‘The Chicago Way’ of Running Up Debt

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? ^[1]

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 ^[2] 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. ^[3]

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 ^[4]. “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 ^[3] 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 ^[5] 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 ^[6]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.

With no pushback from aldermen — except to complain ^[7] that not enough women and minorities in the financial industry would handle the bond letting — city officials will go their merry way, spending money they don’t have today, won’t have tomorrow, and may never have if this profligacy bankrupts the city.

Besides the aldermanic slush fund, some other interesting projects these bonds pay for bear mentioning: ^[8]

The city of Chicago took control of three hulking warehouses on West Pershing Road for $1. But it was hardly a bargain. Over the last nine years the city has used more than $41 million in borrowed money to repair and retrofit the behemoths — even after a top official warned they were a “financial sinkhole.” Today much of the space isn’t being used, and there is no end in sight to the repairs. The buildings, with their shattered windows and leaky roofs, stand as a decrepit monument to Chicago officials’ indiscriminate borrowing and spending. In analyzing the city’s capital expenditures from general obligation bonds, the Tribune uncovered speculative purchases, shortsighted building projects, puzzling choices and massive overspending. And because Chicago is not required to put referendums before voters before issuing bonds, political leaders rarely pay a price for their poor choices. After all, they can always just borrow more money.

Another financial “sinkhole”: warehouses formerly used by the Chicago school district. According to the Tribune report, more than $40 million has been thrown at these buildings over the last decade. A building inspector still says they are “dangerous and hazardous.”

The school district itself has become a financial sinkhole. From 1996 to the present, the Chicago Public Schools has spent the proceeds from $10 billion in bonds. Without regard to demographics — including a rapidly shrinking population of school-age children — the CPS repaired, expanded or replaced the vast majority of the district’s schools regardless of future needs. More than $1.5 billion was poured into schools that today are less than 60% full.

The consequences of all that borrowing became evident last fall when the CPS closed all of those schools and fired thousands of workers. In order to service the debt, the CPS used money from the state that should have gone to fund things like textbooks and student activities. In 2011, 25% of the state’s unrestricted general education aid — the per-pupil money that most school districts count on to fill the gaps in their operating budgets — was spent by the CPS solely to pay off interest on the bonds.

The city is using bonds to buy things that will have long outlived their usefulness by the time the bonds are paid off.

The city in 2005 bought $21 million worth of spare parts for its fleet of cars, dump trucks, street sweepers and other vehicles. Accounting documents filed at the time said the parts would last three years, but paying off the bonds used to cover them will take at least 12 years and increase the total cost to $30 million.
The cost of library books and other materials bought with bond money in 2011 by the Emanuel administration will have nearly doubled by the time the first principal payment is due in 2032, a decade after city accounting documents say the books will reach the end of their usable life.

In 2003, the city spent $700,000 to purchase software for Palm Pilots, the precursors of smart phones. In a few years, the software was obsolete but the city wasn’t due to make its first principle payment on those bonds until 2011, adding $250,000 to the actual cost of the software.

The most egregious use of bond money by the city is technically illegal. Chicago faces tens of millions of dollars in legal judgments related to past and present court and arbitration cases. About $100 million from this latest bond letting will go to pay settlements related to police misconduct cases. While the IRS says that’s illegal, the city gets around it by exploiting an exception in the rules for “extraordinary expenses.” They’ve used the same gimmick in the past. Last year, the city used proceeds from bonds to cover a $54 million settlement “awarded to African-Americans who were denied a chance to become firefighters by a 1990s entrance exam that favored white applicants.”

The bonds used to pay for that $54 million settlement won’t begin to be paid until 2033, at which point interest will have more than doubled the total cost.

Useless software, library books, garbage cans, short-term bank loans, even interest payments on the bonds themselves — all of these and thousands more items have been paid for using the proceeds from bonds that were meant to benefit the city decades from now so that taxpayers who would be paying off the debt could still profit from the spending of the city government that issued the bonds.

Now, those future taxpayers will be saddled with billions of dollars in bills that should have been paid at the time the bonds were issued and not pushed off for another generation to be burdened with.

It seems clear that not only is the Emanuel administration reluctant to tackle the hard fiscal choices necessary to get the day-to-day city budget to balance, but they also lack the courage to face the public employee unions in order to begin to address the ticking pension bomb threatening the city itself. If they can’t find it within themselves to do what is necessary, the only recourse is for the people to demand reforms that will take the power to issue bonds without voter consent away from them in order to bring some sanity back to city government. They are crank addicts who own their own cooking lab and are so addicted to debt that only an intervention by taxpayers can save them — and the city.

Robbing Peter and Paul to pay Lucifer is not a good deal. The people of Chicago better hope that the city fathers realize that before the present crisis leads to catastrophe.

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