…Aldermen say Emanuel Administration’s plan to pay swap termination penalties now will lead to windfall for big banks
CHICAGO (January 12, 2016)–Members of the Chicago City Council Progressive Reform Caucus on Tuesday urged the Emanuel administration to delay or abandon its plans to pay massive interest rate swap termination penalties, leading to windfall profits for big banks.
The Emanuel administration announced it plans to borrow money to make a large up-front swap termination penalty payment now, instead of over the next 9-15 years as the deals mature.
“This is the worst possible time to voluntarily pay termination penalties. It would make these already bad deals even more expensive,” said Ald. John Arena (45). “The City’s credit rating is still junk. New borrowing to pay these off will be at very high interest rates. The property tax hike and other measures were intended to help raise the credit rating back up, but there hasn’t been enough time for its impact to be felt. The Administration is choosing to borrow now at the highest interest rate to pay these swaps off when we know the rate will likely go down.”
“The Emanuel administration is asking to terminate at the exact moment when the penalty payments are at their highest,” said Ald. Carlos Ramirez-Rosa (35).“By paying the banks upfront and choosing the worst case scenario, the City isn’t mitigating that risk; it’s realizing it. It’s like claiming that you’ve lowered the risk of your car getting stolen tomorrow by handing your car keys to a thief today.”
Taking out new bonds to cover the $106 million in interest rate swap penalties that the Emanuel administration plans to voluntarily pay could end up adding nearly $100 million in interest costs, as total interest payments on traditional 30-year bonds tend to be roughly equal to the principal.
“The City of Chicago has already lost over $830 million dollars since these toxic interest rate swap deals started in the late 1990s,” said Ald. Susan Sadlowski Garza (10). “CPS has lost another $500 million–the same amount as the budget deficit they claim may force thousands of layoffs.”
“By borrowing to voluntarily pay these penalties, we could double the future cost of these interest rate swaps,” said Ald. Scott Waguespack (32). “There is no financial benefit to giving the banks everything they ever could have wanted and taking on unnecessary debt that we will pay for decades. The Emanuel administration says it is ‘getting out of risky deals. ‘Getting out of the deal’ by paying the entire ransom is an irresponsible financial move.”
The Progressive Reform Caucus includes Ald. Leslie Hairston (5); Ald. Roderick Sawyer (6); Ald. Susan Sadlowski Garza (10); Ald. Toni Foulkes (16); Ald. David Moore (17); Ald. Ricardo Munoz (22); Ald. Chris Taliaferro (29); Ald. Scott Waguespack (32); Ald. Carlos Ramirez-Rosa (35); Ald. Nick Sposato (38); and Ald. John Arena (45).