CHICAGO - Hoping to usher in a new era of fiscal operating stability, the Chicago Transit Authority has begun the complex task of structuring its nearly $2 billion pension-related bond financing so it both meets the agency's funding goals and legislative mandates and appeals to a wide swath of investors in a tumultuous market.
The CTA late last month completed the process of selecting financial advisers and an underwriting team to craft the deal that will provide an infusion of cash to improve the funded ratio of its pension fund and to establish a trust to cover retiree health care benefits with the aim of entering the market by June.
In crafting the deal, the authority faces guidelines for the use of proceeds and structuring limitations that were included in the state legislation passed in January authorizing the borrowing. The CTA also will be establishing a new credit in a market that has grown more complex in recent months amid a credit crunch that has pushed up municipal rates, with investors seeking credit quality and voicing skepticism in the insurers and credit rating agencies.
The financing represents one piece of transit bailout package signed by Illinois Gov. Rod Blagojevich that paved the way for an increase in the region's sales tax and Chicago's tax on real estate transactions. The tax hikes will provide an additional $500 million annually for the region's transit systems, with the CTA's piece this year totaling about $120 million and about $200 million in future years.
According to Dennis Anosike, the CTA's senior vice president of finance and its treasurer, the agency has faced a growing fiscal threat on four fronts - skyrocketing payments owed on its pension and health care liabilities, annual struggles to make ends meet in its operating budget, and a need for more capital dollars.
"We believe we have mostly solved the first three and hope the final will be addressed this year in Springfield," he said, referring to state legislative efforts to pass a capital budget.
The CTA's total pension and health care liabilities are $3.5 billion, for a 30% funded ratio. The goal of the transaction is to "accomplish the principles embedded in the legislation and to do it in a way that has the least impact on authority's operating budget," Anosike said.
A primary concern is credit quality, given the crisis among bond insurers whose ratings have come under fire as rating agencies review their exposure to subprime-related securities.
"Insurance is the biggest issue. In this market, is insurance useful and economic? It's a question of need and availability. The capacity might not be there," Anosike said.
The agency wants designated revenues to provide a sufficient coverage ratio to achieve double-A ratings. A strong underlying credit is considered crucial, several investors said, given the deal's size and market turmoil. The CTA has not settled on an actual security for the bonds, but has previously said the roughly $100 million expected from the city's real estate transaction tax increase would go to debt repayment.
The CTA has some flexibility in the maturity schedule up to 2011. After that, the legislation requires, in effect, level debt service repayment to avoid any backloading of debt. The legislation also limited total issuance to $1.9 billion and requires that $1.1 billion in proceeds go into the pension fund and another $528 million be deposited into a new health care trust fund, according to Eugene Munin, the CTA's first deputy general counsel who helped negotiate the legislative package.
Before a transaction is completed, the state auditor general William Holland's office must sign off. Two of four financial advisers selected for the finance team will submit independent reports as to the validity of the financing and they will be paid regardless of what their reports recommend. The CTA board also must sign off, and the approval of the Illinois Regional Transportation Authority - which provides fiscal oversight of the CTA - may also be needed.
The deal would bring the funded ratio of the pension fund up to 65% and avert a funding crisis that stemmed from a 2009 deadline to adopt a funding plan to bring its pension fund up to a 90% funded ratio by 2059 under a General Assembly mandate adopted in 2006. The authority's annual required contribution was soon to skyrocket to $250 million from $34 million.
The new legislation requires both the agency and its union employees to increase their contributions, restricts some benefits for new hirees, revises fund oversight, and segregates for the first time health care benefits for retirees, with the future funding burden relying on contributions to the new trust from employees and retirees. If the pension fund's ratio falls below 60%, CTA and employee contributions would go up so that the fund remains on track to reach a 90% funded ratio by a revised date now of 2060.
The authority's picks for its finance team has raised some eyebrows among market participants because of the close ties some members have to CTA board chairwoman, Carole Brown, a prominent public finance banker at Lehman Brothers. Anosike has countered that the choices were his own.
The team includes book-running senior managers Loop Capital Markets LLC,Morgan Stanley, andUBS Securities LLC.The co-seniors includeGoldman, Sachs& Co., Cabrera Capital Markets LLC, and Siebert Brandford Shank & Co.
Rounding out the syndicate are co-managers Citi,Depfa First Albany Securities LLC, Estrada Hinojasa & Co., Grigsby & Associates Inc., JPMorgan, Rice Financial Products Co., Samuel A. Ramirez& Co., and William Blair & Co.
The financial advisers include Mesirow Financial Inc., Peralta Garcia, Columbia Capital ManagementLLC, and Scott Balice Strategies LLC. Mesirow and Peralta will produce the auditor general reports.
Bond counsel is Katten Muchin Rosenman LLP and co-bond counsel is Burke Burns & PinelliLtd. and Gonzalez, Saggio Harlan LLC. Underwriters' counsel is Perkins Coie LLP and Chapman and Cutler LLP. Co-underwriters counsel are Charity & Associates PC and Golden and Associates.
Brown's former colleague and friend Elizabeth Coolidge now works at Siebert, her mentor Lawrence Morris works at Mesirow, and a close personal friend, Leslie Bond Jr., works at Columbia Capital. Brown has long-standing friendships, business, or college ties with others on the team also. William Daley Jr., a nephew of Mayor Richard Daley,works as a public finance banker at Morgan Stanley. The mayor appointed Brown to the board.
While some market participants questioned why other firms with a strong local presence or pension experience were not selected, others said the team's members represent a wide breadth of experience and abilities, and given Brown's career, it would be impossible to craft one without ties to her. Brown did review proposals from firms, but Anosike said: "The decisions were mine. I consulted Carole because nobody knows the industry better than she does, but I made the choices."
The underwriting team and financial advisers were selected based on their experience on pension bonds, past work with transportation agencies, distribution capabilities, and familiarity with the state legislation authorizing the deal. Some bankers said they were not aware of that last factor. The team also reflects the state's requirement that 25% go to minority-owned firms and 5% to women-owned firms. The Chicago City Council set a higher benchmark - as a goal only - of 50%.
"The competition was ferocious. We don't do many transactions, so balancing it is a tricky act," Anosike said.
With its operating budget on more solid footing, the CTA, along with the RTA and other local transit agencies, will shift their focus to capital funding. "The CTA has $6 billion in unfunded needs," Anosike said. The agency's capital current capital budget totals $627 million.
The governor and lawmakers have endorsed a $25 billion spending plan with varying levels of debt issuance but remain opposed on how to fund it. In the interim, the CTA plans later this month to sell up to $250 million of federal capital grant-backed bonds to finance various projects. The agency's outstanding $578 million of capital grant bonds were sold in 2004 and 2006.
The CTA also has $89 million of lease revenue refunding bonds issued in 2006 through the Chicago Public Building Commission. The pension deal would mark the continuing evolution of the CTA as an issuer. Prior to 2003, the agency had long been absent from the market as an issuer as it struggled annually to balance its books and grappled with a poor public image and dwindling ridership. The agency began a fiscal turnaround in the mid-1990s after Daley installed a new management team and the agency enacted cuts that helped improve its fiscal house.
