CHICAGO – Chicago returns to the market in January with a general obligation deal that should benefit from the stabilization of three of its bond ratings.
Those ratings solidified because of the city's progress in developing a funding plan for its pensions, but Chicago's name remains tainted by a junk rating from Moody's Investors Service and warnings that its pension ills are far from cured.
The $1.14 billion issue, made up of $865 million of tax-exempt new money and refunding bonds and a $275 million taxable series, is expected to price the week of Jan. 16, according to a notice from bookrunner Goldman Sachs.
The deal was originally slated for this year but Mayor Rahm Emanuel's administration opted to wait amid the post-election rise in interest rates.
The latest positive news came Monday from Kroll Bond Rating Agency, which shifted its outlook on Chicago's BBB-plus rating to stable from negative.
Fitch Ratings and S&P Global Ratings took similar action earlier this year. S&P affirmed the city's BBB-plus rating on Friday.
"From putting all four city pension funds on path to solvency to cutting our structural deficit by 80%, Mayor Emanuel continues to address our financial challenges, and these revisions reflect our hard work to improve the city's long-term financial stability," Chief Financial Officer Carole Brown said in a statement on the Kroll action.
Fitch, which rates the city BBB-minus, has not yet released a new report.
Moody's Investors Service, which rates the city at the speculative grade level of Ba1 with a negative outlook, has not been asked to rate recent city deals.
S&P shifted the city's outlook to stable in October after the city council passed a new water-sewer tax to boost funding for its municipal employees' fund, marking the city's final fix aimed at shoring up its four pension funds.
The city's massive pension tab had dragged its bond ratings down and pushed its spread penalties up over the last several years.
The council previously adopted a record property tax hike to better fund its police and fire funds and an emergency phone surcharge for its laborers' fund.
S&P said its stable outlook reflects a belief that the city is gradually moving in the right direction toward stabilizing its budget and its pension plan contributions.
The revised funding plans phase in a shift to an actuarially determined contribution in five years when the plans are then put on a path to a 90% funded ratio in 2055. At the end of the ramp, the city will face a big jump in contributions.
"In order to ensure the long-term sustainability of its pension contributions and continued credit stability, we believe that the city will need to identify additional measures to address its mounting pension contributions within the next two years. Furthermore, our outlook is predicated on continued progress toward the elimination of the city's structural budgetary imbalance," S&P wrote.
The revisions to the municipal employees' and laborers' plans are also not yet final because state legislative approval is needed.
During the legislature's recent fall veto session, the plan received strong bipartisan support in a House vote, but the Senate did not act.
The city is hoping to win approval in January with a strong enough margin to override a potential veto by Gov. Bruce Rauner.
The 2017 budget provides $1.03 billion in pension contributions, up from $849 million this year and $480 million in 2015, but they still fall short of an actuarial level of $1.87 billion.
The city's municipal fund plan is just 20% funded, with an $18.6 billion net pension liability; the laborers' plan is just 33% funded, with a $2.5 billion net pension liability; the police plan is 25% funded, with a $9 billion net pension liability; and the firefighters' plan is 22% funded, with a $3.8 billion net pension liability.
The rating reflects S&P's expectation that the city will carry through on reaching full statutory contributions of all pensions by 2022 and analysts expect the city to stick to its pledge to end "scoop and toss" debt restructuring and to keep up its progress on structurally balancing its budget.
S&P said the city is making progress in addressing its budgetary challenges, with the structural gap closed in the 2017 budget down to $138 million from $638 million when Emanuel took office in 2011, though the gap is projected to grow in the next several years.
Kroll described as key rating strengths an effective management team that has improved the stability of financial operations by reducing reliance on non-recurring revenues, the city's substantial tax base and deep and diverse economic base, and ample available reserve balances.
Kroll too remains concerned about looming pension funding strains as well as other demands on city spending.
"High debt levels and borrowing needs, increasing public safety expenditures, and long-term pension funding issues will all exert pressure going forward" as does the city's need to "identify significant long-term funding sources as pension funds transition to an actuarial schedule," its analysts wrote.
Both rating agencies also note the difficulty of balancing the region's overlapping debt burdens as several of the city's sister agencies and Cook County struggle to rescue their pension funds.
"In KBRA's view, city of Chicago taxpayers, who already pay high sales taxes, will likely experience other tax increases to address the funding inadequacy of multiple layers of government," analysts wrote.
The City Council's $1.25 billion bond authorization included a mix of new money and refunding to fund capital projects in 2016 and 2017. Another $150 million is for equipment purchases, and $100 million is to cover judgments and settlements this year and in 2017, the administration said earlier this year.
Emanuel has pledged to halt by 2019 putting routine settlements and judgments on the city's debt load, although the city may still borrow to cover larger burdens because of their size. The $50 million of borrowing for this year and again for 2017 is down from $62 million last year, $158 million in 2014, and $138 million in 2013.
The upcoming sale incorporates $335 million of debt restructuring through 2018 after which the practice would end, the administration has pledged. The much-maligned practice began a decade ago as former Mayor Richard Daley's administration sought to smooth out rising debt service and continued under Emanuel.
S&P in its report said its analysts were told that scoop-and-toss would consume $440 million of the deal and $225 million was earmarked to fund settlements and judgments.
While trade activity has been light so far this week, IHS Markit said it was seeing Chicago debt quoted at spreads around 280 basis points to the AAA.
The city saw its spreads narrow on its $500 million GO issue last January, its first sale after the City Council approved the $543 million property tax hike, but it still paid a punishing rate. The city's 10-year landed at 4.31% and 4.875% on the long bond with a 22-year maturity.
The 10-year rate represented a spread of 253 basis points to the top-rated Municipal Market Data benchmark and 159 basis points over the triple-B benchmark credit. The 22-year rate landed 229 basis points over the triple-A benchmark and 139 basis points over the triple-B.
The city did not offer a 10-year maturity on its previous GO sale in July 2015 when a nine-year maturity landed 290 basis points over MMD's triple-A benchmark and an 18-year maturity was 270 basis points over MMD's top benchmark.
In a GO sale in late May 2015, Chicago saw spreads of 293 basis points on the 10-year maturity and 264 basis points on the longest 27-year maturity.
Estrada Hinojosa & Co. Inc. and Mesirow Financial Inc. are co-seniors on the January deal.
Five law firms are bond counsel, disclosure counsel, and pension disclosure counsel.
Public Financial Management Inc. and Public Alternative Financial Advisors are advising the city.
The size, timing, and structure of the anticipated transaction are subject to market conditions and other factors.