Market Additional: Chicago switched to federal incentives and can now use $ 500 million to repay short-term loans

MarketWatch Note: The City of Chicago responded to requests for comment after this story was originally published. It has been updated to include the answer.

Clever cash management or creative bookkeeping?

The city of Chicago recently announced plans to use funds from the US federal bailout plan to pay off about $ 500 million in short-term debt it took on in December. The move received little attention until a public finance expert posted a blog post on the subject in August.

As Amanda Kass, associate director of the Chicago-based Government Finance Research Center, points out, the move is not inappropriate – but neither does she consider it a prudent choice among possible steps. At best, Kass sees this as a financial Ave Maria, which will probably pay off for the city at the expense of transparency and public engagement.

Here is what happened. Last November, city managers decided to take out $ 450 million in short-term debt plus interest in the face of a fiscal 2020 fiscal deficit of nearly $ 800 million, largely due to the pandemic. City managers reached out to several banks and found JPMorgan Chase & Co.
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the best price offered. The deal was closed in December.

The one-year line of credit offered a number of advantages. Most importantly, it bought time for the city to see if more fiscal stimulus would be available.

But it also brought pitfalls. Among other things: The so-called “private placement” with a bank is a well-known method of removing the control and public input from a municipal body, which are required when issuing bonds in the market. In addition, American Rescue Plan funds are not intended to be used to pay off debts, although they are permissible to use to fill budget holes from lost revenue.

After all, the credit line is an inconvenient maneuver. The state and municipalities should not take out loans to keep their budgets in balance. While many use lines of credit or short-term debt (often referred to as revenue anticipation notes), these are primarily intended for expected, ongoing income that is simply inconsistent throughout the fiscal year, leaving certain periods of time with no money to support ongoing expenses.

As Chicago officials put it in a May presentation to investors, “The city said it will close the $ 965 million budget gap through long-term borrowing, but only if the city does not receive additional federal funding. The city closed its budget gap in mid-2020 with the sale of one-year bonds worth $ 500 million in December 2020. The city plans to repay the notes early this summer with ARP funds and will waive the remaining rescheduling. "

Source: Chicago Investors Conference in May

“In the absence of any clarity about federal stimulus funding for lost revenue, the city passed the 2021 budget, assuming a $ 965 million restructuring. "This was done in order to avoid even deeper, contrast-stimulating measures such as tax increases or reductions in benefits and layoffs."

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"I think that fits in with the spirit of the American Rescue Plan program," Kass told MarketWatch. What worries them is the lack of transparency. In the May investor presentation, city officials referred to an earlier statement about the municipalities' intentions for short-term funding, but it was impossible to track down such communications. (Several publications, including the industry standard Bond Buyer for the municipal market, have reported on this.)

Also, as Kass put it, "the discourse used to explain the plans is largely aimed at the municipal bond market, including rating agencies, bank insurers and investors."

In response to a MarketWatch question about transparency, the city's press office sent an email: "With the leadership of the Biden administration and the continued advocacy of Mayor Lightfoot and a number of cities across the country, revenue replacement is clearly an intended one Purpose of the ARP dollars. The city lost $ 1.7 billion in revenue through tax hikes or benefits cuts and layoffs, the suffering of Chicago residents who couldn't get services, or the economic recovery of over $ 700 billion in GDP that fueled our financial condition , would have extended. "

More specifically, Kass said, “I think there can be a political and political debate about the choices here. Should we use (American Rescue Plan funds) to restore income, keep operations going, or have direct spending programs like rent or care facilities? "

It is also unclear what the city's Plan B would have looked like if Washington had not approved additional incentives. In the May investor presentation, officials said they were ready to take on longer-term debt if that happened – paying more interest and worsening the overall debt situation. What they don't say is what the compromise would have been if it had, stressed Kass.

"Who would be affected by spending cuts?" She said. “I don't see how this relates to city programs and services and communities that may need the city's attention the most or have been neglected. I don't see it in the context of the political decisions that the mayor has identified as priorities. It seems to me to be strong in a moment when there is so much need. "

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