CHICAGO – The Chicago City Council on Wednesday approved $600 million of new money general obligation borrowing along with new rules that require greater oversight of more complex financings such as those with interest-rate swaps.
The city plans to issue up to $1.25 billion of GOs in the third quarter with Goldman Sachs running the books. The council had previously approved $650 million for refunding and scoop-and-toss debt restructuring but put off approving the new money until Mayor Rahm Emanuel's administration provided more detail on how proceeds would be spent.
The city's GO trading spreads have fluctuated over the last year depending on its fiscal headlines, ranging from 200 to 300 basis points over the Municipal Market Data's top-rated benchmark, and are currently on the higher end of that range.
Chief Financial Officer Carole Brown acknowledged the status of the city's ratings and size of the yield penalties are uncertain at a hearing Monday.
The city's costs will depend on how analysts and investors view an alternative plan Emanuel is expected to lay out in the coming weeks for funding the municipal employees' and laborers' pension funds after the state Supreme Court rejected a previous reform plan.
Emanuel said Wednesday that negotiations with unions are ongoing as the city seeks "responsible" funding plan. The two funds are headed toward insolvency in 10 to 13 years.
The city is also awaiting action by Gov. Bruce Rauner on a re-amortization of its public safety pension contribution schedule that would trim payments owed this year by $220 million. The city's $20 billion unfunded pension tab has dragged its credit down and puts it at risk for further downgrades.
The city's GOs are rated Ba1 by Moody's Investors Service and BBB-plus by Kroll Bond Rating Agency and S&P Global Ratings. Fitch Ratings has the city at the lowest investment grade level of BBB-minus.
New legislation
About $170 million of proceeds from the new money borrowing would finance capital projects in 2016 and 2017, including $70 million for the so-called aldermanic menu of projects in 2017. The 2016 menu will be funded from an upcoming sales tax backed issue. Another $150 million would fund equipment purchases. Another $50 million would go to cover judgments and settlements this year and another $50 million in 2017.
The full sale incorporates $335 million of debt restructuring through 2018 after which the practice would end, the administration said. The up to $1.25 billion authorization also includes room for refunding for traditional present value savings.
On Wednesday, the 11-member progressive caucus trumpeted passage of their Financial Transparency and Accountability ordinance that was negotiated with the administration. It imposes new oversight rules on some city financial transactions. The rules were sought by the group in response to the city's costly swap terminations that have taken place over the last year after downgrade-driven defaults were triggered.
Under the ordinance, no long-term debt transactions or novel transactions that bear interest at a non-fixed rate for any part of their life may be entered into by the city until extended hearings are held and costs assessed. Post-sale reports are also mandated.
"Through this ordinance, we seek to acknowledge the economic missteps made in the past, and ensure that reckless investments and debt transactions remain just that: a thing of the past," said one of its sponsors, council member John Arena.
The city is planning a series of revenue transactions this year in addition to the GOs. Next up is a Midway Airport issue for $348 million of new money and refunding second lien revenue bonds. Fitch Ratings on Wednesday upgraded the airport's rating to A from A-minus. The airport has $1.5 billion of second lien and $29 million of first lien debt. The sale is planned for next week. S&P affirmed its A rating Wednesday.
"The upgrade reflects Midway's enhanced franchise strength which, taken together with the robustness of the underlying Chicago air service market, offsets its currently elevated leverage," Fitch said.
The upgrade came as some council members called Wednesday for privatizing airport screening due to long two to three hour waits to clear security at Chicago's airports due to a shortage of federal Transportation Security Administration screeners.
