Chicago Mayor Rahm Emanuel’s financial team will soon decide whether to recommend the city borrow billions to shore up its ailing public pension funds — a move some experts call risky but that Emanuel allies maintain could save taxpayers money and ease the pain from future pension-related tax increases.
City Chief Financial Officer Carole Brown said she could give Emanuel her recommendation by the end of the month or early September. The city might end up borrowing more than $10 billion, depending on the details, she said.
But Brown countered criticism from some, including mayoral challenger Paul Vallas, that the plan is being fast-tracked toward approval, saying she has not yet decided on the plan.
The idea under consideration is for the city to issue bonds at relatively low interest rates and use the money to reduce its $28 billion in pension debt. The pension funds would invest the bond proceeds and ideally earn returns that outpace the interest the city would have to pay on the bond debt.
Brown gave closed-door briefings to groups of aldermen at City Hall on Thursday. The City Council, which nearly always sides with the mayor on his major economic plans, would need to sign off on the borrowing proposal.
Brown’s PowerPoint presentation said the bonds would “provide significant reduction in cost of pension debt,” “materially improve the funded status of the pension funds” and “decrease the total amount of additional revenue required to fund pensions, saving billions for Chicago taxpayers.”
The plan “will not” add “additional reinvestment risk,” the PowerPoint said.
But that isn’t entirely true, as there’s risk that with another major economic downturn, the pension funds could lose a substantial amount of their invested money. Then the city could end up on the hook for both bigger contributions to the city’s four pension funds and the interest on the pension bond debt.
Pension bonds in Puerto Rico, Detroit and Stockton, Calif., contributed to their bankruptcies, prompting some fiscal analysts watching Chicago’s moves to urge caution.
Asked why pension bonds ran into problems in other places if it’s such a good idea, Brown said, “I’m not sure if what we will end up proposing will be identical to what those other municipalities did.”
“What I’m trying to look at is whether or not there’s an opportunity to refinance some of our more expensive pension debt with lower … debt,” Brown said. “And I have to do that looking in the context of what it can do for the city, and mitigate the risk that I can that confronts the city, and not look at what other municipalities did.”
Each situation is different, she said, as “every municipality has a different set of facts that they’re trying to work for.”
In addition to possible financial benefits touted by the Emanuel administration, moving forward with the plan could also provide political cover to the mayor as he runs for re-election.
Emanuel and the City Council already have increased city taxes by more than $820 million since 2015 to boost contributions to the city’s four worker pension funds. Pension payment increases coming due after next year’s elections could dramatically compound that pain.
If Brown were to recommend issuing a pension obligation bond, Emanuel could tell voters he has a plan to address that problem while making sure future tax increases are less than they would be otherwise.
Ald. Scott Waguespack, 32nd, a frequent Emanuel critic, said Brown did little to convince him Thursday that the mayor’s administration would adequately address aldermen’s lingering concerns that the bond plan would put the city at risk before asking them to vote on it.
“We were trying to press her on different scenarios, like what would happen if the market fell, or the housing market took a big hit, and she said she could play around with a few different things but she didn’t have anything specific for us (at the briefing),” Waguespack said.
“So we said to her, ‘Well, when are you looking to move forward?’ and she said ‘late August,’ ” Waguespack said. “And we said, ‘It is late August.’ She then said, ‘Oh, I mean early September,’ and we said, ‘What?’ ”
Longtime Ald. Joe Moore, 49th, a reliable Emanuel ally, said city officials “understand that they are working under a microscope and they’re going to have to justify” any recommendation. He said any proposed plan needs to be “done right and thoughtfully.”
“We have to do it with the point of view of not kicking the can down the road and making the situation worse for future generations,” he said. “This has to be something that is a calculated and well-thought-out measure and not a risky scheme.”
Ald. Daniel Solis, 25th, another veteran alderman and mayoral ally, said he needs more specifics before deciding whether he supports the idea. But facing the likelihood of post-election tax hikes to cover additional pension debt, Solis said the bond proposal is one way to potentially ease that pain for residents still smarting from Emanuel’s recent spate of massive tax and fee increases.
“If anybody comes up with another idea — like some of the aldermen (in the briefing) were having a lot of questions, I wouldn’t say criticizing it, they had a lot of questions. I said, ‘But does anybody have any other ideas right now?’ ” Solis said. “(The answer) was no.”
Retiring Ald. Ricardo Munoz, 22nd, who is an occasional Emanuel critic, said he supports the borrowing plan.
“Anything to shore up the pensions is a good idea,” Munoz said.
City officials emphasized massive pension payment increases due in 2021 and 2023 — $369 million and $339 million, respectively, in the briefing Munoz attended, he said.
“These cliffs are dealbreakers for taxpayers,” Munoz said.
Issuing so-called pension obligation bonds would be a first for Chicago, which for years shortchanged four city worker pension funds and is now trying to catch up.
Emanuel’s close friend and confidant Michael Sacks, CEO of the GCM Grosvenor asset management firm, floated the concept earlier this month at an annual conference for buyers and raters of city debt.
Chicago Tribune’s Hal Dardick contributed.
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