Chicago’s idea for ending ‘unsustainable financial practices’? Billion-dollar borrowing

The city’s long-term borrowing is akin to a Chicagoan taking on a mortgage to pay down credit-card bills she will never be able to pay off anyway.

Update: Chicago City Council on June 17 approved Mayor Rahm Emanuel’s $1.1 billion bond sale with no debate. 

In one of the biggest ironies of Chicago’s fiscal crisis, Mayor Rahm Emanuel’s finance team recently announced he wants to put an end to Chicago’s “unsustainable financial practices.”

How?

By borrowing an additional $1.1 billion from the financial markets.

The bond issue will be the largest completed since Emanuel took office in 2011, increasing the debt burden on hard-working Chicagoans already facing service cuts to their schools, public safety and road repair.

Chicago’s recent credit downgrade to junk status by Moody’s Investors Service has Emanuel and officials scrambling to shore up the city’s finances so it can pay off its bills, including police back pay, court judgments and other obligations that are now due.

The ironies of this bond issue are many and contradict the mayor’s stated goal of ending “unsustainable financial practices.” Consider the following:

– The bond issue actually increases the city’s total debt, moving the city in the wrong direction. Total debt now equals $29.2 billion, including the city’s $20 billion shortfall of its four city-run pension funds.

When you add other debt Chicagoans are also on the hook for, including that of Chicago Public Schools, the Chicago Park District and other Cook County governments, the total exceeds $60 billion, far more than its taxpayers can ever repay without structural reforms.

– The city’s long-term borrowing is akin to a Chicagoan taking on a mortgage to pay down credit-card bills she will never be able to pay off anyway. The city is being forced to pay down its short-term borrowings because it can’t be sure it can continue to find short-term lenders at reasonable costs. With long-term borrowing, the city is just pushing the problem out onto future generations.

And in another irony, by paying down its debt through long-term borrowings, the city is then free to start spending again when the time is right.

– Proceeds from the bonds – which will burden Chicago taxpayers with debt that extends from two to 30 years – are being used to pay for yearly operating expenses that should be financed with current-year revenues.

The bond issue is needed partially because the city agreed to pay more in police salaries despite already being in the red. The city also must pay off fines and other settlements related to city business that should be funded from reserves and current-year budgets, not long-term loans.

Chicago’s mismanagement and lack of control over its expenses has the city trapped fiscally. The current borrowing actions are being forced upon it by the market in order to avoid further chaos.

But don’t let city officials make you think that by borrowing more and pushing payments out into the future things will be more sustainable. This is just the next kick of the can down the road that has become the modus operandi of Chicago and Illinois finances.

And if you’re looking for the biggest irony to come out of this crisis, just look at the mayor’s pension-reform plan.

His proposal to fix a problem created largely by skipped payments and chronic underfunding of the pension plans is to do just that: cut planned payments to the fire and police pension funds by more than $700 million over the next five years.

That plan only makes the hole bigger for the next mayor.

There’s nothing sustainable about this course of action. It just looks like more of the same.

Real reform – meaning a plan that ensures the city can provide education, public safety and other essential services for decades to come – requires opening up the city’s collective-bargaining agreements to right-size payrolls and benefits for city employees.

Chicago must stop paying out what it can’t afford.