CHICAGO — The Chicago Park District heads to market Thursday with $88 million of double-A rated debt that market participants say should offer up some alluring yield premiums due to the troubled Chicago name.
The district is expected to price on Thursday.
Its rating story carries one big caveat; Moody's Investors Service downgraded it to the junk level rating of Ba1 in May citing its governance ties to the Chicago city government.
Moody's was not asked to rate the new general obligation bond deal.
The district's highest rating of AA-plus comes from Standard & Poor's with Kroll Bond Rating Agency putting the district at AA and Fitch Ratings assigning its AA-minus rating. All three affirmed the ratings and their stable outlook.
The deal should price cheaper "because of the radioactivity of Chicago and its name," said Brian Battle, director of trading at Performance Trust Capital Partners.
Savvy traditional buyers can differentiate between the names and credits but some will take a pass due to the negative headline risks associated with Chicago's pension and budget woes.
The district itself also faces a looming legal challenge to its overhaul of its employee pensions, which was designed to put the retirement system on a more solid footing.
Market participants said a pension challenge was always a risk, and represents a negative headline for a district seeking to highlight its credit strengths.
BMO Capital Markets is the senior manager with Loop Capital Markets and William Blair & Co. as co-seniors. Katten Muchin Rosenman LLP and Charity & Associates are co-bond counsel and Acacia Financial Group and Speer Financial Inc. are advising the district, whose board is appointed by Chicago Mayor Rahm Emanuel.
The deal includes new money for capital projects and refunding for savings and pledge restructuring purposes. The district will drop an alternate revenue pledge on a small piece of debt, moving repayment to the district's tax levy for the purpose of freeing up revenues for higher pension contributions due under its 2014 pension reform package.
The district's finances have been "aided by our conservative debt management policies," chief financial officer Steve Lux tells investors in a presentation attached to the offering statement. "Debt management is also being used to assist in funding future employer pension contributions."
The park district's pension overhaul, which preceded approval of a similar Chicago package of changes, has so far escaped a challenge. Pension fund members and their unions, however, are now re-thinking their position since courts have voided Chicago and state reforms.
The Illinois Supreme Court in May threw out the state government reforms finding that benefit cuts violated the state constitution's prohibition on diminishing or impairing benefits. A circuit court judge in July tossed the Chicago reforms to its municipal and laborers fund, citing the higher court's ruling. Justices will hear Chicago's appeal this fall.
The park district's reforms put in place higher employee and employee contributions. In addition to a change in the statutory formula for district contributions, it will make two special supplemental contributions of $12.5 million each in 2015 and 2016 and then $50 million in 2019. Some employees face a higher retirement age and cuts in annual cost-of-living adjustments. The COLA is also suspended in 2015, 2017, and 2019.
The changes shaved $110 million off the district's unfunded liability and put the fund on track to reach a 90% funded ratio by 2050. It was previously headed toward insolvency in 2023.The offering statement puts potential buyers on notice that on July 28 the retirement board received a letter from a lawyer representing a retiree requesting that the board restore previous cost-of-living adjustments in light of the state high court ruling. The letter threatened that a lawsuit would be filed if the cut was not restored in 30 days.
The district also reported that its largest union, the Service Employees International Union Local 73, has reported on its website that it believes the changes are unconstitutional.
"The lawsuit is currently being worked on" although the timing is uncertain, union spokesman Adam Rosen said in an email this week.
"Successful legal challenges reversing the net positive credit impacts of pension reform would likely have a negative impact on the rating," Fitch said.
In the offering statement, the district also warns of other strains under "investment considerations." The district warns of the potentially harmful economic impact of tax hikes should they be sought by overlapping taxing bodies, which include the city, school district, and Cook County.
While Moody's was not asked to rate the new bonds, the district discloses its fall to a speculative grade and warns that further downgrades could result in "significantly higher interest rates" that could pressure its financial operations.
The district also notes that the lien afforded bondholders on pledged revenues has been untested in the Illinois court system.
Lux and acting treasurer Cynthia Evangelista seek in the presentation to highlight the district's fiscal strengths that have held its other ratings in the double-A category, including a $205 million ending balance, equal to 72% of general funds, and its fiscal flexibility.
The 2015 budget maintains reserves despite increasing pension contributions, Lux said. Property taxes make up 58% of the general fund and the district raised its levy last year by $3.6 million, the first in eight years. About 34% of the general fund comes from non-tax user fees giving the district some flexibility to raise revenues outside its tax levy. It's largely insulated from state and federal exposure.
The district did report that the Illinois Sports Facilities Authority informed it that the distribution of $1.4 million in state hotel taxes is delayed in the absence of a fiscal 2016 state budget. The authority issued the debt that financed the overhaul of the district-owned Soldier Field football stadium.
The deal's $40 million new money series of limited tax bonds mature from 2023 to 2040 with capitalized interest through 2017. Proceeds are earmarked for the district's capital program.
Series B for $29 million of limited tax refunding bonds matures from 2018 to 2024 and will current refund 2006 bonds for savings.
Series C for $13 million of limited tax refunding bonds matures between 2018 and 2023 and will current refund debt that had carried an alternate revenue pledge of personal property replacement taxes, freeing revenues up for the district's higher pension contributions.
A final series for $6.2 million of unlimited tax refunding bonds matures between 2018 and 2020 and will refund debt for savings.
Standard & Poor's said its rating reflects a large and diverse tax base, good income and very strong reserves. Pressures include low pension funding levels, a moderately high debt burden at $7,090 per capita and 9.2% of estimated market value.
Kroll in its rating report said it "will continue to monitor the funding levels for the District Retirement Fund, given the risks we have identified in the statutory funding provisions."
A significant challenge is the pension burden and fiscal strains of overlapping local governments.
"Fitch is concerned that pressure could be exerted on the district to let the city's needs trump those of the district, though currently, the board makes these decisions autonomously," its analysts wrote.
Fitch also notes that a limitation on the benefits is that formulas remain set in statute and not based on actuarially derived figures.
Moody's lowered the park district's rating three levels to Ba1 from Baa1 after it stripped Chicago of its investment grade rating in May.
The district operates 585 parks, 231 field houses and 26 miles of lakefront property that includes harbors. Cultural institutions that operate facilities on district property include the Museum of Science and Industry, Field Museum of Natural History, DuSable Museum of African American History, Adler Planetarium, John G. Shedd Aquarium, and the Art Institute of Chicago.
