Shining A Light On Complex City Deals: A New Model
Last month, the City Council unanimously passed the Debt Transactions - Transparency, Accountability and Performance Ordinance. Promoted by the council’s Progressive Caucus and written in consultation with the Emanuel administration, the ordinance outlines a process certain debt transactions must undergo before they are approved.
The City of Chicago, Chicago Public Schools, and the State of Illinois are all swimming in billions of dollars of debt from decades of massive bond issuances, often undertaken with minimal review or discussion before receiving City Council approval.
Under this ordinance, fixed-rate bonds would not be subject to additional scrutiny. The ordinance applies only to long-term debt transactions - "any bond, note or other debt instrument" with a maturity of longer than 271 days - that do not bear interest at a fixed rate for their entire term. Importantly, though, the ordinance will include the creative – and controversial – financing deals that have contributed to Chicago’s shaky finances in recent years.
For example, the ordinance’s provisions will apply to so-called “toxic swaps,” much maligned for their sensitivity to market fluctuations and their sometimes-costly termination fees. The City of Chicago alone has paid at least $377 million in termination fees to exit these deals in recent years. As of August 2014, over $500 million had already been paid to banks as part of these swap deals.
It’s difficult to evaluate how much of the $500 million spent on swaps represents a true loss for the city – i.e., how much money would have been saved had the City not entered into these swaps or corresponding floating-rate bonds. But it seems likely that inflated interest rates and prohibitive contract provisions that prevented the city from restructuring debt played a role in the supersized payments. A 2014 Chicago Tribune analysis of similar deals entered into by Chicago Public Schools estimated that CPS will likely pay at least $100 million more over the life of four floating-rate bonds than the district would have paid had it issued fixed-rate bonds instead.
Much like the Privatization Transparency, Accountability and Performance Ordinance (PTAPO), which was unanimously passed by the City Council in November of last year, the purpose of this ordinance is to subject some debt transactions to "more rigorous evaluation" and "more meaningful public scrutiny." Ideally, additional transparency will heighten the public’s knowledge of and access to the factors considered when entering these often-controversial transactions, including any risks they may pose.
The Better Government Association Policy Unit was heavily involved with the Emanuel administration and Alderman Roderick Sawyer in drafting the privatization ordinance as it applied to large-scale public assets like the parking meter system.
While PTAPO isn’t intended to prevent the City of Chicago from entering into another major privatization deal, it slows down the process, providing additional time and transparency necessary for aldermen and the public to parse these complicated transactions and evaluate whether a deal is in the best interests of the City and its residents.
Many provisions included in the debt transactions ordinance were modeled after elements of PTAPO, and largely or perfectly mirror similar provisions that now apply to privatization deals considered by the City Council:
- Both ordinances require the City’s CFO to obtain an independent evaluation from an outside advisor that includes an assessment of whether the proposal is in the best interests of the City and its residents
- Both include a clear timeline for review, including a minimum of 7 days between a City Council committee hearing and final vote on an ordinance. In each case, the CFO must publicly post a notice that describes the proposed transaction a minimum of 23 days before the committee hearing.
- Both require a public meeting, in addition to the required committee hearing, at which members of the public can comment on a proposed transaction
- Both ordinances require posting relevant documents prominently on the City’s website.
- Both require annual performance reports that describe the financial performance of the transaction over the previous year
The Debt Transactions ordinance also requires the City Council Office of Financial Analysis (COFA) to prepare a report on the transaction that will be distributed to the City Council and posted online. The BGA strongly supported the creation of COFA, which is intended to serve as the City Council’s independent budget office and a valuable third party source of fiscal analysis.
Importantly, the ordinance also prohibits the City from indemnifying any party to a transaction, keeping open the opportunity for the City to file a lawsuit in the event of “gross negligence, illegal acts, bad faith breach or willful misconduct.”
This kind of legal recourse isn’t a theoretical proposition. City Treasurer Kurt Summers has encouraged three city pension funds as well as city, county and state authorities to join in a class action lawsuit against major banks for collusive and anti-competitive behavior. The Chicago Teachers Pension Fund and the Chicago Police Pension Fund filed a similar lawsuit last November; in May, the city of Philadelphia filed suit, as well. All the while, the Emanuel administration has maintained that the City of Chicago does not have cause for such a lawsuit.
It seems unlikely that this administration and council will consider these kinds of risky debt transactions in the near future, given the City’s poor credit rating and the negative publicity these deals have garnered in recent years. Nevertheless, instituting a process that follows the model first laid out in PTAPO reflects an increased commitment by city officials to more careful consideration of massive and consequential financial transactions. Similarly, it was crucial to lay out a process for review of massive asset leases and sales, despite the unlikely possibility of this administration considering anything close to the magnitude of another parking meter deal. Such a commitment to process and careful consideration is particularly important as these transactions become increasingly complex and challenging for city residents – and aldermen – to understand on an expedited time frame.
Deals like massive swaps and the parking meter lease have historically been forced upon the City Council with minimal context and a hefty sense of urgency. And the Council went right on and approved nearly every one of them, though a growing segment has increasingly raised concerns and pushed back. Now, though, a bar has been set. Independent analysis must be provided, hearings must be held. A longer timeline and a heightened level of transparency must be met.
The BGA is pleased that the Emanuel administration and the City Council embraced this important good-government ordinance that draws heavily on PTAPO. It's an important law that will shed some light on, and perhaps, where warranted, prevent some of Chicago's ill advised bonding practices in the same way PTAPO is designed to do for privatization proposals. At a hearing held by the Illinois House Revenue and Finance Committee last week, City Treasurer Summers suggested that the General Assembly pursue a state law similar to DTAPO, an idea worth examining.
It’s impossible to legislate away bad deals – elected officials are human, after all. But with time, transparency and meaningful public input, officials and the public they represent can engage in more robust conversation around our city’s fiscal future.