Rahm's latest Wall Street bond deal is a bad deal for the city

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There's no such thing as a free bond deal. - FLICKR/PICTURES OF MONEY
  • Flickr/Pictures of Money
  • There's no such thing as a free bond deal.

As a public service to my faithful readers, I've plowed through the 492 pages of legalese in Mayor Emanuel's latest school bond deal to see what in it for us.

So first of all—you're welcome.

Now to the bottom line: We're getting hammered by a bad deal that's made even worse by the antics of Governor Rauner, who's supposed to be the mayor's good friend.

With friends like this—right, Rahm?

Let's get to the nitty gritty on this sucker.

As we all know, the Chicago Public School system is broke. So broke that the mayor can't repay existing debt without borrowing more money.

Well, that's what the mayor says. I'm not sure I believe him, as I don't think he's come close to exhausting all of his options. Like emptying the TIF reserves.

But, let's give him the benefit of the doubt—for the moment.

So on February 1, Emanuel flew to New York City to meet with investors, in the hope of talking them into lending $725 million to CPS.

By doing this, Emanuel was essentially asking to do what ordinary consumers do when they pay off one credit card with another credit card.

It's dangerous behavior—which is why he should have considered those other options first. But like I said, I'm trying to give him the benefit of doubt here.

Of course, those New York bankers weren't just going to give Rahm the money for free. Oh no. They charge interest, which, as they likely spelled out to the mayor in their meeting, would be based on the riskiness of the loan. As in, if we lend you this money, how likely is the city to pay us back?

In so many words, Rahm tells them not to worry about risk. He's got a plan to get us through this financial Armageddon.

He's going to cut a deal with the Chicago Teachers Union that will keep labor costs relatively stable for the next four years. And he's anticipating an upswing in the economy—especially the real estate market—which will bring in more revenue. And he's going to raise taxes. And he's going to press the state to send CPS more money.

So there's no need to sock it to us with high interest rates, everybody!

And then what happens?

Rauner—the mayor's old wine-drinking, money-making pal—cuts him off at the knees.

On February 2, Rauner announces that he's not going to be sending Chicago more money because the mayor's proposed union deal is so outrageous that it would be like throwing good money down the drain.

And if a lack of state funds forces CPS to go bankrupt, Rauner says, so be it. Well, you can imagine what impact the governor's words had on Rahm's negotiations with the Wall Street lenders.

Whether he intended to or not—and only Rauner knows the answer to that—he gave the lenders some ammunition to play hardball with the mayor.

Essentially, the investors told the mayor that lending money to CPS is even riskier than usual—what with the governor talking bankruptcy.

So, in light of the added risk, they demanded more in interest charges.

How much more?

Basically, the mayor had to give the lenders what people in the industry call an "original issue discount."

That means they're not lending us the full amount of the loan.

In this case, instead of lending CPS $725 million, they're only lending it about $615 million. But CPS still has to repay the full $725 million.

Think of it this way. They're lending us $725 million and we immediately give them $110 million right back.

I'm telling you—I could use one of these "original issue discounts" for my next birthday.

Actually, we don't really even wind up with $615 million.

That's because, in addition to interest, we have to pay about $9 million in fees to the bond merchants who underwrite the deal—the usual collection of characters that include J.P. Morgan, Barclays, Loop Capital Markets, and so forth.

What—you thought these guys did this stuff for free too?

Bottom line—we're getting $606 million from this deal, even though it's on the books as a $725 million loan.

Add up the fees, the interest, and the principle, and when all's said and done, we'll have paid about $1.9 billion over the next 28 years for the $725 million that we didn't really get.

Wait, there's more.

If Rauner succeeds in driving CPS to bankruptcy, the lenders have some protection, despite all their talk of risk.

According to that agreement, the "pledged taxes" that CPS is dedicating to repay the loan constitute "special revenues" as "defined in section 902(2) of the U.S. Bankruptcy Code."

My personal favorite section of the bankruptcy code.

As a consequence, that money "could not lawfully be used by the board other than in compliance with" the bond agreement.

In short, if CPS does go bankrupt, these lenders get to cut to the front of the line of creditors.

As political consultant James Carville once put it: "I used to think if there was reincarnation, I wanted to come back as a .400 baseball hitter. But now I want to come back as the bond market."

Would this "special revenues" claim hold up in bankruptcy court? I don't know. A similar claim didn't hold up when Detroit's schools went bankrupt. But I suppose it depends on the judge, should things come to that.

In any case, to review:

Your taxes just went up by $110 million in order to assure lenders they're protected from a risk that may or not even exist.

And, of course, because that money's going straight to Wall Street, none of that $110 million plus interest will go anywhere near a classroom.

Just in case any of you still think this is about the kids.


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