Governments in several Republican-led states have attracted a lot of attention this year for dragging the municipal market into the fray in pursuit of right-wing social goals, but the Chicago City Council for decades has sought to wield its fiscal might to make its voice heard on social stances on the other side of the political spectrum.
The Democratic Party dominated city has leveraged its lucrative underwriting business to press banks on issues from an anti-apartheid ordinance in the 1990s to a 2018 threat to bar business with banks unless they required business clients to adhere to gun sale restrictions. When it came the gun issue, the city overestimated that leverage.
Those efforts came long before
Some Republican-controlled states are also
Chicago has for decades leapt into the fray on social issues, pursuing a liberal agenda, sometimes codifying disclosure requirements and bans in ordinance or resolution form that directly impact underwriting teams. Opinions vary as to the effectiveness of such measures and there’s a risk to damaging relationships in way that could impact borrowing costs.
“I tell my students that a government will have to weigh the potential financial costs associated with using the procurement of financing firms to advance social policy,” said Martin Luby, a former University of Illinois and DePaul University public finance instructor who is now an associate professor of public affairs at the University of Texas.
“Depending on how many firms get ‘captured’ by these sorts of bans, governments may have reduced competition in the bidding or purchase of their bonds, less access to creative financing ideas, and fewer capital market partners to choose from to help them navigate the capital markets,” Luby said.
In Chicago, there’s a right way to accomplish social goals in city contracts and that’s not always followed, said Alderman Scott Waguespack, a 15-year veteran of the City Council who has served as Finance Committee Chairman since Mayor Lori Lightfoot took office in 2019.
“I don’t think there’s a danger if you do it the right way, and the right way for me is having good conversations” with stakeholders like underwriters and the rating agencies, Waguespack said. “You can’t just put these concepts forward without figuring out the impact to the city. It has to be measured and if it’s going to hurt the city you have to give reasons why you are doing it…you have to take a measured approach and get the right people at table.”
In 2018, then Mayor Rahm Emanuel and then Finance Committee Chairman Edward Burke pitched the “Safe Guns Policy”
The ordinance came amid headlines over Chicago’s crime rates and renewed efforts on gun control in the aftermath of the Parkland, Florida, school massacre. At the time, Citigroup also had announced that it would require some of its clients and customers to meet those requirements.
The banking industry pushed back, calling the plan so vague and difficult to enforce that many major banks would simply forgo doing work with Chicago. Chicago’s chief financial officer at the time, Carole Brown, warned that the measure as proposed could harm the city’s access to the capital markets. Chicago
Chicago's need for strong banking relationships stems in part from its weak financial position. That was underscored when Moody’s Investors Service
The downgrade triggered termination and default events on the city's credit support, short-term borrowing lines, and swaps, that could have allowed banks to demand the repayment of as much as $2.2 billion. The banks gave the city time to refinance its floating-rate and short-term debt, ending the potential liquidity crunch.
In contrast to the guns measure, Waguespack said an ordinance, backed by Lightfoot and Treasurer Melissa Conyears-Ervin, that passed in March banning the city from investing its $9 billion portfolio in coal, oil and gas companies with the goal of combatting climate change passed received much deeper scrutiny. The portfolio does not include city pension funds.
“Both are political statements but I think the way we approached the ESG and fossil fuels ordinance” was measured and the subject of lengthy discussion that led to codifying rules into law, while on the gun issue “they said we are doing a complete ban. There was no conversation that built up to the ordinance,” Waguespack said.
Ethical considerations may be appropriate and prudent, but “the concern here is that making investment (or banking) decisions based on ethical considerations can put those decisions into a ‘political’ context in which nuance and trade-offs may be hard to explain,” said David Merriman, interim dean at the College of Urban Planning and Public Affairs at the University of Illinois Chicago.
“If a particular investment (or bank) had a small ethically questionable historical or current policy/experience how should that be weighted. What blemish is strong enough to require that all business arrangements be terminated?” Merriman asked.
If a government ends up paying more to borrow, that hurts the community and ability to get a project done, said Richard Ciccarone, president of Merritt Research Services. “That’s detrimental to the same social causes you are trying to promote.”
Ciccarone believes imposing policies on companies seeking a government's business can have a role in promoting a mission or social good, but it’s also a “slippery slope” and the latest clashes have muddied the waters.
“This is really a critical issue” for the municipal market, Ciccarone said. “It’s about favoritism and drawing lines on the cultural battlefield. We’ve had these issue all along that cross over into bond financing but with the politics in America today there’s a risk of further polarization.”
Ciccarone also worries about rating agency stances on ESG. While there are clear instances where such factors such as a specific climate risk can impact a government’s ability to repay debt, Ciccarone said imposing scores that have the potential to impact pricing veers from the longstanding mission of ratings as a reflection of a government’s willingness and ability to repay debts.
“It has the potential to take rating agencies down a new road or path away from their mission to evaluate on a policy neutral basis,” Ciccarone said.
A long history
Chicago's forays into mixing city business contracts with larger policy objectives started with foreign affairs.
In 1990, the council weighed in on South Africa’s apartheid racial segregation system with an ordinance that imposed a financial penalty on companies seeking to do business with Chicago that maintained business ties with South Africa.
The MacBride Ordinance in 1993 imposed a bid penalty on companies seeking city contracts that failed to abide by the MacBride Principles, which were intended to promote the fair and equal treatment of minorities in Northern Ireland.
An ordinance introduced in 1997 proposed that the city cut ties with banks that do business with the Swiss government after Holocaust survivors stated that Swiss banks failed to relinquish money and valuables that belonged to them.
In 2002, the council added a slavery disclosure to the information that private firms including bond underwriters must disclose in their economic disclosure statements filed with the city. Companies must search their records and disclose whether they or a predecessor company profited from slavery.
The former Lehman Brothers
The ordinance requiring the disclosure was pursued by then Alderman Dorothy Tillman and others as a means to aid federal reparations lawsuits that were pending at the time.
The Sweatshop Free Procurement Ordinance which was adopted in 2014 required contractors to file an affidavit verifying that neither they nor their subcontractors used supply chains that utilized sweatshop labor.
In 2016, Chicago
Last year, some council members withheld support to recertify 13 banks as municipal depositories to press for more equity mortgage lending in Black and Latino neighborhoods.
