Creating a workaround for new CPS debt?
Friday, Jun 24, 2016 - Posted by Rich Miller
* AlderTrack…
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.
Thoughts?
- Anonymous - Friday, Jun 24, 16 @ 9:28 am:
A financially sick city buying the debt of a financially lame school system? What could go wrong?
- Jerry - Friday, Jun 24, 16 @ 9:28 am:
Seems like kicking the can and making it larger.
- Ottawa Phil - Friday, Jun 24, 16 @ 9:29 am:
In other words, chasing returns from sister organizations too. Desperate move as legitimate markets/opportunities close given the magnitude of debt being carried now & the junk-rated status of the City’s creditworthiness.
- illinois manufacturer - Friday, Jun 24, 16 @ 9:31 am:
QE Illinois
- Moe Berg - Friday, Jun 24, 16 @ 9:33 am:
There’s no help coming from the state as long as Rauner is governor and Dems don’t have a functional House super-majority. Chicago will need to solve its own problems and be its own hostage rescue squad. Think creatively, take away the gov’s leverage.
- wordslinger - Friday, Jun 24, 16 @ 9:35 am:
At first blush, I’m guessing it is some kind of workaround scheme; a private placement of CPS debt directly to the city, perhaps to bond out annual pension contributions over a longer period of time.
That’s just a guess, and it’s pointless to speculate any further without seeing a lot of paperwork.
- Anonymous - Friday, Jun 24, 16 @ 9:36 am:
For CPS, this just substitutes the credit of the City of Chicago for that of the School District. Sort of like the New York Municipal Assistance Corporation bailed out the City of New York bonds decades ago.
For the City, this just concentrates risk and bad credit.
- LakeviewJ - Friday, Jun 24, 16 @ 9:38 am:
Pair this with pension parity and (ideally) another property tax increase and it seems like it could be a reasonable path forward. Certainly no less risky to all involved than bankruptcy.
- Hit or Miss - Friday, Jun 24, 16 @ 9:43 am:
This sounds like a very high risk attempt at financial engineering with little possible upside for the taxpayers of Chicago. It brings back images in my mind of what happened with Chicago’s parking meter deal. Could something like that happen again if this idea is approved by the city council?
- TinyDancer(FKA Sue) - Friday, Jun 24, 16 @ 9:54 am:
Check.
Interesting…..this might actually work…..maybe the mayor ISN’T working hand in glove with the governor after all.
- cdog - Friday, Jun 24, 16 @ 9:54 am:
Bernanke would be proud. Bring him in as a consultant. /s
- wordslinger - Friday, Jun 24, 16 @ 10:01 am:
MAC was a State of New York play. They took some city sales and service taxes and converted them to state taxes, then refinanced and issued new city debt with the state’s GO, giving the debt exponentially greater coverage and marketability.
I don’t know what Emanuel is talking about here, but I certainly don’t see Rauner signing off on a state role in CPS debt.
- Ghost - Friday, Jun 24, 16 @ 10:13 am:
so the city would lend itself money and pay itself interest on the money via these sister entities. many of the organizations are able to capture federal funds, so this in essence allows them to capture federal money to add to their income. A good idea. the folks above looking on it mgatively are missing that becuase of the presence of fed funds etc this actually adds new rev in addtition to providing operating capital
- Sue - Friday, Jun 24, 16 @ 10:14 am:
This is almost as good an idea of forcing insurance companies to insure people already sick- we know how that is working out. If Rahm buys CPS paper with public money he should be impeached
- From the 'Dale to HP - Friday, Jun 24, 16 @ 10:17 am:
Ignoring the transparency issues for a second, this is extremely high risk and most likely bad policy. The biggest concern should be that doesn’t fix CPS’ structural issues; maybe this buys them a year and not as many layoffs in the fall. Maybe. And how City bondholders would react is unknown, but you’d guess they won’t like it.
CPS does need cash, and it needs it now. But again, no one seems to want to address CPS’ structural issues in Springfield or at the City. So here we are, another stop gap that could easily blow up in taxpayers faces.
The timing of this couldn’t be worse too. We’re six months from the end of the year for the pension systems, but if what happened yesterday/today triggers a bad year for the markets (and it might); the Chicago pension systems*, already a mess, will be in worse shape and now they’d be holding a few hundred of million CPS debt which no one seems to want.
*Would also apply to Illinois, but that’s another day.
