You know you’re in financial trouble when you start making regular monthly payments on your credit card and don’t pay them off right away, causing the bank to charge you double-digit interest on your utility or grocery bills.
Consider the city of Chicago. The situation is not that different.
Chicago issued $512 million in bonds more than a week ago. We wrote last Sunday about the hefty interest charges the city had to pay on those securities, primarily to cover operating costs owed to firefighters under union contracts and in legal settlements primarily related to police conduct.
A few days ago, we learned more about how painful this bond financing will be for Chicago taxpayers when the city released its final offering documents.
Here are the gory “highlights.” By the end of 2033, the city will eventually pay more than US$140 million interest, bringing the total cost of the $512 million bond financing to $652 million.
Part of the reason interest costs are so high is that the city chose to include more than $52 million in interest. interest itself The number of bonds it issues. In other words, the city is paying interest on its interest!
You might ask, why would the city do something so fiscally reckless? This is the same reason why debt-ridden individuals put groceries on their credit cards.
Paying interest allows the city to avoid paying any debt service on those bonds in 2027 and 2028, which will be handy for Mayor Brandon Johnson, who is facing re-election, as he balances next year’s budget. But this increases the overall cost of these obligations.
Incidentally, the firefighter and legal settlement costs behind this brutal calculation totaled $433 million, according to the document. An additional $26 million of those bonds are for capital improvements, but the city was forced to issue them earlier this month in the face of adverse market conditions because those operational needs must be met this year. We’re not talking about the types of projects Chicago’s general obligation bonds typically finance — infrastructure work planned for the next few years.
To make matters worse, Johnson’s government staged a bait-and-switch on the city council late last year, when councilors reluctantly agreed to finance these operating costs through debt. Back in November, then-Mayor Chief Financial Officer Jill Jaworski provided the City Council with a proposed repayment schedule for the bonds. Her message was that while bond investors disapproved of the debt-financed operation and that doing so could harm the city’s credit rating, the costs involved here were significant. For a cash-strapped city, paying them over five years is a reasonable solution.
Jaworski’s timeline shows the bonds cost a total of $58 million in interest. Although the amount was large, the council swallowed and agreed.
Now? Interest costs have soared to $140 million, and the bonds will be repaid in seven years instead of five.
If Johnson does not win re-election, the pain will be left for the new government to bear, as polls suggest he likely will not.
And the pain can indeed be great. After Johnson and the former mayor put those bonds and all other debt on the city’s books, annual debt service on the city’s general obligation (GO) bonds will jump 71% from $366 million next year to $627 million in 2029, according to bond documents. By 2030, this number will climb to $657 million.
General debt bonds make up a little less than half of Chicago’s total bond debt, and other types of bonds are expected to rise or fall over that time period. But the city’s overall debt service costs will rise significantly over the next five years, and these latest securities will exacerbate that burden, according to city budget documents.
Hundreds of millions in GO’s increased debt payments may exacerbate future budget deficits but will not be used to maintain or improve city services. For investor reference only.
When people keep putting daily expenses on their credit cards and racking up interest, eventually the debt piles up so much that bankruptcy becomes the only option. The city of Chicago is not legally allowed to file for bankruptcy protection. at present.
But more bad decisions like this will hasten the reckoning. Chicago desperately needs to chart a different course and start living within its means.
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