With recent attention focused on the budget drama in Chicago, you’re forgiven if you missed what could end up being a yet-bigger story with perilous long-term consequences for this city.
The city floated $454 million in bonds on Nov. 19, and $75 million of those went unsold.
More precisely, Goldman Sachs, which underwrote the deal, was left holding the $75 million after the bank couldn’t find buyers for that amount, according to Bloomberg News. And, making matters worse, the bonds that were sold moved only after Goldman boosted interest rates beyond what the city forecast in order to entice the buyers.
These bonds weren’t issued to finance new spending. Instead, these securities refinanced bonds already on the city’s books, some of which were backed by sales tax revenues and so were about as safe an investment in the city of Chicago as an investor can make these days.
Which begs the question: How will investors respond when they’re next asked to bankroll hundreds of millions in new spending?
If the markets already perceive Chicago as such a fiscal basket case that there’s tepid-at-best appetite for the most risk-free debt the city has to offer, it’s not a stretch to worry that the city will struggle to finance future needs.
Mayor Brandon Johnson’s administration surely isn’t helping to reassure investors by proposing the City Council approve a record-setting $3.8 billion bond authorization.
Johnson’s finance team wants $2 billion of that amount for refinancing, which it thinks can save the city money on debt-service payments. As for the remaining $1.8 billion, $1.3 billion would go for future infrastructure spending. Another $451 million in bond authority would be earmarked to cover $166 million in back pay due Chicago firefighters after the city struck a collective bargaining agreement following years of negotiation, with the remaining $285 million earmarked for current and future legal settlements tied mainly to past police misconduct.
That’s a lot of cash, needless to say. And thus far the council has been reluctant to give its approval.
The trepidation is appropriate, since S&P Global downgraded Chicago’s credit early this year and recently slapped a negative outlook on the city’s rating.
In this ocean of new debt authority Team Johnson is seeking, there’s an important point many have overlooked until now. At least in terms of new infrastructure spending authority, the city has a total of $2.4 billion at its disposal from past capital bond authorizations.
You read that right: It already has, but has not yet used, $2.4 billion.
That includes $754 million from the $830 million the council narrowly approved in February. But it came as a surprise to us that the city has another $1.4 billion of bond authority left from a $1.85 billion ordinance passed in 2022 and a separate $235 million from an ordinance first passed in 2020.
In other words, why in the world is the city asking the City Council to endorse another $1.3 billion for future capital projects right now when there’s so much authority left untapped and markets are jittery about Chicago’s debt load as it stands?
A Johnson spokesperson told us this has been routine practice and that much of the bond money authorized now wouldn’t be issued for years to come.
We spoke last week with Ald. Bill Conway, 34th, vice chair of the council’s powerful Finance Committee, a potential mayoral candidate and a frequent critic of the administration’s financial management. He made the point that the city seems to have no need for more infrastructure bonding authority right now. He supports providing authority only for refinancing, which makes sense to do because it saves on debt service costs (if done right).
We wholeheartedly agree. This is no time for business as usual, which seems obvious to everyone other than the pollyannas on the fifth floor.
Left unaddressed by this approach, though, is how to cover the $166 million in firefighter back pay that the mayor is proposing to handle via borrowing. Likewise, there’s another $90 million in settlements tied to multiple misconduct cases involving former Chicago police Sgt. Ronald Watts that as of now is included in the mayor’s proposal to borrow another $285 million for settlements.
We’ve written before how Johnson’s plan to borrow to pay for operational costs is a terrible fiscal practice, one in which the city used to engage routinely and wisely stopped years ago. Investors feel the same way, as do credit ratings agencies like S&P.
Consider then how the bonds to cover such costs, if the council agrees to authorize them, will be greeted if and when the city attempts to sell them.
As of now, the city estimates the interest payments on the proposed $285 million, five-year debt for the legal settlements would total $42 million. For the three-year debt proposed to cover the firefighters deal, the estimated total interest is another $16 million.
Given the investor reaction to the city’s refinancing deals last week, it would seem the interest estimates on the bonds for operations will run significantly higher than the current estimates.
All of this is to say that, with all the understandable focus on the mayor’s egregious taxes, his exorbitant debt plans haven’t gotten the attention they’ve deserved. But as it trims the budget sails, the council also needs to scale those debt allowances way back, ideally to permit only money-saving refinancings.
And if aldermen don’t want to listen to us on that score, they still should heed the blunt message the market delivered to Chicago last week.
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