CHICAGO — Chicago enters the market today to refund $90.5 million of sales tax revenue bonds for savings that will help chip away at the red ink that drove Fitch Ratings’ decision to put a negative outlook on the city’s general obligation and sales tax-backed credits.
The deal is broken into three series with Rice Financial Products Co. serving as the senior manager. Peck Shaffer & Williams LLP is bond counsel and Golden & Associates PC is co-bond counsel. TKG & Associates is financial adviser.
The sales tax deal comes ahead of a series of city financings planned for either later this year and early next year that include up to $1.5 billion in new money and refunding bonds for O’Hare International Airport, a Midway Airport revenue bond deal and the city’s annual new-money GO sale. Ordinances authoring the three will be introduced to the City Council tomorrow.
The city expects to achieve net present value savings from the sales tax transaction that will refund bonds sold in 1998 and 2005 along with additional savings from a restructuring of some of the debt to achieve near-term budget relief.
While other local governments and transit agencies have seen their ratings tied to sales taxes cut due to faltering collections, all three rating agencies affirmed the city’s sales tax ratings due to the strong debt service coverage ratio of 19 times as the city has limited its use of the economically sensitive revenue stream to back debt.
Fitch rates the city’s $332 million of sales tax bonds AA, while Moody’s Investors Service rates them Aa3 and Standard & Poor’s assigns its top marks.
The city’s general obligation credit, in Fitch’s view, is not faring as well, however, as budget officials grapple with a $520 million deficit going into 2010 and the effects of the recession on housing and employment levels.
Fitch on Friday revised its outlook to negative on the AA credit. The agency scrutinized the city’s GO profile while it was reviewing the sales tax profile based on its criteria that links revenue credits like sales tax bonds to an issuers’ GO profile. Because of the change in the GO outlook, Fitch also revised the sales tax rating outlook.
“The city is facing a structural imbalance that is 20% of its operating funds next year,” said analyst Melanie Shaker.
In a monthly update of revenues, finance officials recently reported that key revenue sources are down $183 million from budgeted projections, a clip that puts the city on track to fall $302 million short of budgeted levels at the end of the year.
Some of the shortfall has been cut through the use of furlough days, management efficiencies and other measures. The city must close an overall $520 million deficit ahead of Mayor Richard Daley’s release of a roughly $6.2 billion proposed spending plan for 2010 later this month.
City finance officials did not return calls to comment on the sales tax deal or on the rating action.
Fitch praised city efforts to reduce spending, but noted that its union contracts limit its ability to trim workforce-related costs. Analysts also view as negative the city’s subprime mortgage risks and foreclosure rates that exceed the national average, its high unemployment rate of 11.5% in July, its reliance on one-time revenue shots like the use of proceeds from an asset lease to help balance the budget, and growing unfunded pension liabilities.
“Fitch will monitor management’s ability to fund its largely inflexible spending requirements once sizable non-recurring funding sources are exhausted,” Shaker said.
Chicago will exhaust about $325 million it placed into a mid-term reserve fund from proceeds of its $1.15 billion lease of the parking meter system earlier this year to reduce the deficit going into 2010.
The city’s long-term reserves remain intact, including $500 million established in 2005 with a portion of proceeds from the 99-year lease of the Chicago Skyway toll bridge and $400 million from the meter lease. The reserves helped offset the impact of an unreserved ending balance of $226,000 in 2008. Daley faces pressure from some members of the city council to dip into the reserves, but any such move “could trigger negative rating action,” Shaker said.
Moody’s and Standard & Poor’s affirmed the city’s sales tax ratings based on the strong coverage ratios and the city’s intention to limit new borrowing against the revenue stream. The sales tax bonds are secured by the city’s share of sales tax and its share of state sales taxes.
The city expects an 8% drop in sales tax collections this year. Sales tax growth had been steady through 2007 when it peaked at a rate of 10.6% annual growth, according to Moody’s. The city collected a total of $571 million in sales tax in 2007, and then saw a 3.8% drop in 2008, Standard & Poor’s wrote.
The city increased its rate by 0.25% to 1.25% in 2005 and receives a 16% allocation from the state’s 6.25% sales and use tax. Cook County’s move to add one percentage point to the city’s total sales tax rate, putting it at 10.25%, limits the city’s ability to raise the tax and could hurt overall collections.
Also on Friday, Fitch downgraded Chicago’s motor fuel tax bonds two notches to A-minus. The move was due to the credit’s vulnerability to possible state action to alter the distribution formula or change the priority of allocations. Motor fuel tax revenues are collected by the state and local distributions are subject to annual appropriation by the Legislature. Fitch lowered the state’s credit earlier this year to A.
Standard & Poor’s rates Chicago’s GOs AA-minus and stable while Moody’s rates them Aa3 and stable.