- Rod - Friday, Jun 24, 16 @ 10:31 am:
Just a great idea, this debt will be golden - NOT.
- TinyDancer(FKA Sue) - Friday, Jun 24, 16 @ 11:14 am:
=If Rahm buys CPS paper with public money he should be impeached=
So, the governor is attempting to destroy and liquidate the public school system of the state’s biggest city and financial engine, but the mayor should be impeached for using public money to fund and save public schools?
- cdog - Friday, Jun 24, 16 @ 11:15 am:
“This is almost as good an idea of forcing insurance companies to insure people already sick- we know how that is working out.”
Not good Sue, not good.
(I could not let that go….Thank goodness this is a GOP mindset, on whom the sun will soon set.)
- Sue - Friday, Jun 24, 16 @ 11:20 am:
Tiny- Rich Daley destroyed Chicago- Rauner is just trying to prevent the State from following suit
- TinyDancer(FKA Sue) - Friday, Jun 24, 16 @ 11:23 am:
Sue-
Rich Daley was enabled by the state’s Republican governor and general assembly.
- JS Mill - Friday, Jun 24, 16 @ 11:42 am:
I would be interested in hearing from AA and RNUG on this but it sounds interesting. I am not sure where the money will come from though.
Schools and other municipalities can already by municipal binds. Recent legislation allows that. So I am not sure why Chicago needs an ordinance to allow it unless something in the ordinances prevents it.
- Put the Fun in unfunded - Friday, Jun 24, 16 @ 12:41 pm:
Probably need the ordinance because they would be buying non investment grade paper. Normally public bodies have to put their money in investment grade debt.
- Sue - Friday, Jun 24, 16 @ 12:46 pm:
If any City Pension Board were to approve purchasing CPS junk bonds Chris Krislov would be in Court in a heart beat suing the boards for breach of fiduciary duty
- Juvenal - Friday, Jun 24, 16 @ 1:10 pm:
if CPS is having to borrow money in the market at 8.5%, and the city pension funds want to buy those bonds instead at 7.5%, meeting their target, this is a win for everyone.
- Whatever - Friday, Jun 24, 16 @ 2:37 pm:
Juvenal ==if CPS is having to borrow money in the market at 8.5%, and the city pension funds want to buy those bonds instead at 7.5%, meeting their target, this is a win for everyone.==
On its face, yes. But it would also make allowing CPS to file bankruptcy an even sweeter deal for the anti-Chicago elements. CPS files for bankruptcy, the unions and retirees take a big cut, and the city’s pension funds take a big hit on the bonds, bringing them and the city down. All with one little piece of paper! Not that I’m paranoid or anything.
- Sue - Friday, Jun 24, 16 @ 2:56 pm:
Juv- a job at either Blackrock or Goldman is not for you
- Ghost - Friday, Jun 24, 16 @ 3:15 pm:
Sue insurance companies have been required to insure sick people for decades. Its the standard draw of large grp policies. they just didnt donit for small grp/buisnesses and individuals. but if you treat individuals as a large grp pool it can work out. the design of insurance is to spread out the cost to a large grp.
- Whatever - Friday, Jun 24, 16 @ 4:27 pm:
== but if you treat individuals as a large grp pool it can work out. the design of insurance is to spread out the cost to a large grp.==
Insurance is to spread the RISK around. If you let people buy auto insurance only after the accident, no one would buy it before an accident and the insurer would have to charge a premium that equaled the average cost of an accident just to break even. The ACA can force insurers to “insure” pre-existing conditions only because it has fines for people who don’t buy insurance, and only time will tell if the fines are enough to make it work.
- Arthur Andersen - Friday, Jun 24, 16 @ 4:43 pm:
Whatever 4:27, agree with your post.
I don’t have enough detail on the Chicago proposal to go thumbs up or thumbs down, but a couple quick thoughts:
-It ain’t what Bernanke did. He had a license to print more dough if he needed it-Rahm doesn’t.
-The State Pensions are limited to 10% holdings in State of Illinois debt, and as a matter of practice, the actual amount tends to be negligible. I don’t have a copy of the Pension Code handy, but Chicago may have a similar cap on City debt.
-I wouldn’t be for this as a Pension Board member with fiduciary responsibility-the bonds are junk and pension funds have no business buying junk bonds unless it’s part of a carefully executed strategy carried out by a professional investment firm with demonstrated expertise. (e.g. Oaktree-the firm that is trying to get Ferro “tronc’ed) This is not that.