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‘The Chicago Way’ of Running Up Debt

Robbing Peter and Paul to pay Lucifer is not a good deal

by
Rick Moran

Bio

February 6, 2014 - 10:58 pm
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Chicago Mayor Rahm Emanuel is preparing to issue nearly $1 billion in bonds this year, continuing a practice begun under his predecessor Richard M. Daley to fund short-term budget shortfalls by issuing bonds intended for long-term capital improvements. The mayor is also seeking to double the city’s short-term credit line to $1 billion. Also, $1 billion in bonds will be issued to fund improvements at Midway, Chicago’s secondary airport.

Chicago is virtually unique among big-city governments because it doesn’t have to go hat in hand to voters asking for permission to issue the bonds. All that’s needed is for the mayor to get approval from his rubber-stamp city council and…poof! Instant cash. For this go-around, the council didn’t even bother to debate the measure. Truth be told, there aren’t very many fiscal conservatives in the Chicago city government.

Just what is the mayor obligating future generations of Chicagoans to pay?

On Monday, Scott said the city plans to issue between $400 million and $450 million in bonds in March and the rest in the second quarter. Between $180 million and $200 million would be used to refund bonds, a move that could save the city money over the long haul.

But the city also would restructure up to $130 million in debt “to better align revenues with our obligations,” Scott said. That would push debt off 10 years further into the future and increase the overall costs.

At the same time, the city would take on between $90 million and $100 million in debt to pay off legal settlements made last year. The bulk of those settlements were made in connection with police misconduct cases.

The city’s current bond debt of $18 billion doesn’t include the $27 billion in unfunded pension liabilities of teachers and municipal unions. The school district recently closed nearly 50 schools and cut 3,000 jobs due to a billion dollar budget shortfall — largely the result of a massively underfunded pension system that Fitch rating agency estimates is only 54% funded.

And the teachers are the lucky ones. Other municipal unions are much worse off. Collectively, the city’s pension funds are only about 33% funded, according to Fitch.

Taking on long-term debt to paper over short-term expenses is the way to ruin, according to former auditor general for Detroit Joseph Harris. “It’s like a cancer,” he said. “You may not know that you have this affliction until all of a sudden you’ve got a tumor the size of a grapefruit in your intestine.”

The state of Illinois passed their version of pension “reform” late last year, part of which obligated the city of Chicago to make a $590 million contribution to the city’s pension funds in 2015. They don’t have it and aren’t likely to get it in time. The city is hoping the state lets them slide, which will only kick the can down the road further and make insolvency more of a reality.

How did Chicago get to this point, where actuaries say that if nothing is done to address the pension crisis, the funds will begin to become insolvent by 2022?

This is a parable you won’t find in the New Testament, although it might appear in the Egyptian Book of the Dead. It’s a gruesome story of bad government, bad management, short-sighted politicians, and, of course, corruption. But not the usual kind of corruption where an alderman uses city funds earmarked for one project to fund another that benefits his cronies. That kind of corruption is peanuts compared to the corruption of civic virtue that all this represents. It is immoral to use the power to issue debt obligations intended to benefit all in the long term to cover the day-to-day operations of city government, while kicking the can down the road, forcing a future city administration to deal with the catastrophe. It’s not only immoral, but cowardly. Millions of current and former city workers have their retirements put at risk because Rahm Emanuel and the Democratic politicians that run the city government refuse to face a crisis created by their predecessor.

Some figures tell the story. Between 2000-2012, Chicago racked up $9.8 billion in proceeds from general obligation bonds. A Chicago Tribune investigation revealed some astonishing facts:

When the Tribune analyzed $9.8 billion in proceeds from general obligation bonds issued from 2000 to 2012, it found that nearly half of the money went to paper over growing budget problems. Among the findings:

City officials used about $3 billion to settle one-time legal expenses, cover closing costs on the bonds, pay off short-term bank loans and buy vehicles and other relatively short-lived equipment.

Even more money went to refinance old bonds. That’s smart if it saves money. But the city put $1.8 billion toward deals that will end up costing taxpayers millions more in the long run by racking up years of extra interest payments.

Less than a third of the total borrowing — $3.2 billion — went to capital improvements that might benefit future generations. Even in this category, the newspaper found hundreds of millions of dollars in questionable spending on short-lived items.

Since 2007, the city council has approved $7.6 billion in bond issuances — without a single dissenting vote. Why should they complain? All 50 aldermen receive a slush fund known as “Aldermanic Menu money” — about $1.3 million each — to spend on “infrastructure” projects like fixing a street light or filling in a pot hole here and there. You can imagine the creativity aldermen use to define the word “infrastructure. Alderman Leslie Hairston should get a vote for most inventive use of the “infrastructure” fund. She paid the Chicago Park District meter fees for 100 prime parking places at a beach along the Lake Michigan shore — to be used by friends, neighbors and cronies — and then had the gonads to claim that the Park District promised her to use the money for “capital improvements” at the South Shore Cultural Center.

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All Comments   (10)
All Comments   (10)
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What time is it? Its BAILOUT time!
25 weeks ago
25 weeks ago Link To Comment
Look, this is Chicago. It's how things are done there. Some say that Chicago is run by the unholy triad of the political establishment, the unions, and the Syndicate. Oh, the Syndicate is no longer in the picture? The politicians took over that function? Now, consider that the Chicago Way has been extended to Washington, DC. very missionary-minded, no? "Wider still, and wider / Shalt thy bounds be set---"
25 weeks ago
25 weeks ago Link To Comment
Is anyone actually surprised by this?
25 weeks ago
25 weeks ago Link To Comment
Living in another State, I'm inclined to say - so what? the residents of Chicago deserve exactly what they have voted for. However, as with the large debts incurred by some States, I am confident that some day they will turn and expect the federal government (and my tax dollars) to pay off all these debts. I hope there will be enough fiscally solvent States left to tell the debtor cities and States to go to h*ll, but I'm not terribly optimistic.
25 weeks ago
25 weeks ago Link To Comment
Naawww! They'll get the Fed to do it by buying their toxic junky bonds as the Fed did for the big banks by buying up those toxic junky mortgage bonds. It's not real money, after all. Just no doc credit. There's hardly anyone now that knows what real money is any more. The government certainly doesn't. the House of Morgan does, though.
25 weeks ago
25 weeks ago Link To Comment
Help me here, how many cities are there that have been run by conservatives for the last 20 or 30 years are going broke or are in deep financial trouble?
25 weeks ago
25 weeks ago Link To Comment
"Taking on long-term debt to paper over short-term expenses is the way to ruin..."

This is how our "Adult" Democrats operate - incur debt for frivolous or nonsensical reasons, and then kick that can down the road for someone else to deal with.
25 weeks ago
25 weeks ago Link To Comment
Chicago is a city known for one-party rule for the better part of the last century. This is the way Democrats run government - over-promising benefits to their union cronies and other supporters that tax revenues cannot pay for, then running up massive public debt. This is the same way Democrats (too often with Republican help) have run big cities, states and the federal government. On the national level, what are the odds we (or or great grandchildren) will ever pay off the $17 trillion in debt we have now or the $20+ trillion debt that we'll have by the time Obama leaves office?
25 weeks ago
25 weeks ago Link To Comment
Chitown Financial Planning:

Luck be a lady tonight
Luck be a lady tonight
Luck if youve been a lady to begin with
Luck be a lady tonight
25 weeks ago
25 weeks ago Link To Comment
Now I've got a Guys and Dolls ear worm in my head.
25 weeks ago
25 weeks ago Link To Comment
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