The Finance Committee advanced Mayor Rahm Emanuel’s plan to refinance existing debt by issuing up to $1.1B in general obligation bonds. It also approved $3.65M in legal settlements against the Chicago Police Department, one intergovernmental agreement for a redevelopment plan and appointments to Special Service Areas. All of these items will go before the full Council on Wednesday.
Committee Members Present: Chairman Ed Burke (14), Vice Chair Patrick O’Connor (40), Pat Dowell (3), Leslie Hairston (5), Roderick Sawyer (6), Gregory Mitchell (7), Michelle Harris (8), Anthony Beale (9), George Cardenas (12), Marty Quinn (13), Toni Foulkes (16), Matt O’Shea (19), Willie Cochran (20), Rick Munoz (22), Michael Zalewski (23), John Arena (24), Danny Solis (25), Walter Burnett, Jr. (27), Jason Ervin (28), Ariel Reboyras (30), Scott Waguespack (32), Emma Mitts (37), Nick Sposato (38), Margaret Laurino (39), Tom Tunney (44), Harry Osterman (48), Joe Moore (49), Debra Silverstein (50)
Other Aldermen Present: Raymond Lopez (15), David Moore (17), Michael Scott, Jr. (24), Milly Santiago (31), Carlos Ramirez-Rosa (35)
Bond Ordinance To Restructure Debt
The committee overwhelmingly approved, with one dissenting vote from Ald. Scott Waguespack (32), an ordinance that greenlights an Emanuel Administration plan to restructure outstanding city debt with the issuance of an additional $1.1B in general obligations bonds that includes legal settlements and upcoming interest payments on existing debt. Although several committee members said they had a hard time understanding the language of the ordinance, and what was at stake if they failed to approve it (the most frequent comments aldermen made during the two hour debate), the ordinance received overwhelming approval.
The plan is a necessary first step the City needs to take to reduce its exposure to outstanding variable-rate interest payments, according to testimony from Carole L. Brown, the city’s new Chief Financial Officer. Brown reported that once the city executes the sale of the new bonds, the city will have moved to fixed-rate debt which will be paid down over 30 years.
The new debt helps phase out a financial tool known as “scoop and toss”, when borrowers refinance the principal and interest of long-term and extend the payments over a longer payment period. The practice, which is comparable to a homeowner continually refinancing their mortgage and extending the pay periods, is not a sustainable practice, but over the last ten years the city had relied on this method to pay for certain operating expenses when it presented its annual budget. Mayor Rahm Emanuel announced in April he is committed to phasing this process out by 2019, and this ordinance helps with that plan, according to Brown.
Brown also said the accelerated timeline for the bond sale, which was made public late Thursday when the Finance Committee agenda was posted online, is largely due to Moody’s recent ratings downgrade of the city’s bonds. When the city’s credit rating fell to junk status last month, it made the city vulnerable to $2.2B in payments from lenders holding lines of credit with the city.
According to Brown, the city has a line a line of credit with Morgan Stanley for $135M, plus an additional commitment for $200M that has not been allocated yet. The City also has a line of credit with Citigroup for O’Hare Airport totaling $140M and BMO Harris totaling $225M.
Brown says the city minimized its risk of potentially defaulting on those payments by making a deal, known as a forbearance agreement, with the banks. Under the agreement, the banks waived their right to terminate outstanding loan repayments if the city promised to retire its exposure to variable interest rates in a timely basis.
The City already took steps to get rid of half of the risk to the city’s corporate funds, Brown says. It eliminated about $918M in variable interest rate risk associated with general obligation bonds that date back to 2002 and terminated 21 swap agreements. Brown said this ordinance was crucial in eliminating the rest of that risk by paying for the following items:
$192M in general obligation swap termination costs. When the city was downgraded by Moody’s, the swaps had an automatic termination event. This means the swap counterparties could demand immediate payment and terminate the swap. The city was able to negotiate a discounted rate and terminate the swap. The city used commercial paper to pay off the termination cost. This ordinance pays the city back for that payment.
$150M for variable rate general obligation bonds converted to a fixed rate
$40M in variable rate fees associated with Moody’s recent downgrade
$170M in a so-called “scoop and toss” bond levy issued in 2014, where debt was rolled into a interest-only loan. The levy was put in place during the 2014 budget process. The City had funded it with short-term commercial paper. This ordinance would pay down the commercial paper. There will still be $100M in outstanding commercial paper payments.
$35M towards a 2015 loan payment for the site of the former Michael Reese Hospital. This dates back to a deal Mayor Richard M. Daley made to buy the site so he could build an Olympic Village.
$19M for a lawsuit related to the parking meter deal. Ironically, Morgan Stanley, the firm the city chose to oversee the bond agreement, is a plaintiff in the lawsuit.
$62M for judgement against the city by Aqua Hotel. The city approved the hotel’s plan to build a public parking garage, which it wasn’t allowed to do under a separate agreement it made in 2006 to privatize downtown public parking garages. The agreement had a non-compete clause. Approving Aqua Hotel’s plan violated that clause.
$4M to terminate QTE equipment lease transaction
$180M to terminate a 2005 CTA Orange Line financing agreement
$75M in retroactive raises and pension payments for Chicago police officersthat date back to a 2014 contract negotiation the city made with the police union.
Two years of capitalized interest for the bonds. When Ald. Carlos Ramirez-Rosa (35) asked what would happen after the first two years, Brown said that when the city eventually sells the bonds, it will put in a debt service levy associated with the debt on the bonds for the life of the bond deal. That means after the first two years, both the principal and interest on the bonds will be paid with the property tax levy.
