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Chicago Readies Three Big Deals Before BABs Expire

CHICAGO — Chicago is planning three new-money and refunding general obligation and revenue bond sales totaling up to $2 billion to take advantage of the taxable Build America Bond program ahead of its scheduled expiration year end.

The City Council today is expected to approve ordinances paving the way for the issues. One authorizes up to $900 million of GO bonds, including $500 million of new money for various capital projects. Loop Capital Markets LLC is the senior manager and Wells Fargo Securities is co-senior manager. Another six firms round out the syndicate as co-managers.

A second ordinance allows up to $750 million of water revenue bonds, including $450 million of new money for system improvements. Cabrera Capital Markets LLC is the senior manager. BMO Capital Markets is co-senior manager. Another four firms are co-managers.

A third authorizes up to $400 million of wastewater revenue bonds, including $225 million of new money for various projects. George K. Baum & Co. is the senior manager. M.R. Beal & Co. is the co-senior manager. Four other firms are co-managers.

All three deals will include a mix of tax-exempt securities and taxable BABs. They are slated for the fourth quarter as Congress is being pressed to extend BABs and other bond programs in the stimulus program that expire at the end of the year. All three authorizations leave room for refundings, so the final size of the transactions will depend on interest rates, according to city finance officials.

The deals are being planned as Chicago’s budget season moves into high gear, beginning with the annual release on Friday of preliminary budget figures that are expected to show the city is facing a sizeable shortfall. Chicago last year was forced to close a $520 million deficit in its $6.14 billion 2010 budget. Revenue collections remain flat and employee costs are rising.

In the spring, officials asked the public finance community for creative ideas to help control spending, generate new revenue, and improve management. Some could eventually make their way into the next budget that is unveiled in the fall.

Chicago’s flexibility to balance its budget without turning to politically difficult solutions like a property tax increase, other tax hikes, or deep service cuts is limited, since Mayor Richard Daley dug heavily into reserves last year to erase the looming deficit. Daley, who would be up for re-election next year if he chooses to run, has said he would not raise property taxes.

To close the deficit last year, Chicago turned to $118 million in savings from debt restructuring and used $250 million from a $400 million long-term reserve account and $100 million from a mid-term reserve, both of which were created with funds from the $1.14 billion, 75-year lease of the city’s parking meter system last year.

The city’s resolve to leave its $500 million budget reserve, established with proceeds of the $1.8 billion Chicago Skyway toll bridge lease in 2005, helped fend off any negative rating action. Its GOs are rated AA-plus with a negative outlook by Fitch Ratings, Aa2 with a stable outlook by Moody’s Investors Service, and AA-minus with a stable outlook by Standard & Poor’s. Fitch and Moody’s raised the ratings by one notch as part of their recalibration processes.

Chicago’s pension funding levels also remain a key challenge. At the close of 2009, the city’s four pension funds had a combined actuarial liability of more than $25.4 billion and assets with a market value of $10.9 billion, for an unfunded liability of $14.57 billion. That figure represents a collective funded ratio of just 43%, according to a report issued by a mayoral commission last spring.

Chicago hopes at some point to revive its plan to privatize Midway Airport in exchange for an up-front payment, though the timing is unclear, given recessionary pressures and international economic turmoil.

City officials expected to tap some revenue from a proposed $2.5 billion lease of the airport to help shore up its pension funds, but that fell apart last year when the bidder could not raise the capital to finance the deal amid the financial crisis.

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