Chicago budget passes, setting stage for $1.2 billion bond refinancing

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Chicago Mayor Lori Lightfoot’s $11.65 billion 2020 budget cleared the City Council in a 39-11 vote Tuesday.

The spending plan wipes out a more than $800 million deficit with a mix of new revenues, cuts, and various one-shots, including $210 million of savings from a $1.2 billion bond refinancing deal.

“The 2020 budget we just passed is a progressive blueprint for the future…with 61% structural changes which means that we have created a long term fix to our budget challenges on which we can build a fiscally sound future. This budget contains no significant property tax increases,” Lightfoot, who took office in May to discover the city was grappling with a higher-than-expected budget gap, said after the vote.

The budget also incorporates the nearly $300 million hike in pension contributions to move police and firefighters payments to an actuarial level. A similar hike occurs in two years when the actuarial requirement hits for the municipal and laborers’ funds. The city has $30 billion of net pension liabilities and the system is 23% funded. The payment next year totals $1.68 billion.

The budget vote came after two hours of debate. While the package easily cleared the council there was more opposition than in recent budget votes under Lightfoot's predecessor, Rahm Emanuel.

During the debate, backers praised it for the 60% to 40% balance favoring structural fixes over one-time maneuvers, raising funding in some areas like housing and mental health services, and limiting the property tax levy hike.

The levy will go up by about $65 million to cover increased library spending, previously issued general obligation debt, and to account for new properties. The budget doesn’t dip into reserves and eliminates some vacant positions but there are no layoffs.

The budget “closes the gap by restructuring our debt in a fiscally sound and financially smart way,” said Alderman Scott Waguespack, a frequent critic of former Mayor Rahm Emanuel’s financial management and Lightfoot’s choice to lead the Finance Committee.

“The budget we are considering today offers a path to stability moving forward that meets all of our financial obligations while also investing in the priorities important to us,” said Alderman Pat Dowell, chairwoman of the council’s Budget Committee.

Opponents chastised the plan for relying on some iffy revenue streams from savings and new taxes and fees, including $133 million in higher emergency services charges from Medicaid, which the federal government must approve. A decision is expected this week.

The budget relies on a ride-share tax hike to generate $40 million that could face litigation from private operators.

A significant property tax hike could also loom if Lightfoot doesn’t get the state to sign off on changes to the tax on property sales or the tax structure on a proposed Chicago casino. Both requests failed to clear the General Assembly during its recent fall veto session.

“This budget is not a balanced budget. This is a budget with a bunch of holes that are going to have to be filled at a later date,” said Alderman Anthony Beale, one of Lightfoot’s most vocal council critics so far. “This is not a legislative body. This is a go-along body.”

Six members of the council who ran as Democratic Socialists issued a statement ahead of the budget vote declaring their intention to cast no votes. They called the proposed tax and fee hikes “flat, regressive, or otherwise burdensome to our working-class citizens.”

The bond deal cleared the council without debate. Chief financial officer Jennie Huang Bennett has acknowledged that taking much of the savings associated with refunding outstanding general obligation and motor fuel tax bonds upfront is not a best practice but says it gives the city breathing room to move toward structural balance by a target of 2022.

Bennett defends the deal against a label of scoop-and-toss lite — a reference to past practices of pushing out principal repayments for budget relief — stressing that the deal will achieve savings in all maturities and the city will trim one year off the final maturity of the existing bonds.

“Debt service in every year will be lower than the refunded debt service….this is not scoop and toss,” Bennett said in an interview last week after the Finance Committee meeting review.

The city is aiming to sell $1.2 billion of bonds to refund $1.3 billion of debt in the coming weeks and a portion will be sold backed by the GO credit and another piece structured as subordinate Sales Tax Securitization Corp. securities.

Municipal Market Analytics still believes the deal should carry a scoop and toss label. “The definition of ‘scoop and toss’ has become increasingly politicized and elected officials and debt managers often cry foul when the term is used other than for transactions that extend maturities,” MMA wrote.

“MMA considers a refunding to restructure debt service and realize disproportionate savings in the short-run (versus sharing the savings pro-rata with future taxpayers) a form of scoop and toss. It may be less egregious than refunding with higher costing debt or extending maturities, but it is nonetheless an unsustainable budgetary practice that should be avoided,” MMA said.

MMA also highlighted the downsides of further siphoning sales taxes from the corporate fund as it believes such action diminishes the value of city GOs. MMA also suggests delaying a property tax hike is risky and could make a future increase all the tougher to swallow politically if a recession hits.

“While the impact of addressing the city’s precarious fiscal position using budgetary best practices may be untenable politically, the STSC transaction will draw would-be resources away from future budgets and further subordinate general obligation bondholders, now to both the senior and junior lien bonds issued by the STSC,” MMA wrote in its weekly outlook.

“A failure to raise taxes now, while the local economy is reasonably strong, raises the risk of an eventual hike being proposed when growth is weaker or even negative: a very hard environment to present recurring budget solutions,” MMA said.

Market participants also say they are concerned about whether some of the revenue projections are precarious and whether the city can count on state approval for the real estate tax — which would generate $100 million annually — and casino changes that theoretically would allow the city to bank about $200 million annually. But they also view the city as heading in the right direction and praise the level of structural fixes.

And rating agencies have not signaled any red flags with the budget. “In our view, current revenue estimates appear reasonable based on historical performance and implementation time frames,” S&P Global Ratings said.

The STSC bonds would establish a new junior lien. The senior lien carries double-A and triple-A ratings. The GOs would be rated in the triple-BBB to single-A category.

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Budgets Primary bond market Public pensions Lori Lightfoot Chicago Sales Tax Securitization Corp City of Chicago, IL Illinois