for our corporate fund, and so this is not something that we would do…move wholesale to. But it’s something we are definitely exploring,” Brown explained.
This bond sale was the only offering that concerned Winick, who noted in his report that the deal could, “place an additional strain on the corporate fund budget.”
And CFO Brown revealed the city is looking for other revenue options to back future borrowing plans, but wouldn’t detail those plans publicly.
Ordinances authorizing the sale of $1 billion in Midway Airport Revenue Bonds and three separate water and wastewater bonds totalling $800 million quickly passed without dissent towards the end of the meeting. The former would raise $500 million in new money to pay for capital improvements for parking, concessions, noise mitigation and other general infrastructure repairs, $200 million to pay for outstanding debt, and $200 million to convert outstanding Midway Airport Revenue Bonds to so-called “Customer Facility Charge Bonds”. The proceeds from the new water and sewer bonds would terminate swap agreements with the Royal Bank of Canada (RBC) transferring existing wastewater bonds from a variable to a fixed rate. That change will cost the city about $100 million, an amount that is based on today’s market. The full cost won’t be known until the deal is finalized.
This past summer, around the time the rating agencies downgraded the city’s general obligation bonds to junk status, the city converted its existing general obligation, sales tax, and wastewater bonds to fixed rate. “And so this water conversion is the last conversion we need to do to totally de-risk the city’s balance sheet,” CFO Brown explained to aldermen when asked why the city is opting to pay such a high cost to convert the water bonds.
When asked by Ald. Rick Munoz (22) if the city could sue the banks to reduce the costs associated with the swap termination, CFO Brown said while nothing precludes the city from litigating the matter in court, the city is voluntarily choosing to pay the termination fee.
That comment didn’t sit well with Ald. Sue Sadlowski Garza (10) who is not a member of the Finance Committee but still complained about the “astronomical amounts of money in termination fees,” and asked why the City doesn’t just threaten to stop doing business with banks that refuse to forgive termination fees.
“We can’t keep paying these astronomical termination fees, especially in the fiscal state that the city is in,” Garza warned. The city has paid $250 million in swap termination fees since Mayor Emanuel took office, according to CFO Brown.
Jim McDonald, Deputy Corporation Counsel with the City’s Law Department, stepped in to testify that his department sought outside counsel in 2014 to determine if the city had a legal basis under federal or state law to sue banks and overturn the swap agreements. The report found that the city has no legal grounds to do so, McDonald said.
The $100 million termination fee on the water bonds will be borrowed through the bond issuance and paid back with revenue collected on water fees.
“So we’re borrowing money from another entity to pay for money we already borrowed,” Ald. Garza asked, sarcastically noting, “That doesn’t make any sense. That’s like me taking out a credit card to pay off another credit card.”
But Holt said that wasn’t an accurate portrayal of the deal, saying, “I recognize [these swap agreements] aren’t the most transparent thing in the world, but it’s not like we’re borrowing money to pay borrowed money. In this case there is a termination fee that we owe […] The city has actually been receiving money all of this period of time, and now, in order to get out of the agreement, we have to essentially pay back the money.”
Aldermen Pushback on Other “Routine” Items
Every item on the Finance Committee agenda, save for a series of Special Service Area appointments, faced heavy scrutiny by aldermen who wanted to make sure they weren’t approving money transfers for projects that shouldn’t receive city subsidies.
That’s why, after nearly 40 minutes of debate, Chairman Burke decided to hold two proposals that would have waived building and permit fees for the Metropolitan Pier and Exposition Authority, as well as a proposal that would authorize $7 million in TIF funds to pay for a new public park next to the Marriott Marquis Hotel currently being built.
Ald. Pat Dowell’s ordinance would have saved McPier roughly $2.6 million in construction fees associated with the McCormick Place expansion plan through 2017. But after having already approved a $55 million dollar TIF subsidy for the construction of the Marriott Hotel, Ald. John Arena (45) argued the city shouldn’t be giving private developers additional subsidies when it’s already strapped for cash.
Mike Merchant with the Metropolitan Pier and Exposition Authority, argued the Authority brings in $8 billion in economic activity and the new hotel will be an “important catalyst” that will bring hundreds of millions in additional revenue.
“We know we’re getting returns on a hotel wherever it’s placed […] but if we’re subsidizing the cost of building it for a private company, that company should be giving us hard returns. I’m not understanding why this is a good deal for the city,” Arena countered.
Chairman Burke tabled the items and said they would be brought up for consideration after McPier provides a breakdown of pending capital projects that would benefit from the fee waivers.
Aldermen were less than thrilled with another plan that would refund CPS for a nearly $5 million athletic field it just built for Williams Jones College Preparatory High School and National Teachers Academy, a public elementary school. The ordinance the committee ultimately approved would reimburse CPS for the construction costs with $4.6 million from the 24th/Michigan TIF.
A proposal that would give the city the authority to reimburse the developers behind a massive redevelopment project in the South Loop for any costs incurred in the public way received some pushback but eventually advanced in committee, too.
The ordinance approves inducement language for the city to issue up to $98.4 million in tax-exempt special assessment bonds for the proposed 3,000-unit Franklin Pointproject in the South Loop. The Plan Commission approved the joint venture from Chicago developer CMK and Australian firm Lend Lease Group in November, but it has yet to advance to the full Council. Should the city choose to issue the bonds, another ordinance authorizing the sale would have to be approved by the full Council. The money would reimburse the developer for costs associated with their plans to improve the Chicago Riverwalk through local property taxes.