By: Mark Glennon*
What a triumph for Chicago last week, if you believe the city and what you’ve probably read.
“It’s been pretty overwhelming,” said Chicago Chief Financial Officer Jennie Huang Bennett about demand for the bonds, and the headlines followed with little or no challenge: “Chicago Boards the ‘Social Bonds’ Bandwagon — And Gets Results” said the Illinois Answers Project; “City ‘social bond’ issue deemed a success with big and small investors,” said the Chicago Sun-Times“; “City touts ‘social bonds’ sale as success,” said Crain’s.
The entire purpose of social bonds, as the city has often said, is to lower its interest cost. That’s supposed to be accomplished by increasing demand for the bonds by attracting investors interested in social justice causes to which the bond proceeds are dedicated.
It turns out, however, that annual interest savings on about $160 million of Chicago social bonds sold last week will save the city only about $48,000 to $80,000 per year. That’s peanuts for a city with a $12 billion budget. And those savings are only for the first year. They drop toward zero as the principal on the bonds is paid off.
On the surface, last week’s Chicago Social Bond sale indeed looks successful. The city sold about $160 million of the bonds earmarked for social justice goals — affordable housing, homeless shelters, vacant lot cleanup, trees and electric vehicles. About 24% of the social bonds sold went to retail investors. That’s very high. The city said it generally sees only about 0.3% of bond sales going directly to individuals, according to reports in the the Chicago Sun-Times, Crain’s and The Bond Buyer.
But work through the numbers below the surface, which nobody has done, and you’ll see that the city failed to achieve any meaningful savings in interest cost.
Bennett told The Bond Buyer that the city saw a “three-to five-basis-point” reduction in the rate for the social bonds compared to the “non-social bonds in the deal under the same lien.” She was referring to other bonds sold concurrently that are substantially the same and secured the same way as the social bonds.
That’s only .03% to .05% in lower annual interest rate, which comes to total savings for the city of only $48,00 to $80,000 per year on all $160 million of social bonds.
Several years worth of those savings were probably consumed just by the cost of all the extra legal work to explain the deal in the complex offering documents and the charge for the silly “verification” opinion supposedly validating the social bond designation, which we wrote about earlier.
How about the social justice goals?
Labeling some bonds as social justice bonds is “like when they started labeling yogurt as ‘high-protein,’” a municipal bond analyst told Illinois Answers Project. “Genius, right? It’s the same product, only now it’s labeled ‘high protein’ and the others aren’t, so people want it more.”
That’s particularly true in Chicago, where Mayor Lori Lightfoot has often said social justice is at the center of everything the city does. Money is fungible, and earmarking some sources as being for social justice programs is artificial.
Our real problem with bonds is not the social justice designation. We’d be happy if that marketing had worked. Instead, it’s how these and certain other Chicago bonds are secured. The city sold off ownership of its future sales tax revenue to secure the bonds. It’s like selling off body parts or your future paychecks. We explained that most recently here.
It’s nice that some investors feel good about themselves, having bought the bonds. We wish, however, that the city had followed our earlier suggestion of giving yard signs along with the bonds. Maybe that would have sparked enough further demand to save a few thousand bucks more in interest costs.
*Mark Glennon is founder of Wirepoints
Earlier pertinent articles from Wirepoints:
- Chicago’s New ‘Social Bonds’: Limited Time Special Offer
- Woke Capitalism Or Smart Marketing? Chicago To Issue ESG Bonds.
- Backlash Against ESG Investment Of Taxpayer Money Grows, But Illinois And Chicago Carry On
- Outrageous Giveaway to Muni Bond Buyers Hidden in Massive Budget Bill
- Bloomberg article echoes our warnings about Chicago’s cash-for-body-parts financing
- Illinois Bill to Prioritize Bondholders Over the Public Must Be Stopped
Think like the Mayor! That $48,000 to $80,000 difference in interest payments is another patronage job hire. Another vote insured forevermore.
Lori and that fool in NYC love to create problems and cry when everyone doesn’t want to dig in and help them extricate themselves of a mess of their own making.hmmmm? MUST BE A VULTURAL THING; you wouldn’t u derstand! You’re right !
(I’m a sucker) should be added parenthetically to every sign.
Another Illinois bate and switch. Nobody does it better than Democrats.
What a downright fraud Lightfoot is. Reprehensible. “Social Justice” is the revolving door for criminals with very long rap sheets. Criminals now have extensive rights to commit even more crimes after they are released by the incompetent boobs working for Foxx and Evans. The world is turned upside down with no thought about the next victim who in many cases are minorities.
Welcome to Detroit Part II. The Chicago media is such a joke. Thank goodness for Wirepoints.
Some stamp should ask Lori about the NASCAR Grand Pri Street Race prices! Obscene hundreds to thousands of dollars! Hmmmmmm…….
So Fred Eychaner and Michael Sacks bought bonds?
The Skyway revenue is gone.
The parking meter revenue is gone.
Now they’re selling off the sales tax revenue.
What are they thinking? Stupid chickens!
Did Chicago sell ownership in future sales tax revenue or did they secure the bonds with a pledge of said revenues? Big difference. Public bonds are quite often secured with a revenue pledge. City still receives those revenues, but must use them and other resources to repay the bonds.
Regarding the Skyway and parking meters, those were outright sales in exchange for a large upfront lump sum. Oh, and they were each very bad deals.
We’ve written extensively about that, some of which is in the links at the bottom of the column. Ownership of the tax revenue was sold to a bankruptcy-remote entity, though it is intended as a from of super duper security interest. It is different from the skyway and parking meters in some ways, but also different from a traditional pledge in other ways.
So ownership was transferred to a City related special purpose entity, as opposed to a sale to a private party as in the parking deal. I may be looking at this incorrectly, but given the very limited savings, it is just another spate of borrowing.
Borrowing against future assets. Not a smart move, but at least they didn’t “lease” the asset for 99 years.
This is exactly why ESG is the greatest financial fraud of our time — money diverted from income for investors to the funding of efforts to destroy capitalism/impose globalist Marxist government
did CTU or any city, cc or state pension funds load up on these phony virtue signal city bonds?
Good question but don’t know yet.
The reason why it is a “big success” despite the poor numbers is that Chicago hasn’t done anything better than this. It is all relative and any success no matter how pitiful is in fact a big success
Just one of many examples of government doing what it does best and that is NOTHING.
When you figure in all the personal costs the bonds are a huge looser (Taxpayers are the looser again).