Mayor Lori Lightfoot’s administration is planning $450 million in short-term borrowing — for less than a year, at an interest rate of 1.95% — to buy time for Congress to ride to the rescue of pandemic-ravaged cities.
The $12.8 billion budget narrowly approved by the City Council last week includes plans to refinance $1.7 billion in general obligation and sales tax securitization bonds and claim $949 million in savings in the first two years.
That would extend the debt eight years and return Chicago to the days of “scoop-and-toss” borrowing that former Mayor Rahm Emanuel ended (though not nearly fast enough for Wall Street rating agencies).
Lightfoot also plans to borrow against future revenue from the sale of recreational and medical marijuana to avert the need for 350 layoffs and issue $1.54 billion in general obligation bonds to bankroll the first two years of her five-year capital plan.
Chief Financial Officer Jennie Huang Bennett said the plan to borrow $450 million for — either through a line of credit or a “publicly-offered note” — would cover pandemic-related revenue losses in 2020.
“We went to a debt restructuring because of the circumstances we’re in due to COVID. The reason why we are looking to implement short-term financing is because of the fact that we want to see whether the federal funding comes through and be able to avoid the cost of the debt restructuring, if possible,” Bennett said.
The city has all of 2021 “to determine what the federal landscape looks like,” Bennett said.
“I don’t envision that we’ll get too far into 2021 without having a better understanding of that.”
When Bennett told the City Council about the short-term borrowing, she anticipated the city would need to pay interest ranging from 2.75% to 2.8%.
After “leveraging our lending relationships” to get the best rate, she now believes it’ll be more like 1.95%, which she called “very aggressive.”
Civic Federation President Laurence Msall said there is “market risk” in the city’s decision to buy time because “interest rates could move against them.”
“If the federal government doesn’t come forward with the level of support that they’re hoping for, then they will have missed the chance to reduce their spending in advance. So, the cuts will have to be more significant,” Msall said.
“It makes sense to not borrow if there are other options. The other options were to reduce spending and to eliminate positions — not just vacancies that were targeted. That was the most financially reasonable and least expensive” option.
Bennett countered there was “no way” the city could have cut this year’s budget by $450 million.
“You would see a material impact in services, which would have longer-lasting damage to the broader landscape,” she said.
“We [chose] … a very balanced approach in reductions in expenditures and a small amount of new revenues. But, also we know that some level of one-time measures are necessary when you’re dealing with a revenue loss of this size.”
As for the risk that interest rates may rise while the city waits for Congress to act, Bennett said: “There’s interest rate risk with every financing we do. There’s a risk that, if we did the financing now, that rates could fall.”
Downtown Ald. Brian Hopkins (2nd) said the $450 million in short-term borrowing “might make sense if it’s structured like tax anticipation notes that are the lowest-cost short-term borrowing, because it’s all but a guarantee that the money will be there” to re-pay the debt.
But he’s not certain that’s how it will be structured.
“They’re going to market very soon on this, but they’re still not telling us everything. ... There were a lot of questions that were not answered fully with regard to the debt re-financing and the short-term borrowing. What the ultimate cost to the taxpayers will be for returning to scoop-and-toss,” Hopkins said.
“There was a dearth of detail provided. They tried to get by with the minimum amount. That’s just not appropriate when you’re looking at the cumulative debt we’re facing. In the last decade, our per capita debt for unfunded liabilities increased over 100%. We’re mortgaging our future and putting this on our children and grandchildren.”
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December 03, 2020 at 05:00AM
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Lightfoot plans $450M in short-term borrowing to buy time for Congress to ride to the rescue - Chicago Sun-Times
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