Cleaning Up After the “Boss”

Chicago’s mayor, Rahm Emanuel, faced a lot of heat this past week during a series of Town Hall style meetings on his budget, according to local Chicago news sources.

This public reaction is very puzzling. He has been in office all of what - 3 months? Is he somehow to blame for the $637 million shortfall Chicago’s budget faces this year? He seemed to be looking for input from his constituents as to how to prioritize the measures available to close the gap. Isn’t this progressive politics? A politician trying to do what the people want?

This is a finance blog, not a public politics one, but I am bringing this up because it highlights a number of applicable finance and treasury subject areas. The budget process, for one. Organizational behavior, for another.

And then there is the mechanism of…

Infrastructure Finance

This is a structured type financing product. By this phrase we mean to say that it is a financing based on very specific assets, and with very specific remedies available to the lender. Regular company debt is supported by all assets of the company. If it files for Chapter 11 or begins liquidation, corporate debt holders can stake a claim to almost all the assets.

Structured debt holders usually have a claim only to a very specific asset. It might be receivables, it might be inventory on display for sale, it may be a portion of a utility bill (personally, these types of deals are fun to do because they are challenging and complex). In Chicago’s case, it is tolls from the Skyway, fees for its downtown parking structures, and revenues from its parking meters.

In a series of transactions over the past 6 years, the city of Chicago executed structured transactions for each of these city assets, where the assets themselves, along with rights associated with them, were leased for up to 99 year terms to investor groups in exchange for large amounts of cash. Billions of dollars of cash.

Asset – Liability Match

Finance theory tells us that we should match the terms of our liabilities with the terms of our assets. If we own a house, something that will last 30+ years if appropriately maintained, it is reasonable for us to see 30-year debt to finance that asset. If we buy a car, it would be unreasonable for us to see 30 year debt to finance that. The car will likely be around for less than half of the debt term.

Lenders are never very happy if there are not any assets to back up the loan should push come to shove.

Chicago did something very different. They used the proceeds of these up-to-99 year term assets to pay off current operating expenses in their budgets the past few years. This is a big mismatch.

According to Medill Reports, it is akin to “mortgaging the house to pay the electric bill”. The problem here is that if we do that, we got nothing left to pay the next 98 years worth of electric bills. Where will that money come from?

When in Rahm, You Can’t Do as the Daley’s Do

Rahm inherited a budget that has had a deficit for the past 5 years, at least. However, the former mayor mortgaged a chunk of the city’s future income to close the gap. He mortgaged the future to pay the electric bills.

Now Rahm still needs to pay the electric bills, but no longer has the toll and parking revenues to pay them. So how is he going to pay them? That is what he went out to ask the citizens of Chicago. Get their input, understand their priorities. And they yelled at him!

He is not the one who sold the next 99 years to pay the electric bill in 2006.

Leadership Lessons

What can we learn from Rahm’s experience?

First, if the person who was in the position before us was a “short-timer” (this is military slang for someone who is being discharged soon) for a good period of time, chances are they deferred a lot of problems for you to handle, and at the same time might have used up a lot of valuable tools you could have used to solve them. So let’s go into new situations with our eyes open.

Second, as the person in charge of our area, we will get blamed by others no matter who’s fault it actually was. Comes with the territory. We need to have thick skin and be willing to accept that some dings are inevitable.

Third, we need to have a solid plan in place to dig out of the holes our predecessor’s left for us.

Finally, if we are truly intent on serving the company or organization we are working for, we should always seek to leave it in a better state than we found it. Otherwise, we will weaken the entire enterprise once others have to come along and clean up our mess.

I would love to hear your thoughts about infrastructure finance or your stories on this topic if you have them.

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