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Bonds This Week, Budget Next Week

CHICAGO — Chicago enters the market this week with $412 million of new-money general obligation bonds ahead of an expected vote next week on Mayor Rahm Emanuel’s first spending plan.

The city priced $200 million of taxable GOs structured as a term due in 2040 on Monday and follows Tuesday with the remaining $214 million of tax-exempt GOs with terms due in 2032, 2035 and 2040. The city moved up the sale dates of each series a day after reviewing favorable pre-pricing scales and orders, market participants said.

BMO Capital Markets is senior manager. Estrada Hinojosa & Co. and Mesirow Financial Inc. are co-senior managers. A.C. Advisory Inc. is financial advisor. Chapman and Cutler LLP and Cotillas & Associates are bond counsel. Duane Morris LLP and Hardwick Law Firm are underwriters’ counsel.

Proceeds will finance capital projects, equipment, and retroactive firefighter salary payments. The firefighter payments stem from a union contract settlement entered into by Emanuel’s predecessor.

Ahead of the sale, Fitch Ratings affirmed the city’s AA-minus rating assigned to $6.7 billion of GOs, Moody’s Investors Service affirmed its Aa3, and Standard & Poor’s affirmed its A-plus, all with stable outlooks.

The city’s GO credit suffered a round of downgrades last year due to mounting fiscal woes and a reliance on reserves and other non-recurring revenues to balance recent budgets. While the city faces daunting challenges, analysts praised Emanuel’s decision to sharply reduce the use of one-shots to eliminate $635 million of red ink in a $6.3 billion budget.

“We were very pleased” with the rating affirmations, the city’s chief financial officer, Lois Scott, said in a recent interview. “It will have a direct financial and economic consequence.”

The Civic Federation, the local government review organization, last week endorsed the budget, though it also urged Emanuel and the City Council to address mounting pension obligations.

“Chicago is not yet out of the woods, but this budget moves the city’s finances in a positive direction,” said federation president Laurence Msall.

The City Council will vote on the plan next Wednesday and most expect it to pass, particularly in light of concessions by Emanuel’s administration late last week to address concerns raised by a majority of aldermen in a letter.

In response, Emanuel restored $3.3 million in library funding and revamped his proposal to raise vehicle sticker fees by $60 on large passenger cars, instead imposing a smaller across-the-board increase on cars. He also pulled his plan to immediately charge small nonprofits for water, instead revising it to phase in a discounted plan over three years.

“The voters did not want Council Wars and they also did not want a City Council that would be a rubber stamp,” Emanuel said, referring to an era in city politics when a majority block of aldermen battled with former Mayor Harold Washington. Under Emanuel’s predecessor, Richard Daley, many called the council a rubber stamp for his policies.

The proposed budget whittles away a $635 million deficit with new revenue from a series of hikes in fees, fines and taxes, along with debt refunding savings, management reforms, and spending and job cuts. Emanuel won’t raise the sales or property tax and agreed to forgo enacting an income tax. He also won’t further drain remaining reserves, which hold $624 million.

The budget does rely on $88 million in one-shots, including $66 million in debt restructuring and $10 million in swap-related savings. The city intends to spend $1.6 billion on capital improvements, including $738 million on aviation projects, but has not released planned borrowing levels for the next year.

Emanuel previously outlined some of his fee and tax increases, but last week made public the longer list of fees and fines or various violations that would be raised to help generate $220 million in new annual revenue.

In addition to raising the city’s hotel tax and imposing a loading zone fee and a parking congestion charge, the list of increases includes towing fines, impoundment fees, and fines for tampering with parking meter boxes, failing to maintain vacant lots, and allowing weeds to grow higher than 10 inches.

The federation praised the city’s move to trim expenditures, including the public safety budget, instead of raising the property or sales tax, and praised efforts to better align expenses with recurring revenues. But the organization pushed the city to take action to stem the rise in its long-term obligations, including its pension liabilities. The group recommends reducing benefits not yet earned by current employees, increasing employer and employee contributions, and consolidating its four retirement funds.

“The city faces enormous financial challenges with its long-term liabilities, and the Civic Federation is deeply concerned with the lack of action taken to address this pending fiscal crisis,” the report reads.

Chicago’s unfunded liabilities rose by $12.1 billion over the past decade. Payments are set by statutory formula and the city faces a $550 million rise in its contribution in 2015 under an Illinois mandate.

The city’s direct debt burden has risen by 97% to about $7.3 billion from $3.6 billion over the last decade. “It threatens to further reduce the city’s credit rating, making borrowing more expensive and possibly limiting available capacity for additional borrowing,” the federation wrote.

“The size and direction of long-term liabilities is a significant rating concern,” according to Fitch, echoing the federation’s concerns.

Though Chicago holds more than $600 million in reserves, the federation also expressed concerns over its fluctuating unreserved balance. The city does not have a policy. The balance plummeted to just $2.7 million in 2009 and then rose to $81 million in 2010. The 2012 budget anticipates carrying over a $143.5 million balance, or 4.6% of corporate fund revenues.

The Government Finance Officers Association recommends 16.7% as healthy fund balance, the federation noted.

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