The first-of-its-kind measure will allow the city to accept billions in private financing for infrastructure projects.
Just before the Chicago City Council moved to vote on Tuesday, Alderman Ed Burke stood up. The powerful councilman and fierce mayoral ally laid out what was at stake, saying, "this plan fundamentally permits us to build for the 21st century."
Moments later, the council overwhelmingly approved Mayor Rahm Emanuel’s controversial Infrastructure Trust, a proposal to leverage private funds for city projects. An infrastructure bank is unprecedented on the municipal level, and may become a critical model for how cities pay for new building.
Infrastructure in cities is typically financed in one of two ways: either the municipality issues bonds to cover the costs or the state and national government doles out the cash.
Neither of those options looked particularly good for Chicago. Illinois is in fiscal shambles, second only to California in state debt troubles. Funds for infrastructure rarely make it out of Congress these days. And the city's credit rating is lower than it should be, thanks in part to the now infamous 2008 deal that privatized parking meters, which cost the city billions.
With their plan, the Emanuel administration is hoping to free Chicago from "complete and total reliance on Springfield and Washington, D.C.," says Lois Scott, the city’s Chief Financial Officer. Here's how it would work: the Trust establishes a non-profit, manned by five voting members and a six-person advisory panel. City agencies would bring any funding needs to the Trust, which would determine how the specific project gets financed.
Some projects will be steered to the usual bond backing; others will dip into a new pot of cash from investors, who hope to reap decent returns. At the onset, the city plans to fund only one project through the Trust: a $225 million green retrofit of city buildings.
Since the Chicago proposal was announced, the city has received tentative commitments of $1.7 billion from investors along with letters of interest from the investment arms of Citibank, JPMorgan, and Ullico, a manager of labor union pension funds.
But the plan has its critics. Cate Long, a municipal analyst and blogger at Reuters, has argued the city shouldn't tie public assets so closely to private hands. She compares Emanuel's plan to a recent proposal in Boston to invest $1.8 billion in the city's infrastructure.
The additional 1.04 percentage points Chicago pays to borrow versus Boston is a much lower cost for Chicago than what it will pay to private investors through Mayor Emanuel’s proposed infrastructure trust. America’s urban areas need revitalization, but taxpayers should not have to transfer the benefits of their city’s rebuilding to private investors.
The proposed influx of private cash has raised another concern. One of the letters of interest came from Macquarie Infrastructure and Real Assets Inc., an Australian company that won the 99-year lease for the Chicago Skyway, where tolls have shot up. Some local politicians are fretting over hidden user fees that Trust deals may require to pay back investors.
Alderman Scott Waguespack and three of his colleagues submitted a revision to the Trust that, among other changes, proposed levying “a cost comparison to traditional municipal financing methods” for every project. That amendment failed 39 to 9 yesterday.
As the Emanuel team prepped for the council vote, Strand noted that other finance departments were paying attention. Four major cities reached out to Chicago about their interest in a similar plan.
“We're certainly aware of it,” says Lauren Passalacqua from New York City Mayor Michael Bloomberg’s office, adding, “at this point, there's nothing concrete.” A spokesperson for Washington, D.C. Chief Financial Officer Natwar Gandhi denies that their office reached out about the Trust. “It is not on our radar,” he says in an email. San Francisco made an initial inquiry but nothing more, and representatives from Atlanta, the other city Strand mentioned, have yet to return a request for comment.
But analysts on both sides of the privatization debate agree that as more cities feel the pinch of critical infrastructure needs combined with strained budgets, they will look to Emanuel’s approach. “As soon as we start seeing some lessons from Chicago,” says Rob Puentes, an analyst with the Metropolitan Policy Program at Brookings. “You’re definitely going to some replication across the country - especially if they’re doing it right.”
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