By: Mark Glennon*
Mayor Lori Lightfoot announced on Monday a plan to refinance $1.3 billion of outstanding bonds and book resulting savings of $200 million in the coming year to help balance the budget.
How could the city possibly save that much on interest? That’s the first and most obvious question.
The city expects to reduce its interest payments on the borrowed money from 4.9% to something in the range of 3 to 3.5%, as reported by the The Bond Buyer. So, the maximum savings on $1.3 billion would only be 1.4% — about $18 million annually. The city acknowledged that the total supposed savings of $200 million is a one-time measure, but the justification for claiming it entirely in one year and using it to balance the budget escapes me.
The city would benefit from generally lower interest rates, but reason why the city expects a lower rate presumably is that the new bonds will be “securitized.” That’s the new structure authorized by the state in 2017 that we and others have heavily criticized.
“Alchemy turns Chicago’s junk into gold” is how a Bloomberg article described the concept when the city used it earlier. We’ve been calling it sale of body parts. Others have likened it to selling your furniture to cover your mortgage.
The basic idea behind securitized bonds is an actual sale of assets. By transferring full ownership assets to ensure repayment of a bond, lenders believe they make their right to payment assured even in bankruptcy. It’s like completing a foreclosure sale before there’s even a default. Some of you may still think chances of a Chicago bankruptcy are remote, but the municipal bond community sees it otherwise. They want not just collateral but full conveyance of ownership in something at least as valuable as their loan amount.
How that will work here is a bit murky. The city says it will use future sales tax revenue to securitize the new bonds, but it already sold that revenue for earlier bonds. So, the new bondholders will get a junior interest in future sales tax revenue, the city says. Presumably there’s some value in that junior position, which would help the city would get a reduced interest rate.
Or maybe not. Chicago Chief Financial Officer Jennie Huang Bennett says she believes the subordinate position might not necessarily result in lower ratings, according to The Bond Buyer. Hmm.
Finally, Lightfoot’s press release on this sure won’t help her maintain her reputation as a straight shooter on financial issues. It reads like something from Rahm Emanuel’s administration:
Much like a homeowner refinancing a mortgage, the City’s refinancing will issue new bonds at lower interest rates to replace higher interest bonds that are currently outstanding in order to achieve cost savings.
Sorry, the bond proposal is certainly not like that. And no homeowner would add up all the future savings from refinancing and claim the total can be used for next year’s budget.
The press release further quotes Lightfoot: “Since my first day in office I have made responsible stewardship of taxpayer dollars a priority in every financial and budgetary action we have taken.” Blah blah blah.
And this doozy from Bennett: “Instead of looking to one-time measures of the past, we are focused on prudent measures for addressing outstanding debt that will achieve significant near-term savings to the taxpayer without sacrificing the long-term financial health of the City.” [Emphasis added.]
A “one-time measure” is exactly what Bennett said the bond savings will be on a phone conference with reporters: “This is one of the one-time measures we are using as part of the budget….”
Lightfoot’s full, annual budget address is this Wednesday. Should be interesting.
*Mark Glennon is founder of Wirepoints.
For further reading on securitized bonds see our earlier articles:
- Outrageous Giveaway to Muni Bond Buyers Hidden in Massive Budget Bill
- Riverdale Will be Third Illinois Municipality to Sell Body Parts Under New ‘Securitization’ Law
- Bloomberg article echoes our warnings about Chicago’s cash-for-body-parts financing
- Jeanne Ives’ fiery description of how Chicago’s new bond scheme sold out pensioners and taxpayers
- Why Chicago’s new debt scheme is reckless
- Illinois Bill to Prioritize Bondholders Over the Public Must Be Stopped