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*** UPDATED x1 *** Lightfoot patches almost a quarter of city deficit with bond refinancing scheme

Monday, Oct 21, 2019

* Press release…

Mayor Lori E. Lightfoot today announced the City’s plans to refinance existing debt, which are expected to generate $200 million in savings, representing nearly 25 percent of the $838 million Fiscal Year (FY) 2020 gap. The City will issue General Obligation (GO) and Sales Tax Securitization Corporation (STSC) bonds to refinance $1.3 billion in outstanding callable City GO and Motor Fuel Tax (MFT) bonds for savings.

To address the City’s growing cost of debt and other liabilities, the FY 2020 budget proposal, presented later this week, will prioritize sustainable solutions for the long-term. Importantly, the budget will not include any of the following one-time solutions: borrowing for settlements and judgments, scoop and toss restructuring, a significant draw down of reserves, or pension obligation bonds.

OK, but as Greg Hinz points out, this refinancing thing is itself a one-time savings with all of the proceeds booked in the first year

The old debt will be replaced with new bonds that carry a lower interest rate and with new sales-tax-securitization bonds, in which the city pledges motor fuel tax receipts to this purpose and this purpose only. The city says it will not be extending the maturity dates of the new debt beyond those specified in the old bonds.

Such a securitization was first begun by former Mayor Rahm Emanuel but is somewhat controversial because the funds involved will not be available for other use in the event of a recession or other unexpected development.

By booking all of the projected savings now, Lightfoot will be making up almost a quarter of the projected $838 million gap in her next budget. General interest rates have been running at near-record lows, even with the city’s so-so overall credit rating.

Not to say this is necessarily a bad idea. But this is a one-off dealio. Most of that $200 million in patched deficit will be back again next fiscal year. This just puts off the inevitable. As I’ve been saying, kicking the can is our official state pastime.

The plan will also divert motor fuel tax proceeds to bond payments. The bonded MFT revenue cannot then be used to fix roads and bridges or for new projects until those bonds are paid off.

*** UPDATE *** OK, maybe this is actually a bad idea. Greg updates

$200 million is the entire projected savings over the next two decades—the difference in debt service between the roughly 4.9 percent the city is paying on the current bonds that expire in 2040 and the 3 to 3.5 percent it hopes to pay by refinancing that debt, city Chief Financial Officer Jennie Huang Bennett said in a phone call.

But instead of taking those savings each year, as annual debt service comes due, the city will book the entire $200 million in projected savings in 2020, reducing the budget hole from $838 million to $638 million. That means debt service will rise in 2021 and thereafter, since the $200 million has already been “spent.”

Emphasis added. He also compares this to Rod Blagojevich booking his pension bond savings up front.

- Posted by Rich Miller        

18 Comments
  1. - ChicagoBars - Monday, Oct 21, 19 @ 1:33 pm:

    Lockbox amendment didn’t cover home rule transportation taxes?


  2. - TheInvisibleMan - Monday, Oct 21, 19 @ 1:40 pm:

    Will Tillman be filing another one of his ’special’ lawsuits against these bonds as well?

    He doesn’t seem like a guy who knows when, or how, to stop digging.


  3. - Blue Dog Dem - Monday, Oct 21, 19 @ 1:42 pm:

    I ask frequent posters Demorilized and Grandson on Man, what the solution to Chicagos financial woes are.

    I have maintained for years that the mayor must lobby the legislature for a city earnings tax.


  4. - Oswego Willy - Monday, Oct 21, 19 @ 1:45 pm:

    === I have maintained for years that the mayor must lobby the legislature for a city earnings tax.===

    With the progressive income tax on the ballot, you think this governor will be willing to help find those votes?


  5. - njt - Monday, Oct 21, 19 @ 1:49 pm:

    ===General interest rates have been running at near-record lows, even with the city’s so-so overall credit rating.===

    Will be interesting to see how this is addressed if and when we get to negative rates. Does seem to be another factor that could lend itself to future refinancing strategies.


  6. - Blue Dog Dem - Monday, Oct 21, 19 @ 1:51 pm:

    …the plan will divert MFT proceeds until the bonds are paid off.

    This is about as last ditch as it gets.


