Mayor Brandon Johnson already has presided over the downgrading of Chicago’s credit by three separate ratings agencies. The latest to ding the city’s credit are Fitch Ratings and Kroll Bond Rating Agency, both of which docked their ratings on the city’s general obligation bonds by one notch on Wednesday.
Standard & Poor’s downgraded Chicago a little over a year ago and continues to give Chicago a negative outlook. This most recent Kroll downgrade is its second in two years.
Wednesday’s downgrades come as the city prepares to solicit bond investors next month for close to $500 million to cover back pay owed to firefighters due to a lengthy contract negotiation and hundreds of millions in anticipated costs to settle lawsuits, most of which pertain to alleged police misconduct. The downgrades will make the debt more expensive for the city, as investors will be expected to demand higher yields in response to the higher risk tied to Chicago’s precarious financial condition.
But here’s the real shocker: The city is structuring this debt so it doesn’t have to make payments for the next three-plus years, extending the time frame for paying off the bonds and making the entire enterprise considerably more expensive than was envisioned during the fraught budget discussions late last year.
Before the downgrades, these bonds already were problematic.
Cities in decent financial health customarily don’t float bonds to cover operational expenses such as legal settlements and compensation for workers. Bonds are supposed to be for capital investments — improvements that will last for years, justifying the long-term cost of financing them.
The cost of the firefighter pay and the settlements together totals about $449 million. But the city is seeking to issue $488 million in bonds for that purpose.
Hmm, we wondered. Why such a difference?
As it turns out, the Johnson administration wants to keep the cash-strapped city from having to make payments on these bonds for another three years. The extra amount the city is borrowing would go largely toward making interest payments on the debt through 2029.
In describing the arrangement to us, Fitch actually used the dreaded municipal-bond financing term, “scoop and toss.” As in the frowned-upon practice of refinancing existing debt and extending it into the future, thereby raising the total cost of whatever costs that initial debt was covering in the first place — a method Chicago mayors largely have eschewed since Richard M. Daley retired.
“While not an actual scoop and toss, the city’s choices do throw the city’s current and past liabilities into the future,” Fitch Senior Director Ashlee Gabrysch told us in a statement.
During last year’s budget debates, Chicago’s then-chief financial officer, Jill Jaworski, provided aldermen with a chart projecting that these bonds would be retired in 2031 and total interest on them would amount to $58 million.
Obviously, that plan fell by the wayside in the intervening months.
Fitch now tells us it’s the agency’s understanding the city will retire the bonds within a decade, not the five years originally envisioned. Adding insult to injury, the city will need to float taxable bonds rather than the tax-free bonds municipalities ordinarily issue because of how it’s using the money. That also will hike the city’s interest rate substantially because investors require far higher yields if they’re paying taxes on their interest income.
We don’t know as of now how much more the total interest costs will be, but no doubt they’ll be considerably higher than $58 million. All to pay for $449 million in operational costs that should have been managed within the city’s budget. We asked the mayor’s office about all of this, but they were unable to comment by press time.
Suffice to say, though, the city right now is akin to a household living paycheck to paycheck that must take out payday loans to pay for a car repair.
No wonder, then, that downgrades are the order of the day for the Johnson administration.
So is the mayor taking any responsibility for this dismal state of affairs? No, the buck is stopping anywhere but his fifth floor desk. When he’s not blaming his predecessors for the mess they left him, he’s pointing the finger at the City Council majority that refused to endorse his job-killing corporate head tax. That council group reluctantly included the plan to debt-finance the firefighter back pay and the settlements in the budget that eventually passed, but those proposals originated with the mayor.
Now, the mayor’s team is continuing to criticize some of the other budget actions the council approved, which was part of Fitch’s rationale for the downgrade. Johnson’s refusal to accept the limited defeats he suffered in the budget process is raising costs for all Chicago taxpayers.
Fitch in its release cited “ongoing disagreements between the administration and the city council … (which) have impeded decision timeliness and the development of a credible and comprehensive plan to restore structural balance.”
The reality is that, as much as Johnson likes to heap blame on prior mayors for his troubles, he’s poised to leave whoever sits in his chair after next year’s election a worse situation than he inherited.
Chicago saw nothing but credit upgrades for the seven years that preceded Johnson’s mayoralty.
And no one should be surprised if the pile of downgrades on Johnson’s watch grows larger than it is today before Chicago voters go to the polls a year from now.
Editor’s note: The total for the bonds the city of Chicago is issuing to pay firefighters and for legal settlements has been corrected. The figure for those uses is $488 million, not $503 million. The remaining $15 million in bonds is to be used to refinance existing lines of credit, Fitch says.
Submit a letter, of no more than 400 words, to the editor here or email letters@chicagotribune.com.
