Emanuel’s real motivations for Chicago’s $10 billion pension bond plan

August 28, 2018

By Ted Dabrowski and John Klingner,

Chicago Mayor Rahm Emanuel’s team claims its proposed $10 billion pension obligation bond is good fiscal policy. Far from it. The POBs, as the bonds are called, are nothing more than gambling using taxpayer funds. They’re a terrible idea.

But bad policy has never stopped a Chicago politician. Emanuel’s motivation for pushing the bonds is the upcoming mayoral election. He faces ten challengers and they’re slinging all kinds of mud on him, in particular for his record as a property tax hiker and his failures on policing. Emanuel’s looking to deflect those challenges. He thinks he’s found a way using POBs.

Emanuel hiked property taxes by more than $800 million during his first two terms in office, and yet the city’s pension mess continues to worsen. As a result, required taxpayer contributions are set to double to $2.2 billion by 2022. Absent some “solution,” property taxes will have to go up dramatically and Emanuel won’t be able to defend himself on the campaign trail. It’s a loser position.

And Emanuel is still negotiating the city’s police and fire labor contracts that expired more than a year ago. The prickly one, of course, is the police contract. The mayor’s mess there is more than just about pay and incentives. He’s got a real crisis – from the handling of the Laquan McDonald video to transparency and settlement scandals – that has damaged his relationship with the department.

The POB is all about accessing money now to assuage both groups. But all Chicagoans – residents, media and civic institutions – should refuse to buy into this deal. This bond is no different than the Skyway and parking meter contracts or the more recent securitized borrowings. They’re all deals that cause Chicagoans long-term pain in exchange for some politician’s short-term gain.

Here’s how the bonds help Emanuel, and how they’ll hoodwink Chicagoans:

POBs and Emanuel’s short-term gains

Emanuel’s upcoming property tax hike problem

The bonds require the city to reach out to Wall Street banks and borrow $10 billion, which would more than double the city’s general debt. The mayor will promise whatever he needs to promise – including committing the city’s future sales tax revenues – to ensure he can entice the bankers to lend at the most lenient terms possible. (How the city is selling off its financial future is the subject of an entirely different piece – you can read about that here.)

The city will then take the $10 billion and pour it into its four city-run pension funds. The funded levels of the pension funds will increase from a collective 26 percent to more than 50 percent – a dramatic jump. By pre-funding the pension funds with such a large amount, the higher funding ratios will lower the city’s required taxpayer contributions over the next few years significantly, thus removing the pressure for tax hikes.

But this plan won’t work if the massive taxpayer pension contributions disappear only to have them replaced by equally big repayments toward the $10 billion borrowing. So expect Emanuel to structure the repayment of the $10 billion debt so it’s far, far off into the future.

With all the financial engineering in place, Emanuel can then run on the promise that he won’t hike property taxes his next term. Problem solved.

Emanuel’s unsigned police contract

Emanuel needs serious leverage if he’s to put his police contract negotiations to rest in a way that gives him power going into the elections. He’s got that power in the POBs.

The police plan is just 23 percent funded. Fire is just 20 percent funded. By any measure those systems are broke. Most analysts give the plans just a few years before insolvency hits. Public safety workers, and the unions that represent them, know this. Pensions haven’t been a priority in negotiations for years. But now that pension checks are close to bouncing, they’re the hot topic.

If Emanuel can offer to take the two plans’ funded ratios to 50 percent by putting in billions of fresh money, he gets the real leverage he’s been looking for. “Sign the labor contracts and I’ll take your pensions away from the brink,” he can tell the unions.

And he can tell those public safety workers near the end of their career that the money will be there for them in retirement. With that, Emanuel can buy labor peace with the police and fire unions right before the elections.

The pitch to Chicagoans and the truth

To make the bond deal happen, Emanuel has to sell it hard. Listen to his CFO Carole Brown and other surrogates like Ralph Martire of the CTBA and you’ll hear nothing but how POBs are good policy.

They’re saying Chicago can borrow more cheaply. That the pension crisis will be defused. That this makes city finances more healthy. And all at little-to-no-risk to Chicagoans. “If I can create a structure that can re-fund some of my higher cost pension debt with lower-cost bonded debt, then I can save money for taxpayers,” said Brown.

None of that is true.

1. Borrowing more money to pay down debts doesn’t solve anything, especially when you have a borrowing problem. Don’t think that borrowing $10 billion and putting it into pensions solves any of the city’s problems. At its core, the POB only moves $10 billion in debt from one pile (pensions) to another (the city). Chicagoans will be just as indebted as they were before. Playing financial shell games like this is especially galling considering Chicago is a junk-rated mess with a borrowing addiction.

Emanuel claims he’s ended the irresponsible practice of “scoop and toss” borrowing. But the pension bond is scoop and toss in everything but name.

2. There are no guaranteed savings from issuing the bonds. They’ll try to sell it that way, but it’s simply not true. Instead, the bond requires taking a massive risk with taxpayer dollars. The word “if” in Carol Brown’s quote above tells why the bonds are a bad idea for Chicagoans. The whole POB proposal is a gamble with taxpayer money. Officials hope to borrow at 5 percent, invest it in the stock market and make a profit. The problem is, the market can go the other way and the funds can lose money in the process. And taxpayers will be left holding the bag.

Many other governments have gambled on POBs and ended up losing money in the markets. San Bernardino, Detroit, New Jersey and Puerto Rico all issued bonds that cost their residents hundreds of millions. Closer to home, the CTA issued a $1.9 billion pension bond in 2008 that turned into a debacle when the recession hit.

3. What it does for the pension plans is illusory. Pension obligation bonds do not address the real problems with defined benefit plans. They are not reforms. Instead, they just hide and perpetuate the underlying problems. Illinois’ $10 billion and the CTA’s $1.9 billion pension bonds are two good examples of can kicking where the pension funds only got worse afterward. Their failures were covered in Wirepoints pieces here and here.

4. The expected tax hikes don’t disappear. They just get shoved further into the future. If the POB goes through, Emanuel will be more than happy to tell Chicagoans he saved them billions in near-term tax hikes. What he won’t tell Chicagoans is that they’ll pay those tax hikes later. That’s because he’ll push the bond repayments far into the future – and way past his tenure.

Just look at how former Gov. Rod Blagojevich’s POB was structured. In 2003, the state borrowed $10 billion to fund pensions. Today, 15 years later, the state still owes $9 billion in principal, never mind the interest still owed. Illinoisans will be paying off that debt through 2033. If the graphic looks a lot like Gov. Edgar’s failed 1996 pension payment ramp, that’s because it does.

Mortgaging Chicago’s future

If it wasn’t clear how self-serving this whole plan is, consider the fact that Emanuel is doing this at what could be the worst possible time to play the arbitrage game. The U.S. is experiencing its longest ever bull-market and it’s not unreasonable to expect a correction.

But that’s how selfish Chicago politicians are. Emanuel is willing to gamble with taxpayer money just to win the election.

For him, it’s “heads I win, tails you lose.”