Mayor Brandon Johnson struggled mightily to win approval Wednesday from the City Council to float $830 million in bonds to finance infrastructure work around the city. But win he did after having to cast a tie-breaking vote himself to keep the plan from being returned to the Finance Committee for a needed overhaul.
Don’t pop the Champagne corks yet, Mr. Mayor. A tougher audience than our feckless aldermen awaits.
Bond investors, most of whom are a pretty sophisticated bunch, will be asked to step up and purchase these securities once the city’s well-compensated investment bankers peddle them. After having witnessed the mayor’s critics on the City Council raise appropriate questions about the city’s weak fiscal standing and then seeing the mayor and his council supporters plunge ahead anyway, those investors will be forgiven if they’re leery of financing the nation’s third largest city when it’s run by such an irresponsible bunch.
Likewise, rating agencies — two of which downgraded the city’s credit earlier this year, even before considering this unusually large debt offering — are likely to weigh in on these bonds before they hit the market. Last July, as the Johnson administration prepared to issue $643 million in bonds for capital projects, Standard & Poor’s was sanguine about the outlook for repayment, giving the securities a BBB-plus rating.
S&P described the situation then as “stable,” but said that could change if, among other things, the city couldn’t “manage any economic or revenue disruption without experiencing a deterioration in overall credit quality.” Months later, that’s precisely what has happened.
The City Council refused last year to hike property taxes at all, the 2025 budget debate dragged well into December, and S&P in January reversed course. It downgraded the city to BBB, two notches above junk-credit status, prompting Chicago Chief Financial Officer Jill Jaworski to complain that the downgrade “does not accurately reflect the strength of the City’s credit.”
How much strength, we would ask, does the city display when it plans to delay any repayment of principal or interest on these bonds until 2028 and instead cover the minimum owed over the next few years with … more interest? We might expect ratings agencies to take that fact into account in their assessment.
An S&P representative told us he can’t comment on whether the agency has or hasn’t been asked to rate any specific transaction, whether for the city of Chicago or any other issuer.
In these pages, we said the mayor should reduce the size of the bond offering and scrap the plan to make no payments for two years. More than one alderman offered amendments to do just that, but this city’s historically unpopular mayor insisted on plowing ahead and managed to cajole 26 aldermen — the slimmest of majorities — to go along.
But not before the council aired a bunch of the city’s dirty financial laundry in the debate leading up to that nail-biter of a vote. Surely, rating agencies and investors will consider the back-and-forth on the council floor and how Johnson’s aldermanic supporters defended a repayment structure akin to some of the worst mortgage practices in the lead-up to the 2008 housing crash. Their rationale? The city can’t afford even the few tens of millions in interest-only payments over the next few years because the council won’t hike property taxes and the mayor has categorically refused to cut costs.
That should inspire investor confidence!
Hey, Mr. and Ms. Bond Investor, this mayor and council — you know, the ones asking you to invest in the future of Chicago — aren’t willing to pay a nickel during the remainder of their terms to cover any part of what the city will owe you over the next 30 years. But surely some future mayor and aldermen will step up. Worry not.
This isn’t to predict that the mayor’s finance team won’t ultimately find takers for this wheelbarrow full of debt. Most everything that’s for sale can be offloaded at some price.
But we expect investors will demand higher interest rates than Johnson administration officials now anticipate. As it stands, this repayment structure will end up costing taxpayers $2 billion for an $830 million loan.
Don’t be surprised if that $2 billion proves conservative.
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