The cost to issue the bonds. Financial fees to underwriters.
Brown would not speculate on what she expects interest rates to be on the $1.1B in general obligation bonds, which she says the city hopes to sell later this summer. The city could end up issuing less debt, she says, depending on how much those rates could end up costing the city. Brown reiterated this point multiple times after several aldermen questioned whether it was appropriate for the city to incur additional debt at a time when the city already has too many bills to pay.
Brown said she was confident the city wouldn’t have any trouble finding buyers for the new debt, because the response to the city’s bond sale three weeks ago was “great” with six-times as many interested buyers as there were bonds. “We should see agressive rates on this transaction based on just the favorable feedback we are getting from investors and the rating agencies and the general direction of the city.”
Ald. Scott Waguespack (32), who voiced some of the committee’s most forceful criticism, quipped that the market would obviously be interested in junk bonds because it would mean a higher interest rate with a greater a greater return.
Ald. John Arena (45) demanded to know what plans the city had in place to bring in additional revenue. Arena said that other than, “fines here and fees here,” the city has yet to devise a revenue strategy other than threatening a property tax increase. He added that it was “irresponsible” for the city to issue new debt without a revenue plan. “Many here on the Council and many taxpayers finally want to see us actually paying our bills and [have] the administration telling us what it costs to run the city based on our past debt,” he said, accusing the city of once again pushing off long-term debt by issuing new debt.
Brown countered that not approving the plan would be more irresponsible because of the promises the city made to its lenders after the downgrade. She added the Emanuel Administration is committed to discussing new revenue proposals, but that would come later as part of a “larger discussion around not just this years budget, but budgets going forward.”
There was also some concern about the city’s lack of involvement with local, women and minority-owned financial firms. The deal is underwritten by Morgan Stanley, who employs William Daley, Mayor Emanuel’s successor as White House Chief of Staff, and the brother of former Mayor Richard M. Daley. Ald. Walter Burnett (27) and Ald. George Cardenas (12) spoke at length about their annoyance with the city for not doing enough to hire local, women, and minority-owned firms during bond sales. According to Brown, 50% of the financial fees associated with this bond deal will be paid to local firms and 30% will go towards minority and women-owned firms.
As the meeting approached the three-hour mark, the committee approved $3.65M in three financial settlements against Chicago police officers. Leslie Darling, with the city’s Law Department, provided a detailed brief of the first case and a short synopsis of the second and third settlements.
Mary Daniel as Special Administrator of the Estate of Joshua Madison, Sr., deceased, and Shaunda Rogers v. Estate of Chicago Police Officer Robert Campbell & The City of Chicago (13 C 1682).
According to Darling, Chicago Police Officer Robert Campbell and his partner fatally shot 21-year-old Joshua Madison, Senior Officer Campbell and his partner were responding to a report that drugs were being sold in a fast food parking lot. Mary Daniels sued the city for the wrongful death of Joshua Madison, Sr. on behalf of Madison’s two sons. Shaunda Rogers, who was in Madison’s car at the time of the incident, brought her own claims for assault, battery and intentional infliction of emotional distress. Darling recommended that the committee approve the settlement for the November 2, 2010 incident, because Officer Campbell, who was the city’s key witness to the event, died before the case made it to court. The plaintiffs had asked for $6M, but the Law Department brought the settlement down to $1M.
Dana Cross v. City of Chicago, Officers Macario Chavez, Mohammed Ali, and Matilde Ocampo, cited as 12 C 4263, Now known as Tunoka Jett v. City of Chicago, Officers Macario Chavez, Mohammed Ali, and Matilde Ocampo, cited as 12 C 4263.
Officers fired at 19-year-old Calvin Cross, Sr. 45 times during a foot chase. Officers believed Cross had a gun, according to Darling, but when the officers questioned Cross, he refused to comply and fled the scene, prompting the chase. A gun was later found at the spot of the first shooting, but since it wasn’t on Cross at the time of death, it would have been difficult for the city to prove it was Cross’ gun. The committee approved the Law Department’s recommendation to settle the case out of court for $2M.
Jose Salgado v. Hiram Gutierrez & City of Chicago (10 L 10568)
According to Darling, 39-year-old Salgado was riding his bike to work down a designated bike lane when Officer Hiram Gutierrez opened the door of his parked squad car, hitting Salgado. The plaintiff sustained neck and shoulder injuries that required $250,000 in medical surgeries. The committee approved the Law Department’s recommendation to settle the case for $650,000.
Other Items Discussed
There was no discussion of Ald. Will Burns’ (4) resolution requesting the state deny Spike Lee’s film company, Forty Acres and A Mule Filmworks, an application for a Film Production Tax Credit for his new film Chiraq. Ald. Burns could not attend the meeting. Chairman Burke also defered an ordinance to amend the Municipal Code concerning the sale of wood products made with formaldehyde. The committee approved various appointments and reappointments to nine Special Service Areas.
The Committee also signed off on two of the four ordinances proposed by the Department of Planning and Development. One of the approved ordinances [O2015-4195] is a redevelopment agreement to pay for infrastructure improvements for Amundsen High School. The other ordinance [O2015-4235] would approve a new loan agreement of $1.7M for Newberry Park Preservation Associates, LP. The other two ordinances [O2015-3708, O2015-4207] to approve a Class 7(c) Tax Incentive Classification for 1056-1520 E. 87th Street and a new redevelopment plan for Maple Park Marketplace in the 34th Ward were held in committee.