Rabbit-Hole Math: How Chicago Mayor Rahm Emanuel Is Trying To Make A Bad Financial Crisis Worse

Chicago Eyes Bonds that Delay Repayments

Chicago Mayor Rahm Emanuel has his eyes on raising money via Capital Appreciation Bonds.

CABs saddle taxpayers with higher costs because they delay interest and principle payments until a final lump-sum payment at the end.

CABs have fallen out of favor because of risk. Some cities and states have outlawed them.

Nonetheless, Chicago Mulls Borrowing That Puerto Rico Rejected as Too Risky.

Mayor Rahm Emanuel proposed issuing $500 million of bonds this week in an ordinance that would permit the use of capital appreciation bonds, where borrowers postpone interest and principal payments into one big sum at the end of the term.

Chicago is struggling to plug its deficit and $20 billion of unfunded pension liabilities. Emanuel’s move would give the third-most-populous city a means of borrowing without having to face the costs right away.

Texas restricted the use of CABs in June and California has limited them since 2013. The Puerto Rico Electric Power Authority dismissed a bondholder plan last week to restructure its debt using capital appreciation bonds, citing the disproportionate risks.

Former California Treasurer William Lockyer called the debt “abusive” because it passes on large payments to future generations.

“They increase the total cost and lower flexibility going into the future,” said Steve Murray, a senior director at Fitch Ratings. “They can limit future borrowing ability.”

Emanuel also proposed selling $125 million of wastewater revenue bonds to fund swap termination payments, Poppe said. A separate ordinance would authorize $2 billion in bonds for O’Hare International Airport, including $1.7 billion of refunding for savings, and about $300 million of new money for capital projects and interest, according to Poppe.

Rabbit-Hole Math

Given Chicago's junk bond rating, no investor in their right mind would purchase Chicago CABs. Default risk is enormous.

Also note that Emanuel needs to sell bonds to "fund swap termination payments". Those termination fees came into play because Chicago issued taxpayer-risky bonds that required repayment if the bonds dropped into territory.

Those bond are now junk, so Chicago has to borrow money to get out of swaps it never should have gotten into in the first place.

And $1.7 billion in bonds for "refunding savings". Say what?  Borrowing to refund savings?

Maybe that description makes sense down the rabbit hole, somewhere in Wonderland, but real world math seems questionable to say the least.

Desperation Tactics

These are the tactics of a city that is clearly in serious trouble. Is there no end to stupidity?

Here's the deal.

  1. Chicago pension promises cannot be met.
  2. The Chicago Board of Education is bankrupt.
  3. The City itself is bankrupt as well (but no one can really say that, especially when they cannot admit points one and two).

Until there is an honest discussion about the above three points, Emanuel has proven he is willing to go further down the rabbit hole in search of solutions that cannot possibly work in the real world.

Emanuel Needs Another Choice

The Illinois legislature contributes to the problem. Chicago needs choices. One of those choices is to declare bankruptcy.

Because bankruptcy is different for municipalities than corporations, Chicago itself cannot declare bankruptcy now. But the school system can and should.

Unfortunately, Illinois municipalities cannot declare bankruptcy until the state allows it. The legislature needs to give Chicago that choice.

Perhaps that choice would wake up the mayor. Perhaps not.

Question of Mushrooms

Did Emanuel eat too may funny mushrooms in his travels in Wonderland to understand a good option when he sees it?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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