Last week I wrote about 23 good government bills that made it through the same state legislature in Springfield that still can’t pass a comprehensive budget or even agree on a temporary funding plan for K-12 schools, higher education and social services.
Well, it turns out there’s another silver lining in another dark fiscal cloud—this one in the City of Chicago.
It’s a wonky story—way wonky—but it’s important, so stay with me.
For years—under Mayors Richard M. Daley and Rahm Emanuel—the city entered into numerous exotic borrowing agreements known as “variable interest rate debt transactions,” often without much discussion in City Council or the media.
The goal of these promising but risky deals is to significantly lower upfront costs—to get cash on the cheap—but they’re unpredictable because interest rates fluctuate with the whims of Wall Street.
Market swoons and costly termination clauses can result in ballooning repayments to the lenders, and that’s what happened in Chicago.
One example: So-called “toxic swaps”—what a perfect name— have cost the City upwards of $500 million in payments, according to some estimates, and the City recently spent at least $377 million more to get out from under several deals, according to a Tribune analysis.
Add in Chicago Public Schools, which played the same reckless game, and you’ve got hundreds of millions in additional swap payments.
Talk about bad bets.
But here’s the good news: Last month, with minimal fanfare, City Council passed the “Debt Transparency, Accountability and Performance Ordinance,” or DTAPO.
It flew under the radar, drowned out by the hubbub in Springfield, but it’s critical to Chicago’s future fiscal stability.
DTAPO draws heavily on the city’s privatization ordinance, which was drafted with the help of the Better Government Association’s policy team and passed in 2015 to protect taxpayers from another abominable parking meter deal.
DTAPO includes similar safeguards to prevent fast-tracking borrowing schemes by requiring:
- Two independent analyses of any proposed transaction – one from an advisor hired by the city’s CFO, the other from the Council’s Office of Financial Analysis.
- A timeline that gives aldermen and other interest groups ample opportunity to review a transaction.
- A public hearing—in addition to a Council hearing— to let citizens weigh in on a proposed deal.
- A yearly review that compares a transaction’s actual performance with its anticipated risks and benefits.
The ordinance also prohibits indemnification of participants in these swaps from allegations of fraud, bad faith breaches or illegal acts.
That provision comes as City Treasurer Kurt Summers urges the Emanuel administration to join an antitrust lawsuit filed by two local public employee unions to recover money from banks that made millions on these costly and complex deals.
So far the mayor’s rejected the suggestion.
It’s fair to say passage of the new ordinance is like shutting the barn door after the horses have bolted.
But it’s still worth closing the door, even now.
So props to the Council’s Progressive Caucus, led on this issue by Aldermen John Arena and Scott Waguespack, and to Ald. Roderick Sawyer, whom the BGA worked with on the privatization ordinance—the template for handling other complicated, high-stakes transactions.
Now that there’s a process in place, let’s make sure the other ingredients of a smart financial deal—careful thought, public input and good faith negotiations—stay in the mix.
Safeguarding our tax dollars—not spending them wantonly like a Vegas gambler—depends on it.