CHICAGO -- The Chicago City Council signed off on a $2.45 billion borrowing package Wednesday.
The final package was trimmed by $800 million, at least temporarily, due to council members' questions about capital projects and Mayor Rahm Emanuel's swap termination plans.
The council gave Emanuel's administration authority to issue up to $650 million of general obligation bonds, up to $1 billion of Midway Airport-related borrowing, $400 million of wastewater revenue bonds, $200 million of new money water revenue bonds, and $200 million of new money and refunding sales tax bonds.
A separate $200 million water revenue bonding request was held after the council's progressive caucus questioned the city's plan to use the proceeds to pay for terminations of swaps tied to $455 million of outstanding variable-rate bonds.
The city intends to convert the floating-rate paper to a fixed rate this year. Council approval for the conversion is not needed, but the council has to authorize the borrowing authority to pay for the swap termination fees.
Chief Financial Officer Carole Brown scaled back the initial GO authorization of $1.25 billion, dropping the new money piece after some council members raised questions earlier this week in the finance committee about the lack of information on funded projects.
Council members are showing more independence since Emanuel has come under criticism for his administration's handling of a controversial fatal police shooting and they also are on the defensive about the city finances after approving a record property tax increase for rising public safety contributions.
The administration plans to return later in the year with the $600 million new money GO authorization, and hopes to get the water authorization approved next month after providing council members with additional information.
Emanuel defended the borrowing plans.
Some will fund infrastructure improvements and "it would be wrong not to make that investment," Emanuel said after the council meeting.
On the city's move to convert the floating-rate debt and cancel swaps, he said: "It's consistent with what people in the financial community and the rating agencies want to see….this is all an effort to unwind things that we inherited."
Emanuel shrugged off questions over the council's heightened scrutiny of his proposals.
"The city council is going to play an important role in being a partner in moving the city forward and I think they are going to continue to do that," he said.
The water conversion and swap termination mark the final step in the city's resolution of a $2.2 billion liquidity crisis created in May when Moody's Investors Service downgraded the city's rating to junk.
The GO and sales tax-backed bond downgrade and related actions on Chicago's water and wastewater bonds triggered defaults on bank contracts supporting floating-rate paper, short-term borrowing lines, and derivatives.
Last year, the city retired the short-term lines, moving much of it to its long-term debt load, and converted variable-rate GOs, wastewater and sales tax bonds to fixed rates, and terminated the associated swaps.
Brown said Tuesday the city has so far paid $250 million to cancel swaps, including $150 million tied to GO paper, $30 million for sales tax debt, and $70 million for sewer. The cost of terminating the water swaps is currently estimated at about $100 million.
At a news conference Tuesday, the 11-member progressive caucus questioned the wisdom of moving forward now on swap terminations and called on Emanuel to delay or abandon its plan.
"This is the worst possible time to voluntarily pay termination penalties. It would make these already bad deals even more expensive," said Alderman John Arena.
"There is no financial benefit to giving the banks everything they ever could have wanted and taking on unnecessary debt that we will pay for decades," said Alderman Scott Waguespack. "The Emanuel administration says it is getting out of risky deals. Getting out of the deal by paying the entire ransom is an irresponsible financial move."
Fitch Ratings in a November report said the city successfully renegotiated terms and/or obtained waivers to remove near-term liquidity risks. On the three swaps, bond rating threshold triggers were lowered via novation of the swap to a different counterparty or the agency that currently assigns the lowest rating was removed.
Brown defended the city's decision to complete the conversion and swap terminations. "This was a policy that we adopted in the spring," she said, citing praise from rating agencies and investors for the city's decision to shed its floating-rate and swap risks.
The triggering of defaults on the city's bank support for floating-rate debt drove the cost of support up to 10 basis points from two, said deputy comptroller Jeremy Fine. In order to shift to a fixed rate to shed those costs and future risks, the city has to cancel the swaps as it lacks authority to have naked swaps outstanding.
"We believe it is cheaper and lowers our risk profile," Brown said.
Some council members and the Chicago Teachers Union have called on the city to take legal action against the banks. The administration said it commissioned an analysis in 2014 by two outside legal firms with regulatory expertise to explore the possibility.
Chicago corporation counsel attorney James McDonald said the report found the city had no legal claim to assert as the "city entered into the swaps knowing the risks" and entered into the contracts because they believed at the time they "made financial sense."
Fine and Brown said the city hired swap advisors to help negotiate and lower the valuations and they were reduced by about $20 million. They also suggested that firms were reminded of their lucrative business with the city on multiple fronts, from banking to underwriting.
"We work with a relationship banker on various products [at the firms] so they are keenly aware of the potential other business opportunities," Brown said.
The city's ability to threaten to withhold bond business must also be weighed against its need for ongoing bank products like short-term lines and support for the distressed Chicago Public Schools, which is a tougher sell, market participants said.
The smaller GO authorization will cover the city's remaining plans to push off some near-term debt repayments through a "scoop-and-toss" maneuver and pursue economic refunding opportunities.
On folding the remaining scoop-and-toss restructuring into one deal this year, Brown said she hoped to trim some costs and was "seeking to instill a level of fiscal discipline" and show the market and rating agencies alike that the city was serious about its intent about eliminating the practice in 2019.
Brown said she expects later in the year to return to the council with the new money piece that would include a more detailed project list and also offer aldermen a clearer picture of how much might be sought to cover judgments and settlements. The 2016 budget includes $45 million for those items. Emanuel has said the city plans to phase out the use of debt to cover those items, but has not set a date.
