Saturday, June 13, 2015

Has Rahm Emanuel lost his financial nerve?

Rahm Emanuel Finance Government and Politics Pensions Opinion & Columnists More +
Mayor Rahm Emanuel's latest financial proposals raise questions.
Mayor Rahm Emanuel's latest financial proposals raise questions.
He's just won re-election, with his clout presumably now as great as it ever will be.
He has a first-class financial crisis to take advantage of—and constituents, especially in the business community, who know the time really has come to make tough decisions.
So why is Mayor Rahm Emanuel suddenly acting like a fiscal wimp, engaging in the kind of can-kicking that got Chicago into trouble? I hope it's a passing phase, because this longtime Emanuel defender is beginning to wonder.
For the four years of his first term, I thought Emanuel generally did a decent job playing a bad hand. He cut deals with two of the city's four employee pension funds, started talks with the funds that cover police and firefighters, avoided raising property taxes and cut borrowing to about half the rate of his predecessor, Richard M. Daley.
Then the Illinois Supreme Court this spring unanimously and unambiguously tossed out state pension reform. That raised huge doubts about whether Emanuel's pension deals will stand and prompted one of the major bond rating firms, Moody's Investors Service, to downgrade city debt to junk.
Emanuel's core response has been solid. Specifically, he and his team have moved to refinance nearly $1 billion in variable rate debt, exchanging it for more expensive but non-callable paper. Even Moody's was impressed, issuing a report this morning that termed the actions "credit positive."
But the mayor has done a couple of other things that raise questions.
The first was to agree on a pension deal with the police and firefighter unions that requires not one penny of concessions from either—not one penny, despite four years of speeches from Emanuel about shared sacrifice. The only concession is that the city will take an additional 15 years to substantially fund the system, meaning that it will have to contribute "only" an additional $319 million or so next year, rather than the previous $500 million-plus.
Why abandon the notion of concessions on all sides? Team Emanuel responds that it didn't have a choice. Any changes had to clear the General Assembly, and there was no low-hanging fruit as in the generous cost-of-living hikes that were targeted in the state's unsuccessful pension fix. If the city was to avoid that half-billion-dollar cliff—or, more accurately, cushion the fall—this was it.
Perhaps. Equally troubling is the $1.1 billion in new general obligation borrowing that Emanuel floated with aldermen in a series of briefings late yesterday.
Some of the borrowing is understandable and unavoidable. Like the rest of that exchange of floating-rate for fixed-rate I referred to above, or financing the city's closeout of losing swap derivative positions. That's $343 million combined. In the same category is $181 million to refinance a lease deal on the Chicago Transit Authority's Orange Line that, given the Moody's downgrade, could have forced the city to post collateral.
But $35 million to pay for a loan taken out when the city purchased the old Michael Reese Hospital site for the 2016 Olympics? Or $85 million in legal settlements, $75 million in back pay for police and $170 million to refinance old debt that's now due, a process known as scoop and toss?
Then there's my favorite: "Two years of capitalized interest, $170 million." In other words, not only is the city going to borrow money, but it's going to borrow money to avoid having to pay interest on what was borrowed until, um, later. When someone else is mayor.
City officials have not been available to discuss this in detail. But even if such tactics have been used in the past, they sure look like more of what got Chicago up a creek in the first place. Most municipalities pay for legal settlements and pay raises out of their operating budget with tax revenue. They don't ship the bill to the grandkids.
"All of these are things that Mayor Emanuel said he would stay away from when he spoke to the Civic Federation this spring," says federation President Laurence Msall, referring to a speech in which the mayor promised to cut back and eventually eliminate things like scoop and toss.
The mayor could have rolled out dramatic spending cuts and reorganizations, pointing to Chicago's moment of crisis. Instead, he took the easier road. "Is it really that hard to borrow?" Msall asks.
Perhaps the mayor is just clearing the decks for one big moment of pain later this year, when he rolls out a new budget that will have to include nearly $400 million in additional spending just for pensions. Perhaps, but I'm beginning to wonder.
If Emanuel was just going to sprinkle fairy dust on the city's financial problems, perhaps Chicago should have elected the other guy in April.
1:15 p.m. update – City Budget Director Alex Holt says the mayor's critics, including me, are being a little hard on him. The borrowing and other moves may not be “pristine” but they are “reality” in the current world, she said.
Holt said the legal settlements are for things “inherited” by Emanuel and generally “not routine.” She repeated Emanuel's promise to end scoop and toss within four years, and said borrowing to pay interest costs now was needed. She did clarify that the police borrowing will only be for two years, but most of the rest will be for 30 years.
Detailed amortization tables–how much the city is now planning to pay in coming years, compared to the recent past–were not immediately available. But Holt insisted the city is on the right track. “I don't think it's fair to blame us for not solving 100 percent of the problem because we've only solved 80 percent,” she said.

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