CHICAGO — The Metropolitan Water Reclamation District of Greater Chicago will bring as soon as Monday a $300 million deal that offers a mix of refunding securities and new-money designated as "green bonds" to fund projects including its mammoth "Deep Tunnel."
The district is highlighting its triple-A general obligation ratings from Fitch Ratings and Standard & Poor's. The district did not ask Moody's Investors Service to rate the bonds.
Moody's in 2013 stripped the district of its top credit marks after revising its pension criteria. Moody's cited the size of the district's pension obligations and overlapping tax burden with Chicago and other related governments all struggling with high unfunded liabilities for the downgrade; it rates the district's $2.6 billion of outstanding bonds Aa1 with a negative outlook.
The district said it decided to go with just two ratings to save money. "Investors informed us that they are increasingly relying on internal credit reviews, and that two ratings are sufficient for this sale. In addition, many issuers across the country are moving to two ratings to control costs as was the district's intent," said Treasurer Mary Ann Boyle. "Some issuers have lines of credit or swaps that are tied to ratings, and the district has no such requirement." All of the district's debt is conservatively structured in a fixed rate.
The district is one of the first of its type to offer designated green bonds. The sale includes four tranches of bonds including Series A for $100 million of unlimited tax capital improvement bonds maturing between 2039 and 2044.
"These top ratings and stable outlook will be a very strong selling tool in the bond market," said Commissioner Mariyana Spyropoulos. "The Green Bonds will support projects that reduce our carbon footprint and improve energy efficiency. The green bonds are a wonderful offering for financial institutions and individuals who want to invest in environmentally-beneficial opportunities."
Proceeds will finance the district's massive "Deep Tunnel" reservoir and tunnel flood control project. It was launched in 1972 and the tunnel portion came online in 1985 with reservoirs still under construction.
District Executive Director David St. Pierre said in an investor presentation the ongoing project draws visits from wastewater officials from "across the world."
The deal's B series for $50 million offers unlimited tax, alternative revenue source bonds that mature between 2016 and 2044 and will finance storm water improvements. The deal's C Series for $75 million of limited tax capital improvement bonds matures between 2015 and 2029 and will finance resource recovery and water reclamation bonds that will aid the district as it moves from simply treating water to resource recovery such as recycling water for reuse.
The district is hoping to raise new revenue through initiatives such as the sale of biosolids recovered from the treatment process.
Flood control from storm water is a central issue facing the district and state legislation now allows it to borrow for projects aimed at helping communities deal with the issue.
The new money supports projects that are part of the 125-year-old district's ongoing $2.3 billion capital program. The district serves five million residents from 125 communities, treating 1.3 billion gallons of wastewater daily. Use of the proceeds are being segregated by project type for the benefit of investors given the series' green designation.
A final D series for $75 million of limited tax bonds matures in 2022 and will refund 2006 bonds. Morgan Stanley is the senior manager and Loop Capital Markets LLC is co-senior manager. A.C. Advisory Inc. and Public Financial Management Inc. are advising the district. Katten Muchin Rosenman LLP and Gonzalez, Saggio and Harlan LLC are co-bond counsel.
Ahead of the sale, Fitch and Standard & Poor's affirmed the district triple-A ratings and the Civic Federation of Chicago endorsed its budget proposal.
"The rating reflects our assessment of the district's participation in the deep and diverse Chicago metropolitan statistical area economy, strong financial performance with maintenance of high reserves, and moderate overall debt burden," said Standard & Poor's analyst Jennifer Boyd.
The Civic Federation recently endorsed the district's proposed $1.3 billion fiscal 2015 budget but raised concerns over the district's plans through 2019 to raise its property levy by the maximum amount allowed. The 2015 budget raises the levy by 3.7% to $560 million.
"The Civic Federation continues to view the MWRD as a model for long-term financial planning and we acknowledge that the District faces significant challenges in funding its pensions and other costs," said federation president Laurence Msall. "However, we encourage the district to balance this need with expenditure controls and other revenue sources rather than relying on automatic annual property tax increases as projected."
The district is highlighting with investors its strides in dealing with its retiree benefit liabilities. It persuaded state lawmakers in 2012 to pass legislation that increased employee and employer contributions. The district is proactively increasing its contributions beyond what's required. Its funded ratio based on the most recent results rose to 56.5% from 50 %.
The board recently adopted a funding goal to contribute more than required to beat a 2050 target for full funding.
Unlike other local governments in the region, MWRD is allowed to contribute more than the statutory requirement to its pension fund if the funds come from interest earned on other accounts.
The district has also won praise for being among the first in the region to have established a trust to fund its retiree healthcare benefits. The district said it expects to hit the 50% funded goal this year, far ahead of the 2055 goal under the 2007 plan, and recently adopted a measure aimed at fully funding the trust in 12 years.
