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Saturday, July 20

Gapers Block

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I like to give myself little assignments for these columns. Like, "Let's see if you can find the positives in the Plan for Transformation," or, "Let's see if you can explain to Cubs fans how its okay that Sox fans celebrate their every failure." A few weeks ago, I gave myself the following assignment: "Let's see if you can make bond issues seem interesting and engaging."

Turns out, I can't. Although I do think the title is quite witty. Five drafts later, there is still nothing interesting about the fact that the City of Chicago issues bonds for everything, and then issues more bonds to pay the coupons on those bonds, and then paves potholes with more bonds and then use more bonds as memo pads at the Department of Streets and Sanitation. Boy, does our city love bonds. And boy, bond issues are very, very boring.

Bonds, and more recently TIFs (Tax Incremental Financing), are the two pillars that support the enormous public works programs that make our city's economic and political structure run. Yet you rarely hear about these in the standard or alternative press, because bonds are very boring. And if bonds are boring, then TIF Zones belong in some new category that transcends boring and requires its own neologism. Let's call it "zarxbar." Bond issues are boring -- TIF Zones are zarxbar as hell.

Of course, to make the issue of Chicago's (and, actually, Illinois') bond issues interesting, I had to first figure out how bonds worked. I had a basic idea, of course, but municipal bonds and corporate bonds are different. And municipal bonds are far more amusing than corporate bonds, because municipalities are free to issue bonds to pay for old bonds, basically borrowing in perpetuity, hoping for an eventual earthquake that will swallow everything.

Bond issues are the best way for the City to quickly raise funds for some project or other. The main purchasers of the bonds, besides kindly old ladies with newborn grandchildren, are enormous financial institutions and corporations that need somewhere to put their money that doesn't endanger their own fiscal profile. Owning little bits tiny of the City of Chicago is a pretty safe bet; probability dictates that the municipality won't disappear any time soon. Plus why put that money in a bank when you yourself are the bank? You might as well buy 50,000 $1,000 bonds off of which you can earn as much as $2.5m in coupons and then get the entire $50m investment back in 20 years. Awesome!

Richard M. Daley, Mayor, really likes bonds because he knows how to manipulate them. In fact, he is probably the world's foremost expert on what I would call "Bond Trompe l'Oeil" because I can't think of anything else to call it. A cursory look at page 21 of the city's latest Five Year Plan (okay, it's actually called the "Five Year Capital Improvement Plan," but close enough) indicates that of all capital improvements to be made between 2003 and 2007, more than 78 percent will come from bond funds. Three percent will come from city funds. Yet he has maintained an excellent bond rating from Standard and Poor's, one of the best for any municipality in the country. In fact, Standard and Poor's was so taken aback by our city's bond-mania, they began rating not only the city, but each of the city's governmental departments!

Mayor Daley really hates having to do anything with taxes. Not that he wants to get rid of taxes, but I imagine for him seeing "Mayor Daley" and "taxes" in the same sentence in the newspaper gives him the same feeling it would give you or me to see your name and "weird even for a pedophile" in the same sentence. Which is why he prefers bonds, and why he had been planning on financing his pet project with bonds. Pet project such as what? His planned third international airport.

"What!" you may be saying, "Mayor Daley doesn't want a third airport!" Mayor Daley was quoted in an interview with Paul Green in 1991 as saying:

"So that for the year 2000, the third airport is the whole key to the future of the metropolitan area. Otherwise, there's no growth. You're not going to have a lot of growth that can accomplish what O'Hare Field has done for the metropolitan area in the north and west suburbs. It will do the same thing for the Lake Calumet area. We need the guts to do it. If you don't do it, you are not going any place. You're not going any place."

Just thought I'd throw that in there.

Plus, politicians have all sorts of wild and crazy tricks they can pull with bond issues. Hunka Hunka Burnin' Gov. Blagojevich recently proposed easing the state's debt payments (paying off the coupons on bonds, which was putting more and more stress and the ability of Springfield to spend) by lengthening the maturity period of the bonds it owes money on. Fasten your seatbelts, because this is where it turns into a Plato's Den of Inequity, a thrill ride if you will:

The state has a bond issue extending into the next 20 years that it will have to pay $31.56b on, in total. So Gov. Rod proposed extending the maturity of those bonds to 25 years (which you can do with government bonds, because you're the government) which would make debt repayment less burdensome now and free up some cold hard cash he can use to, say, help expand an airport, or maybe build a new state Capitol in the 33rd Ward. The Republicans and Crain's Chicago Business termed this a "budget bomb," which will inevitably hurt our children, assuming of course we have children and they live in Illinois. And also assuming that the State of Illinois will be unable to simply issue more bonds. But the GOPers and Crain's have a point, since the recent Standard and Poor's (let's punch that up) Standard…AND POOR'S!!! bond rating of the state was AA, which is okay, but also came with a negative outlook.

They even have a graph!

The graph shows, with a squiggly line, how the debt service repayment will increase exponentially over the next 25 years. A note at the bottom reads, naturally, "NOTE:" then it goes on: "No adjustment made for inflation."

Granted, the people at Crain's Chicago Business forget more about bond issues before their first scotch and soda than I will ever know; but part of the purpose for extending a bond issue is the fact that the mean inflation rate of 3 percent yearly will make the face value of the bond (e.g., $1,000) worth less (though not, strictly speaking worthless). So not adjusting for inflation kind of skews the graph. Thus why the squiggly line becomes less squiggly and more vertical at the end there.

Without these titanic financial institutions, smaller local banks, eccentric millionaires, thrifty old ladies, and spritely, lovable webmagazine columnists buying bonds, even when those bonds are issued only as a way to finance older bonds, Richard M. Daley, City Manager would be forced to raise property taxes, find new places to drop "entertainment" and other luxury taxes, and perhaps have traffic cops selling W.F. Crisp bars at street corners to create the thousands of jobs the city is regularly able to manufacture though huge pork projects like Millennium Park, O'Hare Expansion, and Pretty-Fence-Putting-In. But bonds are de facto loans, and a close friendship to Chicago's exploding business community never hurts. And that friendship trickles down and colors every aspect of the "Chicago System," the complex of business, political, and social programs that works to benefit of politicians and businesspeople alike. Oh, and taxpayers (known in some parts of the country as "voters") too.

Thrilling, isn't it? Well, I tried.

GB store


brian / March 24, 2004 9:36 AM

I followed you, and I think it is an interesting topic. (Well sorta. Let's not take it too far.) If you need any more of those charts, give me a ring (that's sort of what I do for a living).

Oh, and what about that TIF for the Home Depot? Ugh.

Ramsin / March 24, 2004 9:23 PM

Brian- You make fiscal outlook graphs? I really wanted to put a graph in this article but couldn't find a good one on-line.

TIF zones have been ridiculously abused by the city over the last few years. State rules regarding TIFs are very explicit in saying they should be used only for "blighted" areas (with a good definition of what "blighted" means) but now they're being used to put in a Home Depot. Gross.

Cinnamon / March 24, 2004 10:12 PM

Not to completely hijack your article, but Rogers Park is probably going to get a TIF passed to beautify the Loyola University area. Rogers Park not at all blighted. Sure we have more than our fair shares of dollar stores, but they're stores that are supporting families and not empty storefronts.

I've wondered about the preponderance of bond issues and now I understand them in a much better way.


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