On Wednesday, City Treasurer Kurt Summers proposed an ordinance to City Council that would impose striking new changes to the city’s investment policy allowing the City of Chicago to purchase debt issued by sister agencies like Chicago Public Schools.
The proposed changes, introduced by Mayor Rahm Emanuel at the request of Treasurer Summers, would allow the city to invest in “tax anticipation warrants, municipal bonds, notes, commercial paper or other instruments representing a debt obligation” from sister agencies, including the Chicago Board of Education, the Chicago Housing Authority, the Chicago Park District, the Chicago Transit Authority, and the City Colleges of Chicago. Officials from the Treasurer’s office would not comment on the record about whether the move was designed to float CPS during its fiscal crisis.
For the city to invest in bonds for the state, any other county, township, or school district outside of Chicago, the bonds must meet certain requirements, including a rating of at least A-, a maturity of no more than 30 years, and cannot exceed 25% of the total holdings across all funds. The same limitations would not be true for sister agency investments, according to the new proposed rules.
The Board of Education’s most recent ratings from Moody’s are four levels below junk status, which led to an extraordinarily high 8.5% interest rate when it hit the open market in February.
According to the same official from the Treasurer’s Office, there are no limits to the type of sale either, meaning the city can also buy the debt through a private or “over the counter” sale, rather than just on the open market. CPS would be able to issue debt of its own, at potentially a much lower interest rate than the open market would fetch, because it could have a guaranteed buyer in the City of Chicago.
This introduction comes the same week that Governor Bruce Rauner has again pushed for the state to authorize bankruptcy for CPS.
This move could mirror another major municipal bailout. In 1975, triggered by a fiscal crisis in the City of New York, the Teachers’ Retirement System of the City of New York and four other municipal pension funds agreed to buy $2.53 billion in city bonds over roughly two years to avoid bankruptcy for the city. At the time, New York’s Board of Education was short $268 million, and was forced to lay off about 14,000 teachers and 7,000 other educators. Then-Gov. Hugh Carey pushed the State Legislature to set up the Municipal Assistance Corp (jokingly referred to as Big MAC), which sold bonds on behalf of the city, backed by New York City’s sales and stock transfer taxes. Just as the city was on the brink of default, the United Federation of Teachers, the teacher’s union, agreed to furnish $150 million from its pension fund to avert the crisis.
The Chicago Treasurer’s office was unable to immediately report on the current liquidity of its long-term investments yesterday evening, but according to the Treasurer’s most recent quarterly earnings report, the city has over $4.75 billion in long-term investments (commercial paper; corporate, municipal, and agency bonds), and $1.3 billion in short-term investments (certificates of deposit, money market funds, and cash).
The other proposed tweaks to investment policy would also allow investment in mortgage backed securities, under certain circumstances, and changes the classes of assets the city can invest its cash in.
According to City Council’s Financial Analyst, Ben Winick, the proposed changes limit the kinds of corporate bonds the city can buy: companies must have assets of at least a billion (the previous ordinance was $500 million), and the city’s portfolio will be made up of fewer corporate bonds: it’s now limited to 25% instead of 30%. The city would also be allowed to purchase mortgage backed securities as part of the asset portfolio. Investors can receive interest and principal payments made on mortgages that have been packaged together.
Those in the Treasurer’s office authorized to execute investment transactions must sit through an investment training session within the first year at the job, and an extra ten hours of instruction on “investment controls, security risks, market risks, diversification of investment portfolio and compliance with applicable laws.”
The changes “increase investment security by ensuring that the corporations we invest in are well capitalized,” spokesperson Alexandra Sims with the Treasurer’s Office said. The changes would also “enable investments in Chicago.” Though no details were provided in the ordinance itself, Treasurer Summers previewed the creation of a $100 million local investment fund, “a free-standing, independent non-profit investment vehicle comprised of capital from a variety of sources including institutional investors” aimed at providing capital to small businesses and real estate developers.