By: Ted Dabrowski
Mayor Rahm Emanuel’s $10 billion pension bond idea deserves a brutal vetting.
After all, it’s a massive deal, highly political and ripe for the same chicanery that every arrangement in Chicago is known for. Witness the outcomes of the parking meter and Skyway deals. Or the city’s chronically failed budgets. Or its bankrupt pension plans.
And Rahm Emanuel is a lame duck, just like Mayor Richard Daley was with his parking meter debacle. Emanuel shouldn’t be allowed to cram through a $10 billion borrowing that doubles the city’s bonded debt and which won’t be fully repaid by this generation nor the next.
But that’s not the world we live in. The Chicago Way demands no real vetting. No real questions.
The city will do its deal. And Chicagoans will be kept in the dark until it’s too late.
Since no real challenge will be made of the pension bond scheme by the Chicago media, I’ve decided to transcribe what an honest interview with Emanuel might look like. One in which the media asks the right questions and where the mayor’s spin is unspun.
Hopefully readers will get a good understand of what this transaction is really all about:
Emanuel: Good afternoon. We’ve got a new plan to improve Chicago’s pension funding levels, avoid property tax hikes and save the city $6 billion going forward. It’s an innovative plan that only a city like Chicago can pull off.
Reporter 1: Mayor, there’s a lot of skepticism around the plan. Please explain to us how it works.
Emanuel: The lynchpin of the plan is to borrow $10 billion from Wall Street. We’ll issue pension obligation bonds, POBs, and repay the money over a 35-year period.
That money will be put it into the four city-run pension plans, boosting their funding levels to more than 50 percent, up from just 26 percent today.
The city has really big pension payments due in the next few years. So, if we can borrow the money, put it into pension and bring up the funding ratios, it will bring down our actuarially required contributions for many years. That will get us out of our fiscal mess.
Reporter 1: Ok. I get how it immediately improves the pension funding ratios. But in the end, aren’t you just borrowing money and putting it into the pension funds? Just another scoop and toss? How does that save Chicagoans $6 billion and help avoid property taxes? What’s the magic?
Emanuel: Here’s what you’re missing, Chicago will borrow the $10 billion at a low interest rate and we won’t have to pay that money back for a really long time.
We then take that money, give it to the pension funds and let them invest it in the stock market.
The difference between the low interest rate on the bonds and what we can make in the stock market is our profit. If it works, it’ll be good for Chicagoans.
Reporter 2: Hang on. There are several things I don’t get here. How can the city borrow so cheaply? Moody’s rates Chicago bonds junk. Did we get upgraded or something?
Emanuel: Our bond ratings are poor right now, so we can’t borrow the normal way – by issuing general obligation bonds. The interest rate would be way too high, plus we probably couldn’t raise the full $10 billion.
Instead, we plan to use our new securitization structure. It’s complex, but it’s clever. Here’s how it works. To entice lenders, the city gives them special collateral by selling them some of the city’s assets – some future tax revenues. The structure makes it safe for lenders and it protects them in the event of a Chicago bankruptcy. The bondholders want this type of deal, so the bankers give us lower interest rates.
Reporter 2: Wait, you’re selling-off assets that belong to the public? Like the revenues that could be used in the future to fund basic services like roads and police and health services?
That means the bankers would have ownership over those future city revenues. And if the city gets in real financial trouble in the future, the bondholders would have priority over Chicagoans when it comes to accessing that money. How is that good for Chicagoans?
Emanuel: That’s the beauty of the deal. The bankers and bondholders get what they want – much better security – and we get a lower rate. That’s how we get access to “cheaper” money to put into the stock market.
Reporter 2: Sounds to me like you are selling the city’s future – its public assets – and then gambling with the money. So, the $6 billion in “savings” is predicated on an artificially-low borrowing rate and then playing the stock market?
Emanuel: Yes, but it’s a no-brainer. Nobody has come up with a better plan, so we need to take advantage of this structure. The bankers and lawyers are ready to go.
Reporter 3: So you want to gamble with taxpayer money in the stock market when the market is at all-time highs? We are into the tenth year of the longest-ever bull market and everyone agrees a recession is somewhere around the corner. It’s super risky if there is a major market correction.
Emanuel: It won’t matter in the long run. We’ll have plenty of time to make up losses.
