By: Mark Glennon*
The City of Chicago finally released enough information to assess its pending plan to refinance some of its debt. It’s a can-kick and the price tag is estimated at $2 billion, plus plenty of risk.
Recall Mayor Lori Lightfoot’s budget proposal released last month for the coming year. To make ends meet, it relies heavily on a refinancing plan that would push off debt repayments scheduled for 2021 year and 2022. The basic idea is to save cash this year and next by delaying debt repayment and, supposedly, getting lower interest rates.
The city claimed taxpayers would come out ahead in the long run, but it did not provide the details needed to check that claim, which looked very suspicious. We, among others, tried to do the calculation but we didn’t have the necessary numbers.
But reporters did their job. Crain’s wrote about the missing information and harangued the city’s chief financial officer in her meeting with its editorial board.
The city finally responded on Monday with more numbers.
In essence, the refinancing will kick down the road $950 million in debt service owed in 2020 and 2021. But doing that requires higher debt repayments in later years and extending the time for repayment by eight years. That means taxpayers ultimately pay more – probably $2 billion more – for the luxury of reducing their debt repayments over the next two years.
That’s our plain English version of the transaction. More technical details are here from The Bond Buyer’s Yvette Shields, who consistently delivers terrific reporting on our state and local finance.
There’s plenty of risk and uncertainty surrounding that $2 billion cost estimate.
First, nobody knows for sure what interest rate the city will have to pay on the refinanced bonds. The city is claiming it will have to pay only 4%, according to Crain’s, though recent costs have been about 5%.
Second, to figure out the true, long-term cost of the refinancing requires an estimate the future inflation rate. That’s because future debt payments should be discounted by that inflation rate. The higher the expected inflation rate the lower the true cost.
The city initially assumed an inflation rate of, wait for it, 4%. That’s nuts. The financial markets provide a very good consensus number on projected inflation. It’s currently just 1.37% over the next ten years. The Federal Reserve has failed for many months to get inflation up to its target rate of 2%.
Finally, the refinancing will rely on the new “securitized bond” structure we’ve long criticized whereby the city sells off full ownership in future revenue. If the city is to get lower interest rates it’s almost certainly because it will be pawning off more assets, probably in the form of future tax revenue. Exactly how that will work here is still murky.
It’s possible the entire transaction could be scaled back or even cancelled entirely. That’s because we don’t know what, if any, pandemic relief package may come from the federal government for cities and states.
However, Illinois taxpayers would be then be paying their share of that for all cities and states so, one way or another, the bill is coming.
*Mark Glennon is founder of Wirepoints.