CHICAGO — Chicago's steep borrowing costs should come down if the City Council adopts Mayor Rahm Emanuel's proposed 2016 budget and property tax hikes, the city's chief financial officer told council members.
CFO Carole Brown said the city has shaved between 40 and 60 basis points off spreads in secondary trades of its general obligation debt of late. The narrowing of spreads that were about 300 basis points above the Municipal Market Data's top-rated benchmark came in spurts over the recent weeks.
First, spreads came down as word circulated a few weeks ago that Emanuel would finally pitch a big property tax hike to deal with skyrocketing police and fire pension costs, and then again after the formal plan was unveiled last week.
Emanuel wants to phase in hikes that will increase property tax revenue by $543 million annually after four years.
"That [movement] is a result of investors having a better view of our credit," Brown told council members Monday, based on "their belief that we are starting to make the hard choices" to right the city's financial ship.
In response to questions from Alderman Tom Tunney over when the city might see some further benefit on its interest rates, Brown said she thought the city could expect a positive investor response "if the budget passes with these stable financial resources for our legacy liabilities still intact." Brown was referring to the property tax hike which is earmarked specifically to tackle rising police and firefighter pension fund contributions due in 2016 under a statewide 2010 legislative mandate.
The city's next appearance in the primary with GOs is expected this fall after passage of the budget. The city will sell up to $500 million to push off some near-term debt service for 2015 budget relief and refund debt for traditional present value savings. That sale will follow the issue of $2 billion of airport revenue bonds and $400 million of wastewater revenue bonds.
Brown added that the city could also see positive responses from rating agencies, but acknowledged that big interest rate savings and upgrades would take longer to achieve.
The city's GO ratings range from a speculative-grade Ba1 from Moody's Investors Service to A-minus from Kroll Bond Rating Agency. Fitch Ratings and Standard & Poor's assign BBB-plus ratings and all but Kroll take a negative view on the credit. Kroll has it at stable. The city's $20 billion unfunded pension burden has dragged the credit down.
Last week, Fitch labeled the proposed budget and tax plan a positive credit development if approved. Standard & Poor's offered a commentary focused more on the city's long-term pension and structural budget ills than on the plan's aims and warned of further credit deterioration without positive strides.
As per tradition, the city's finance team — Brown, budget director Alexandra Holt, and comptroller Dan Widawsky — appeared before the council's Committee on Budget and Government Operations to offer prepared remarks and take questions from aldermen.
The council hearings, which are supposed to lead to a late October vote on the budget, began as Emanuel and his finance team started promoting their plan with market participants. The city hosted its annual investor conference in Chicago Friday and Emanuel delivered a speech Monday to the Municipal Forum of New York.
The administration received some questions about the big property tax hike at Monday's hearing but the lack of unrest over the plan seems to indicate that many council members see it as needed medicine to solve the city's fiscal woes even if politically difficult to stomach.
Some did question the finance team as to whether it was enough and some want the city to look at alternative revenue sources and spending cuts.
"If we bite this bullet are we going to asked to bite yet another one next year," asked Alderman Joe Moore.
Holt and Brown said the administration believes the tax hikes will suffice to put the public safety funds on a stable path. Another $125 million package of non-property tax and fee hikes along with $170 million in savings from reforms, efficiencies, and other measures tackle a $233 million operating deficit. Holt added that the administration believes remaining budget challenges can be dealt with through further reforms and efficiencies.
Holt acknowledged an unknown is the fate of the city's 2014 reforms to its two pension funds for laborers and municipal workers. A circuit court judge tossed the reforms in July and the Illinois Supreme Court will hear the city's appeal this November.
If tossed, the city's contribution will come down in 2016 but the funds are headed toward insolvency under the previous non-actuarially based contribution schedule.
Holt acknowledged that the city will need to come up with a "plan B" if the high court doesn't uphold the reforms.
Much of the council's questioning focused on other areas, like the impact of drawing from tax-increment financing surpluses and opposition to a new garbage collection fee.
The finance team sought to stress that its plan doesn't rely on state aid as the state is locked in a political impasse its own 2016 budget, but it does require state legislative approval for several pieces.
"We need one thing, and are asking for another," Holt said in response to a question on the subject.
The need is for Gov. Bruce Rauner to sign off on legislation that reamortizes the public safety pension payment schedule. The city has tied its property tax hike plan to the reamortized schedule and it will have to immediately come up with $200 million more if the schedule is not adjusted.
State lawmakers have passed the plan, but haven't sent it to the governor's desk. Rauner has offered conflicting comments on the legislation. He initially called it "kicking the can" down the road but then said he was willing to help the city achieve its goals. His support hinges on whether Emanuel puts his political muscle behind Rauner-backed policy reforms that are opposed by the General Assembly's Democratic majority.
Emanuel and his administration have sought to lay the issue at Rauner's feet, taking the position that the legislation is consistent with Rauner's comments in support of local control over pension issues.
The "ask" Holt referred to is for an expansion of the homeowners' tax exemption to limit the impact of the property hike to higher valued homes and commercial properties. If the state doesn't come through on that front, the city could implement a more complicated rebate program.
Holt and Brown highlighted efforts to wipe out Chicago's structural deficit in the coming years by cutting back on so-called scoop-and-toss debt restructurings, using less debt to cover some operating expenses, and depositing $5 million into the city's reserves while maintaining core services.
The $7.84 billion budget includes a $3.63 billion corporate or general fund.
"It begins to phase out unsustainable financial practices and provides a long-term stable plan to fund our pension obligations," Holt said.
In addition to the continued, albeit smaller, debt restructuring, the budget relies on $22 million in tax-increment surplus revenue and gambles that the courts will upheld city cuts to retiree healthcare expected to save $30 million in 2016.
On the market front, several investor and analyst representatives said Emanuel and his team did a good job of conveying that the city has the economic strength to solve its fiscal ills and that the budget shows it has the political will to do so.
But the praise is tempered by market participants' belief that more revenue increases and spending cuts will be needed to truly fix the city's fiscal problems. The administration also did not allay concerns over a reliance on state legislation or offer an backup plans. The city's multi-year plan also leaves little wiggle room should the economy and revenues nosedive.
"The city's economic resilience and a willingness to address its obligations were the mayor's themes," said Richard Ciccarone, president of Merritt Research Services LLC, adding that while it was a good message to send, "the bottom line is there are loose ends in the plan."
Emanuel also sought to portray the city's delay in raising revenues to address pensions as less about his political will and more about the harm it could have posed to the city's bargaining position in negotiations with unions or at the state level. The Chicago Public Schools, which also offered presentations at the investor conference, didn't fare as well in comments from conference attendees. While they said they were impressed with new chief executive officer Forrest Claypool, the conference did little to curb deep concerns over the district's solvency. The district also offered no new insights beyond past warnings that deep cuts and borrowing would be needed if the state doesn't come through with $480 million in pension help this year.
