CHICAGO — The top-rated Metropolitan Water Reclamation District of Greater Chicago aims to enter the market Wednesday with $500 million of mostly taxable Build America Bonds — but it may reduce, restructure, or postpone the sale depending on interest rates.
“We are proceeding as planned at the moment, but the market is volatile and so we are examining size and structure,” said district Treasurer Harold Downs. “With the volume out there, our triple-A may not be recognized for its value.”
More than $10 billion of new volume is slated to sell this week on the heels of the improved price stability that followed some volatility last week. Though the district benefits from its own tax levy, the sale faces the added hurdles of headline risks due to Chicago and Illinois’ budget struggles. “We are trying to differentiate ourselves from any other credits,” Downs said.
The district is tentatively set to sell $400 million of BABs, $70 million of tax-exempt bonds, and $30 million of non-BAB taxable bonds. The limited-tax general obligation, capital improvement bonds will bring the district’s total debt outstanding to $2.6 billion.
Proceeds would help finance the district’s long-term capital program of more than $2.5 billion that includes plant expansions and improvements, sewer upgrades, bio-solids management projects, and deep-tunnel related projects.
JPMorgan is senior manager. Citi, Public Financial Management Inc., and Gardner, Underwood & Bacon LLC are co-financial advisers.
The deal marks the agency’s second use of BABs. The district’s $600 million sale last year is being scrutinized by the Securities and Exchange Commission and the Internal Revenue Service. The reviews followed several stories from Bloomberg LP about investors profiting in secondary market trading of the bonds.
Ahead of this sale, all three rating agencies affirmed the district’s top credit marks even as it has struggled to balance its budget. The Civic Federation of Chicago also endorsed the district’s $1 billion budget for 2011.
“The Aaa rating reflects the district’s sizeable, diverse, and growing tax base that is essentially coterminous with Cook County, well-maintained financial operations with healthy reserve levels, and modest debt burden despite significant issuance to support extensive capital needs,” wrote Moody’s Investors Service.
The district’s tax base is estimated at $616 billion and has declined over the last two years due to the housing market’s struggles. The base is expected to see long-term growth from the diversity and breadth of the local economy.
The district had for years posted sizable operating surpluses, but began shrinking reserve levels in 2008 to offset deficits. Reserves, however, remained at healthy levels of 62% of general fund revenues in 2009. A $30 million operating deficit is expected this year, leaving a $190 million general corporate fund balance. The district’s 2011 budget does not rely on drawing down the balance or non-recurring revenues, wrote Fitch Ratings.
The district’s long-term financial challenges include its growing unfunded pension liability. The district’s funded ratio is just under 61%. The district has unfunded other post-employment benefit liabilities of $478 million, but in 2007 it established a trust to begin prefunding that liability.
The local government watchdog group, the Civic Federation of Chicago, last week announced its support for the 2011 budget, praising the district’s efforts to control personnel costs by reducing staff and overall spending reductions. The district will request a levy increase of $12.9 million, the maximum hike allowed under state property tax caps. The federation said it could swallow the increase because it is combined with spending cuts. The federation said it is most concerned with the district’s growing unfunded pension liability due in part to shortfalls in contributions.
“MWRD must end its resistance to recent pension reforms enacted by the state of Illinois and instead work with the General Assembly to implement further pension reforms that will stabilize the Metropolitan Water Reclamation District Pension Fund,” said federation president Laurence Msall.
The district provides wastewater treatment services to 5.3 million customers in Chicago and 128 municipalities.
