Chicago Eyes Mayor's Plan for an Infrastructure Trust

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CHICAGO —  Despite pleas from some aldermen to slow down, the Chicago City Council is expected Wednesday to take up Mayor Rahm Emanuel’s plan to establish an infrastructure trust that would serve as a vehicle to leverage private investment in public works projects.

The trust, which would aid the city and its sister agencies, cleared the council’s Finance Committee Monday in an 11-7 vote after more than five hours of debate, during which council members concerned about oversight and accountability issues grilled chief financial officer Lois Scott.

Council skeptics are not expected to derail the ordinance creating the Chicago Infrastructure Trust, although aldermen could move to temporarily delay a vote through a parliamentary maneuver.

The Emanuel administration briefed aldermen over the last week and submitted a revised plan on Friday to address some of their concerns. Several aldermen said the changes and the administration’s assurances were not enough to quash their worries, though they generally praised the concept of such a trust, and they asked the administration to delay a vote.

“With something as ambitious as this everyone on the City Council needs to understand it,” said Alderman Brendan Reilly, whe voted against advancing the plan to the full council. “This might be the greatest idea on earth; I just have so many questions.”

There is heightened scrutiny of any deal involving private investment in city assets after former Mayor Richard Daley’s $1.15 billion parking meter privatization in 2009, which won speedy City Council approval. Although the city stresses it won’t hand over existing assets in the new trust financings, public appetite for privatization soured following the meter deal, in which the transfer of meter operations was fraught with operational problems, rates soared, and the city exhausted most of the proceeds to balance its budgets. The council is also battling a reputation as a rubber stamp for the previous mayoral administration as well as concerns over past corruption. Daley did not seek re-election and Emanuel took office in May.

Emanuel unveiled the plan to establish the trust in March, billing it as a first-of-its-kind local government financing vehicle modeled in part after various state and foreign public banks and trusts.

At the hearing Monday, Scott laid out the dire need for infrastructure funding across the nation amid dwindling state and federal support and how the trust would tap alternative financing. The city and its sister agencies — which have announced $7 billion of infrastructure projects in the works — would use the trust for “ambitious and transformative” projects to complement traditional financing models while preserving the city’s strained general obligation and revenue-backed bonding capacity for routine projects and maintenance.

“The vast majority of the routine capital needs of the city will be done” through traditional bond financing, she said. The trust would finance projects that might otherwise sit on a backburner.

“Our crumbling infrastructure needs are too great and too pressing,” Scott, one of administration’s principal architects of the trust, told council members. “The Chicago Infrastructure Trust’s purpose is to create another tool in the toolbox for funding crucial infrastructure projects.”

The city bills the trust as a means to access capital from investors like public pension funds, union investment funds, and charitable foundations while shifting the funding risks to investors from taxpayers and creating new jobs.

“It allows us to seek out projects that we otherwise wouldn’t be able to consider easily and puts in place a mechanism in which we can consistently and fairly consider the implications and opportunities for these projects,” said Scott, who maintained her composure through hours of sometimes tough questioning. 

In response to questions over the administration’s refusal to delay a vote, Scott said action is needed to get the ball rolling to set up the trust. “The time to act is now,” she said.

The city has identified $200 million of energy-efficiency projects at city facilities and schools to be funded through the trust, with anticipated savings of $20 million in Chicago’s annual $170 million bill for energy consumption. The city would leverage those savings to repay private investors that put up the capital to fund the projects.

Officials hope to eventually tap the trust on a broader scale for projects tied to transportation, education and utilities owned by the city and its sister entities, such as the Chicago Transit Authority and the Chicago Board of Education.

Scott said future projects have not yet been identified, but stressed that they would involve funding new assets where a defined revenue stream could be identified to leverage private investment, not the privatization of existing city assets.