  7. - Charlie Brown - Monday, Oct 21, 19 @ 1:57 pm:

    Fake it til you make it.

    Any other Democrat would be sliding under the broiler right now over at the Tribune editorial board, which has consistently opposed borrowing by Democrats as a stopgap measure.

    Rauner borrowing billions from state vendors at credit card interest rates was a-okay, and $5 says Chicago Tribune gives lightfoot a pass as well.


  8. - Nagidam - Monday, Oct 21, 19 @ 1:59 pm:

    Man I miss the days of the Gross Receipts Tax. A city earnings tax has nothing on the GRT.


  9. - Pelonski - Monday, Oct 21, 19 @ 2:00 pm:

    Buying back outstanding bonds and replacing them with new bonds at a lower rate and with the same maturity date is generally good government policy. Adding all the savings to the first year is not. About the only time that makes sense from a long range perspective is when you are making other serious budget changes that will only start showing up in year 2 of your budgeting.


  10. - 17% Solution - Monday, Oct 21, 19 @ 2:04 pm:

    “ About the only time that makes sense from a long range perspective is when you are making other serious budget changes that will only start showing up in year 2 of your budgeting.”
    Enter legal marijuana and a casino.


  11. - NeverPoliticallyCorrect - Monday, Oct 21, 19 @ 2:27 pm:

    This is playing at the margins. Unless they find a way to either generate spectacular returns (highly unlikely) they have to cut expenses. Including, most importantly, across the board pay cuts. If they continue to tax people and business the exodus will begin again. Difficult choices but if you don’t do it now this pain won’t just go away.


  12. - Chicagonk - Monday, Oct 21, 19 @ 2:34 pm:

    @ChicagoBars - There is a case working it’s way through the court system now. Initial ruling by a Cook County judge favored home rule jurisdictions, but I wouldn’t be surprised if this ends up with the state supreme court.


  13. - Dybalaton - Monday, Oct 21, 19 @ 2:52 pm:

    Great idea to refinance higher interest rate debt for lower interest rate debt, but how can you take all the savings in one year? Is that legitimate accounting?


  14. - ChicagoBars - Monday, Oct 21, 19 @ 2:55 pm:

    Thank you Chicagonk. Found the lawsuit which looks very ongoing in the appellate court. Much appreciated.

    https://cookcountyrecord.com/stories/511868542-judge-state-constitution-doesn-t-force-cook-county-to-spend-250m-more-on-roads-transport-projects


  15. - DarkDante - Monday, Oct 21, 19 @ 4:26 pm:

    ==I ask… what the solution to Chicagos financial woes are.==

    There ain’t no magic bullet, so stop looking for one. The true solution would have to be multifaceted, and would require rethinking our current tax structures. Extending the sales tax to services is a piece of it. After 2020, when it may become more politically palatable to do so, a city income tax may well be a part of it. The the city needs to look at meeting its expenses more consistently. Finding more stable sources of revenue to pay for infrastructure is a part of it (congestion fee, temporary ride hailing fee). Allowing TIF’s to sunset will expand the property tax base, freeing up some new revenue via property taxes. More money from the State (via the new ed funding model as well as an increase to the LGDF) is a huge part of restoring fiscal order to Chicago’s house.


  16. - Dybalaton - Monday, Oct 21, 19 @ 4:48 pm:

    DarkDante, some good points for sure. Especially the need to continually focus on the spending side. The problem with phasing out TIFs is that the vast majority of the funds go to CPS, Chicago Park District, affordable housing development, CTA, and other public infrastructure. So there is very little to be had by sunseting TIF. It would simply shift the source of funding on those things. Unless you are suggesting we cut spending on those items?


  17. - Da Big Bad Wolf - Monday, Oct 21, 19 @ 5:57 pm:

    3.0 to 3.5 is still better than 4.9 in actual dollars no matter how you write it in the book.


  18. - revvedup - Tuesday, Oct 22, 19 @ 7:47 am:

    Lightfoot did an onside kick and recovered the ball by doing this. She’s buying time for the casino deal, and telling City taxpayers she did something without raising taxes *this time*. She’ll be looking all over the budget for “refi” plays like this.


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