Conference Panelists Talk Chicago Finances

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John Hallacy

CHICAGO — Chicago's junk-rated paper offers an enticing opportunity, according one buyside professional who views the city's credit as being on the upswing with a long term solution to its pension woes within reach.

"In my view, at current spreads, it's a big opportunity," C. Tyson Schoback, senior municipal analyst at Columbia Threadneedle Investments, said during a panel discussion on credit trends during The Bond Buyer's recent Midwest Municipal Market Conference. The city "still has a lot of wood to chop" in tackling their budget and pension woes but he sees "positive steps forward."

Investors will have a fresh opportunity in the primary market soon enough as the city plans to enter the market with a $1.1 billion GO restructuring as soon as the week of July 13 to finish eliminating those liquidity risks tied to its GO credit and for budget relief.

Like others who follow Chicago's credit woes, Schoback says it was poor fiscal decisions that got the city into its current mess over a series of years. Despite its recent credit dip among three rating agencies, he now views the city as an "improving credit" that is moving to clean up its balance sheet and his firm holds Chicago GO paper.

The positive view is due to the city's efforts to shed its general obligation-backed floating rate debt, cancel swaps and shed credit-line backed debt supported by bank credit agreements that fell into default after Moody's Investors Service dropped it to junk-level Ba1 in May. Those efforts come with a substantial price. Mayor Rahm Emanuel has also vowed to phase out debt restructurings that push off principal repayment by 2019 and to curtail operating costs — like judgments and retroactive pay raises — that are paid with debt.

In drawing distinctions between Chicago and Detroit's fiscal struggles, market professionals have generally noted that Detroit's problems stem from an inability to meet its obligation due to a faltering tax base whereas Chicago's come from a political unwillingness to dig deeper into its strong tax base.

Schoback contends the city is just "one governor signature away" from an overhaul to all four of its pension funds being in place. An overhaul to the municipal and laborers funds is pending before the courts as unions contend benefit cuts violate the state constitution. Lawmakers recently approved a 15-year extension to the amortization schedule to bring the city's police and fire funds to a 90 % funded ratio. It trims more than $200 million off a $550 million spike in the city's 2016 payment by ramping up to an actuarially based contribution.

Schoback says the latter plan may not be ideal as it further pushes off the funding schedule, but it has the benefit of being "politically palatable" to local taxpayers. Lawmakers have not yet forwarded the bill to Gov. Bruce Rauner and it's unclear whether he would sign it. He initially slammed it for kicking the can further down the road but more recently said he could support it as part of a larger pension overhaul.

Solutions are within reach for both the city and state with the right steps to turnaround their credits in the coming years, Schoback added, noting what market participants frequently say is the under-taxation of the state as a whole.

"You hate to see management by crisis," said panelist John Hallacy, a managing director at Assured Guaranty Corp. "When that happens the first order of priority is to maintain liquidity and market access, and then have to come up with a short term and long term plan…..the real challenge is getting buy in from everyone around the table."

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