You know you’re in financial trouble when you start putting regular monthly expenditures on your credit card and you don’t pay them off right away, allowing your bank to charge you double-digit interest on stuff like utilities or groceries.
Consider the city of Chicago. The situation isn’t much different.
Chicago issued $512 million in bonds more than a week ago. We wrote last Sunday on the hefty interest charges the city had to pay on those securities, which mainly are covering the operational costs of back pay owed to firefighters per a union contract and legal settlements tied largely to police conduct.
We got more detail a few days ago on just how painful this bond financing will be for Chicago taxpayers when the city released its final offering document.
Here are the gory “highlights.” By the end of 2033, the city will end up paying more than $140 million in interest, bringing the total cost of this $512 million bond financing to $652 million.
Part of the reason the interest costs are so high is that the city chose to include more than $52 million of interest itself in the amount of bonds it issued. In other words, the city is paying interest on its interest!
Why would the city do such a fiscally reckless thing, you might ask? The same reason the debt-burdened individual puts his or her groceries on a credit card.
Paying interest on the interest enables the city to avoid having to pay any debt service on these bonds in 2027 and 2028, which will be quite convenient for Mayor Brandon Johnson in terms of balancing next year’s budget as he faces reelection. But it jacks up the overall cost for these obligations.
By the way, the firefighter and legal-settlement costs underlying this brutal math total $433 million, according to the document. There’s another $26 million in these bonds for capital improvements, but the reason the city was compelled to issue these bonds earlier this month in the face of disadvantageous market conditions was that those operational needs had to be met this year. We’re not talking about the sorts of projects Chicago’s general-obligation bonds ordinarily finance — infrastructure work scheduled for future years.
What makes all of the above even worse is that the Johnson administration pulled a bait-and-switch on the City Council late last year when aldermen reluctantly agreed to debt-finance these operational costs. Back in November, Jill Jaworski, the mayor’s then-chief financial officer, provided the council with a proposed repayment schedule for these bonds. Her message was that, while bond investors frown on debt-financing operations and doing so could harm the city’s credit rating, the costs at issue here were extraordinary. Paying them over five years was a reasonable solution for a cash-strapped city.
The bonds would cost a total of $58 million in interest, Jaworski’s schedule showed. That was substantial, but the council swallowed hard and agreed.
Now? The interest cost has swelled to $140 million, and the bonds will be paid off after seven years, not five.
The pain will be left to a new administration to absorb if Johnson doesn’t win reelection, as polling suggests he very well may not.
And the pain will be significant indeed. After these bonds and all the other debt piled onto the city’s books by Johnson and previous mayors, the city’s annual debt service for general-obligation (GO) bonds is set to mushroom to $627 million in 2029 from $366 million next year, a 71% increase, according to the bond document. In 2030, that figure will climb to $657 million.
General-obligation bonds make up a little less than half of Chicago’s total bonded indebtedness, and other types of bonds are slated to rise or fall over this time frame. But the city’s total debt service costs will rise substantially over the next five years, according to city budget documents, and these newest securities will contribute to that burden.
Those hundreds of millions in added GO debt service, which will exacerbate likely future budget deficits, won’t go to maintain or improve city services. Just to investors.
When people keep putting day-to-day costs on the credit card and accruing interest, eventually the debt piles up so much that bankruptcy is the only option. The city of Chicago isn’t legally allowed to file for bankruptcy protection. For now.
But more bad decisions along these lines will hasten the day of reckoning. Chicago badly needs to chart a different course and start living within its means.
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