Daley, in his statement, didn’t directly address tax law issues, but he said: “Having worked our way through the toughest economic time in recent history, we sought to make major improvements, following the rules but unable to predict the future.”
Another troubling legacy of city borrowing is the $1 billion in bond money that the Daley and Emanuel administrations have used to pay for legal judgments and settlements. The practice not only forces future generations to pay a huge price for the city’s misdeeds but also could be an abuse of the tax code.
Federal law prohibits issuers of tax-exempt municipal bonds from using proceeds for legal costs. But by exploiting an exception for “extraordinary expenses,” the city was able to pay off nearly $400 million in judgments and settlements with tax-exempt bonds.
The tax code reserves that exception for “nonrecurring” items, but the Daley administration used the provision every year from 2000 to 2005.
In 2002, for example, the city used tax-exempt bonds to pay an arbitration award involving the Fraternal Order of Police. Rank-and-file officers had rejected a city contract offer in 2001, but an arbitrator ruled in favor of the city’s wage proposal a year later.
The deal included raises of 2 to 4 percent a year, to be applied retroactively. In bond documents, city officials deemed the back pay the city owed an extraordinary expense and paid $164 million of it with tax-exempt bonds.
The city ultimately will need to pay bondholders $280 million to cover the loan.
“That’s not typically why cities borrow money,” said Michael Pagano, dean of the University of Illinois at Chicago’s College of Urban Planning and Public Affairs. “They usually borrow money to build roads and school buildings and city halls.”
Bonds also ended up covering the $28 million a jury awarded to Joseph Regalado in 1999. The jury found that, years earlier, a Chicago police officer had beaten him in the back of the head and neck with a blunt object, which ripped apart an artery and cut off the blood supply to his brain. The injuries left Regalado unable to walk, talk or care for himself.