Reporter 3: But we all know what happened to Detroit, San Bernardino and Puerto Rico. Their pension bond schemes lost hundreds of millions on the very same gamble you are proposing.
And closer to home, Chicago Transit Authority’s own pension bond was a mess, too. The market collapsed right when CTA got their money from the bonds. Have you run stress tests to see how much Chicagoans might lose if your plan goes wrong?
Emanuel: None of you must have seen the presentation I gave to the aldermen. It has everything you need. It’s pretty clear that this is a good deal for Chicagoans. And don’t forget. Chicago is different. We’re not like those other cities. We’ll do it right.
Reporter 1: Mayor, I saw that presentation you gave the aldermen. It was only five pages long and only two pages had any information about the plan. And even those two pages said little. There was nothing about what happens if the stock market goes south.
Emanuel: I’ll get back to you on that. We think we can make $6 billion in profits. The bankers really like this deal.
Reporter 2: Well, of course the bankers like this deal! There’s like $70-$80 million in fees for them and the lawyers, no matter whether the city’s gambling pans out or not.
And I’m still confused about how your plan avoids tax hikes. The city borrows $10 billion and it eventually has to pay it all back – there’s no net new money for the city. So, without reforms or some concessions from the unions, how does the city avoid tax hikes?
Emanuel: The key is that we borrow the money for a long time. It’s exactly what Blagojevich did in 2003 with his $10 billion pension bond. We are 15 years into his bond and only $1 billion has been repaid. Illinoisans won’t be done repaying that bond until 2033.
That’s how you avoid tax hikes in the near term. Push the repayment as far into the future as possible. That’s what our plan does. The bonds won’t be fully repaid until 2054.
Reporter 3: I’m sorry, Mayor. Here’s what I take away from your proposal.
One, the city is gambling with borrowed dollars. Borrow, gamble, then repay. You hope that it works, ignoring that if it fails, it could cost Chicagoans hundreds of millions, or more, in losses.
Two, to increase the chances of the gamble working, the city will sell public assets to reduce the city’s cost of borrowing. You and your staff then take credit for borrowing “cheap” money.
Third, by borrowing money and giving it to the pension funds, you’ve created a big jump in the priority given to pensioners over taxpayers.
Fourth, if Chicago ever falls into some form of bankruptcy, the banks will have control of the tax revenues you’ve sold to them as collateral. So bondholders keep their ownership and pensioners already have their cash. It’s only taxpayers that lose.
Fifth, you tell Chicago residents that your bonds help avoid tax hikes. Well, the bond has to be repaid at some point in the future. If there are no reforms, taxes will eventually have to go up to repay the bond. It’s $10 billion dollars that need to be repaid! It’s a massive amount. In the end, this whole deal is just a can kick.
Sixth, this whole scheme makes everyone forget what’s really needed: reforms. By hiding the problem for a few more years, you are suppressing the pressure needed to actually fix what’s wrong with the pension system.
Reporter 2: What this proposal needs is a complete series of committee hearings, debates and stress tests. Chicagoans deserve full transparency. We haven’t seen any of that yet. Chicagoans don’t need another deal like the parking meter debacle.
Reporter 1: And you’re a lame duck, Mayor. You’re pushing this deal – the biggest pension bond ever done by a city – and you won’t be around for the consequences. That just doesn’t seem right.
Emanuel: Chicago doesn’t need more naysayers. Until someone has a better idea, I’m going to push forward with my plan. Thank you.
Read more Wirepoints coverage about Chicago’s pension bond:
- Aug. 5 – Rahm Emanuel’s latest can kick: Borrow $10 billion for Chicago pensions
- Aug. 15 – $125,000: The pension debt each Chicago household is really on the hook for
- Aug. 19 – How Emanuel is misleading you on the city’s debt – Crain’s
- Aug. 24 – Pension Obligation Bonds Are Like Big, Fat, Dangerous Margin Loans For Stock
- Aug. 26 – Chicago CFO’s Stupendously Bad Timing On Her Last Pension Obligation Bond
- Aug. 28 – Emanuel’s real motivations for Chicago’s $10 billion pension bond plan
- Aug. 29 – A plan to make “bad pension borrowing” good? Greg Hinz is mighty confused
- Aug. 30 – Liquidation Sale. That’s How To Think About Chicago’s Proposed Pension Bond
- Aug. 31 – Emanuel’s misleading pension bond presentation to Chicago aldermen