Chicago has nonbinding agreements from Citibank NA, Citi Infrastructure Investors, Macquarie Infrastructure and Real Assets Inc., JPMorgan Asset Management Infrastructure Group and Ullico to consider investing in more than $1 billion worth of projects.

Structuring options include the use of private equity from the firms, vendor financing, and traditional tax-exempt and taxable borrowing, along with other methods that leverage specific revenue streams or a pool of revenue sources.

The trust would be set up as a nonprofit that would use the city as a conduit to access the bond market when needed, although the ordinance clearly spells out that the trust itself could not put the city’s general obligation pledge behind a project financing.

The trust would also have credit support and grant-making capabilities for select projects. The ordinance earmarks $200,000 in funds for professional services and $2.5 million in initial grant funding.

 The trust would hire an executive director and establish a qualified list of financial and legal advisors similar to the way the city establishes bond financing pools. The trust would be governed by a five-member board, including four professionals with public finance or other financial experience, and one City Council member.

The mayor would appoint the members, subject to council approval. Six non-voting board members may also be appointed.

The revised ordinance would require participating investors to provide disclosure statements similar to those required by the city of its bond underwriters. The trust would have to comply with state open-meetings laws and provide public access to its records under freedom of information rules.

It would also comply with city procurement rules, and provide an annual report of its financials and activities to the council. The ordinance also now makes clear that all trust projects involving city funds, revenues, assets or properties are subject to City Council approval.

Even with the changes and Scott’s assurances that the trust would not dilute council power, some aldermen remained skeptical. “We support this trust, what we need is to get our questions answered,” said council member Leslie Hairston, who voted against the plan.

Hairston and others raised concerns over their lack of say over how the trust proceeds on projects for the city’s sister agencies. Those projects would bypass the council and go before the agency’s own boards, which are appointed by Emanuel.

“You’re asking us to take a bit of a leap of faith,” Reilly said.

Aldermen were also dissatisfied with conflicting answers over the enforceability of inspector general oversight and state open meetings and freedom of information rules. Some council critics also called for an independent assessment of each deal’s financing.

Scott defended the creation of just one trust to serve the city and its sister agencies, saying it was more efficient and stressing that the trust would be subject to the same contracting and disclosure rules that apply to the city government.

Reilly questioned how Chicago would assess the value of using the trust on specific deals and whether it was the most affordable route to finance a project.

Scott acknowledged that “absolutely” a portion of trust financing that relies on private investment would carry a higher borrowing cost than a traditional bond deal, and the overall package “possibly” could be higher.

The CFO said the council would ultimately have the final word on whether the potential added costs would be worth the benefits of transferring financing risks off city tax rolls and on to investors. “It all comes down to risk transfer,” she said.

Some skeptics pressed Scott to name additional projects on the drawing board and raised concerns over the imposition of user fees. She repeatedly said none so far have been identified but suggested  that the CTA, for example, could perhaps leverage bus maintenance savings to repay investors who fund bus upgrades.

A handful of community activists and groups also outlined their worries. Better Government Association policy and government affairs director Emily Miller raised concern over whether the Illinois attorney general would have the power to enforce disclosure laws given the trust’s not-for-profit status.

Several council members praised the administration’s creativity in coming up with the trust. Finance Committee chairman Edward Burke had little comment on the plan, saying only that advancing it was “absolutely” the right vote.

Though the city’s debt load has steadily risen over the last decade to fund infrastructure, the investment hasn’t kept pace with city needs as the average age of infrastructure rose to 12.5 years in 2010 from 8.7 years in 2004.

Chicago’s long-term debt hit $19.4 billion last year, up from $15.1 billion in 2007 and $11 billion in 2001. That figure includes the city’s GO debt, sales tax and motor-fuel tax revenue bonding, tax-increment financing debt, water and sewer bonds, and airport borrowing. Debt paid primarily by taxpayers totals $10.6 billion. “This pattern of increasing long-term debt load is not financially sustainable,” warned a city report issued last year.

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