Mayor Brandon Johnson’s “exaggeratedly back-loaded” schedule for repaying $830 million in general obligation bonds could saddle Chicago taxpayers with $2 billion in additional costs by 2055, municipal finance experts warned Tuesday.
Municipal Market Analytics, an independent research group on municipal bonds, urged the City Council to restructure the debt repayment schedule before signing off on Johnson’s plan to add $830 million to Chicago’s mountain of debt to bankroll a year’s worth of capital projects.
The City Council is scheduled to take a final vote on the general obligation bond issue at Wednesday’s meeting, unless any two alderpersons use a parliamentary maneuver to postpone the final vote. They don’t need to provide a reason for that delay.
MMA Partner Matt Fabian acknowledged the city has a history of “back-loading” its debt — putting more principal at the end, thereby “ballooning” those late payments.
But he argued Johnson’s plans is a “more extreme version” of that dubious structure. It calls for the city to make “capitalized interest” payments only — using borrowed money — for the first two years and make interest-only payments until 2045.
“Future taxpayers will be paying for improvements that current taxpayers benefit from. … It leaves future taxpayers to address the city’s current management failure to address its budget in a sustainable manner,” Fabian said.
“This back-loaded structure increases the total cost of borrowing for this project by $2 billion,” he added. “This is a more extreme version than what the city has done in the past. Chicago had been moving towards a more balanced budget and now, they’re moving away from that again.”
Homebuyers routinely “make level monthly payments” to manage the impact on their family cash flow even though those monthly payments include “more principal and less interest” at the back end of the loan, Fabian said.
The city’s annual payments will, in contrast, balloon — from $47.6 million in 2028 to $136.9 million in 2050, remaining there until the bonds are fully retired in 2055.
“The city is showing an inability to create budget space in its current budgets to pay for what it’s borrowing….Just like using your credit card to pay for recurring expenses, it’s not a sustainable practice,” Fabian said.
“Future Chicago will have a harder time balancing its budget because of this bond issue. … They should pay the principal earlier. … I’m not saying they should borrow less. I’m saying they should pay for more of it now.”
Lisa Washburn, chief credit officer and managing director, called the city’s repayment structure “atypical.”
“It’s a more aggressive and costly debt structure because … you’re paying interest on the full amount for a much longer period of time,” Washburn said.
“ It’s a more costly debt future. It pushes the costs out to future generations and it makes budget balancing more difficult in the future assuming all else is equal.”
Chief Financial Officer Jill Jaworski called the backloaded repayments schedule “standard practice” for the city.
“There’s a mis-match between the timing of when we authorize the bond issue and authorize the associated property tax levy and actually collect revenues that would be available for repayment of the bonds,” Jaworski told the Sun-Times.
“So we capitalize interest for the first couple of years. Depending on when the bonds are actually issued, it will likely be less than two years…We’re planning to pay the principal starting in about 20 years. … We are wrapping it around the principal payments that the city already has for existing debt service.”
When someone buys a home, their annual mortgage payments are “level for the entire time,” Jaworski said. When the city issues bonds, it doesn’t have “just one mortgage” — it has many, Jaworski said.
“These bonds are being wrapped around the existing debt service we have so the amount of debt service that is being paid annually in the city’s budget is affordable and reasonable for the city,” Jaworski said.
“If we were to take every debt transaction and amortize it with principal starting with Year One, the debt service would be much higher and the city would need additional revenues and tax increases in order to pay for that type of rapid repayment.”
Ald. Bill Conway (34th) and State Comptroller Susana Mendoza both have questioned that delayed repayment schedule. They also urged the City Council to shrink the size of the borrowing for capital projects after Standard & Poor’s dropped the bond rating that determines Chicago’s borrowing costs. It was lowered from BBB+ to BBB — two notches above “junk bond” status.
That change is expected to cost Chicago taxpayers tens of millions of dollars over the next 40 years.
Jaworski called those comments “political in nature,” pushing back hard against efforts to shrink the borrowing.
“These are capital investments we need to make,” she said.
“If Susana Mendoza and Alderman Conway think that we should have some significant tax increases to continue physical infrastructure investments we need to make in the city, they should propose those.”
