The Tribune’s Hal Dardick tells us about a routine conference the City holds for investors who buy their debt. There was one of these a couple of weeks ago and it was pretty uneventful. But then, he says, there was a roundtable discussion and one of the participants was Michael Sacks, a senior Rahm Emanuel advisor, and a heavy investor in his campaigns. It’s about 5:00 on a Friday afternoon.
“And Michael Sacks sort of drops a bombshell,” Dardick reports, “because the big concern in the room and the big concern for taxpayers is how do we handle spiking pension debt after the mayor or the next mayor gets elected. So, it’s going to spike by over $900-million between next year and 2023, so everyone is concerned well you’re going to raise taxes. Michael Sacks says, “Well I’ve got an idea. Let’s borrow $10-billion, pay down $10-billion of the $28-billion debt in the pension funds with that money.”
Ralph Martire (Center for Tax and Budget Accountability) interjects. “They are calling it borrowing,” he explains. “You’re not borrowing one nickel of new debt. You are not incurring one nickel of new debt. This is money they already owe. It’s debt they already owe to the pension systems. What they are saying is rather than owe this $10-billion to the pension system we would like to owe it to bond-holders. The reason for that is we should get a lower interest rate which benefits taxpayers.” Another big bond issuance, he points out, just got an interest rate of 3.6%, so if the city could get its hands on ten billion dollars at that low rate and drop it all into the pension systems, it could make huge dent in the pension deficit.
“It’s like refinancing your home mortgage,” he insists. “You’re not incurring new debt, you’re just taking advantage of a lower interest rate. And that could benefit taxpayers in a couple of ways. Way #1 is it puts $10-billion immediately into the pension systems, which will move their funded ratios up to just north of 50% across the board. They are now in the high 20s. This would be a good thing and not a bad thing. You’re not considered healthy at a pension system until you are at least 80% funded according to the Congressional Budget Office.” In addition, he says, the plan could lower the overall costs over time.
But Dardick argues that these so-called “Pension Obligation Bonds” have been tried in many other places over the past couple of decades, with not-so wonderful results. He says they might work in Chicago, because they can project earnings around 7% most years – as long as the economy is strong, “But if they don’t,” he cautions, “what you are doing is you are paying interest on the debt, the 3½ or whatever it is and then if that loses money, if there is a great recession or something then you’ve got to make up that money plus you’re still paying the interest on the debt. You could come out behind if it doesn’t work out well.”
And it hasn’t worked out well in various parts of California, in Detroit and in Puerto Rico. Martire, though, insists that there are structural safeguards that can be put in place to protect the taxpayers from heavy losses.
That’s where “securitization” come in. Dardick says a recent bond issue ws securitized by linking the payments to tax receipts, so the bind buyers felt confident that they’d get paid. “And whenever you have a dedicated revenue source it always helps you with your bond,” Martiere adds.
But Dardick says that the City of Chicago probably doesn’t generate enough sales tax revenue to make this happen. “They may have to go to the legislature and get further authorization to dedicate some other revenue stream in this case,” he cautions. “But here’s where some people criticize that and that is if you do that you are putting those bondholders first in line. As I understand it Detroit when they defaulted the securitized bondholders got their payment and the others basic general debt from general obligation got shafted.”
And Martre counters that it’s almost irrelevant because pension payments in Illinois are guaranteed by the Constitution. “So the fact that it would not be guaranteed debt payable to bondholders rather than the pension systems doesn’t change the characterization of it. It would be first up.”
We point out (using some stats that Hal Dardick has gathered) that Mayor Emanuel has aggressively raised taxes in his second term. The overall taxes and fees being collected in 2018 by the city and by Chicago public schools are nearly 2.2-billion more than when Rahm Emanuel took office, according to the Tribune. All told the average family will pay $1,813 more this year in taxes and fees than it would have in 2011. So you can’t say he didn’t step up and do what had to be done to try to raise the revenue needed to fund the pensions. But that, of course, that will work against him with many voters.
Dardick credits the Mayor with the institution of many improvements to the budgetary process. “He has stopped using one-time revenues, the infamous sale of the parking meter system to pay operating costs. He has gotten rid of other high risk elements in the city’s debt portfolio, so he has taken a lot of steps,” he tells us. And that money, he adds, is not only going to the pensions, but “also to upgrade a very out of date water and sewer system in the city.”
Ralph Matiere gets the final word: “One of my least favorite political canards that’s out there from a rhetorical standpoint is the phrase tax and spend liberal. If you tax to spend on police are you liberal? No. Tax and spend is responsible. What you’re saying to taxpayers is these are core services and we need to fund them with current revenue. Borrowing to spend on current services is highly irresponsible, and that’s what the City of Chicago did for generations. It’s what the State of Illinois did for generations, and their lender was a captive lender that lent against its will. It was their pension systems.”
You can watch the entire program by clicking the image above.
You can read a full transcript of this show here: CN transcript August 23 2018