Wed. Jan 19th, 2022

Smart cash management or creative accounting?

The city of Chicago recently announced plans to use federal stimulus funds from the U.S. bailout plan to pay off about $ 500 million in short-term debt it contracted 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 Government Finance Research Center, makes clear, the measure is not wrong, but she also believes it is not a prudent selection of all possible steps. At best, Kass sees it as a financial Ave Maria that will likely work for the city, at the expense of transparency and public engagement.

This is what happened. Last November, in the face of a budget gap of nearly $ 800 billion in fiscal 2020, mainly due to the pandemic, city administrators decided to borrow $ 450 million in short-term debt, more interests. City administrators contacted several banks and found that JP Morgan offered the best rate. The agreement was finalized in December.

The one-year line of credit offered some advantages. Most importantly, he gained time in the city to see if more money would be available for the fiscal stimulus.

But it also entailed some pitfalls. Among them: doing what is often called “private placement” with a bank is a known method of allowing a municipal entity to avoid scrutiny and the public input that comes from issuing bonds to the market. In addition, American Rescue Plan funds are not intended to pay off debt, although they are allowed to be used to plug budget holes in lost revenue.

Finally, the line of credit simply represents an awkward maneuver: state and local governments don’t have to apply for loans to keep their budgets balanced. Although many use lines of credit or short-term debt (often called Income Advance Notes), these are primarily intended for current and projected income that is only hurt throughout the fiscal year, leaving certain periods of time without income in money continuous spending.

As Chicago officials said in a May presentation to investors, “The city stated that it would plan to close $ 965 million of the budget gap through long-term loans, but only if the city did not receive additional federal funding. closed its budget gap in mid-2020 with the sale of $ 500 million of a one-year ticket in December 2020. The city plans to pay for tickets earlier this summer with ARP funds and will give up the restructuring of the remaining debt ”.

Source: May Chicago Investor Conference

The city did not respond to any MarketWatch comment requests.

Related: The Fed’s COVID-era municipal lending program worked for Illinois

“I think this fits the spirit of the American Rescue Plan program,” Kass told MarketWatch. What he finds worrying is the lack of transparency. At the May investor presentation, city officials referred to an earlier statement about their short-term funding intentions, but it was shown that no such communication could be traced. (Some publications, including the municipal market industry standard The bond buyer, he reported.)

In addition, as Kass said, “the discourse used to explain the plans is largely aimed at the municipal bond market, including credit rating agencies, bank subscribers and investors.”

More to the point, Kass said, “I think there can be a political and political debate about decisions here. We should use (rescue plan funds) to restore revenue, maintain current operations or direct spending programs like the relief of rent or the relief of public services? ”

It’s also unclear, he said, what the city’s Plan B could have been if Washington hadn’t approved any additional incentives. At the May investor filing, officials noted that they were prepared to borrow long-term debt if that had happened, paying more interest and further worsening an over-indebted situation. What they don’t say is what the commitment would have been if it were so, Kass noted.

“Who would have been affected by spending cuts?” she said. “I don’t see how this relates to the city’s programs and services and the communities that may need the city’s most attention or have been neglected. I don’t see it related to the political decisions the mayor has stated are a priority. I find it cruel at a time when there is so much need.

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