Carole Brown, Chicago's chief financial officer, hit resistance from the City Council's finance committee on the city's GO bond request.

CHICAGO – The Chicago City Council votes as soon as Wednesday on more than $2.6 billion of bonding after a day-long hearing in which aldermen flexed some newfound political muscle that prompted a compromise from Mayor Rahm Emanuel's administration.

Council members deepened their scrutiny of city borrowing when Chicago's chief financial officer, Carole Brown, and budget director Alexandra Holt laid out the city's 2016 borrowing plans at a Finance Committee meeting Monday. Most ordinances were approved as offered with the exception of the finance team's initial request for $1.25 billion of GO authorization.

A handful of council members questioned the city's request for $600 million in new money borrowing authority for capital projects without a list of funded projects.

Brown agreed to shave the authorization down to $650 million, the amount needed to cover the city's debt restructuring for budget relief in 2016, 2017, and 2018. The so-called scoop-and-toss maneuver to push off principal repayments, a regular feature in Chicago budgeting, is supposed to be eliminated in 2019.

Brown will return to the council at a later date when the city has compiled a project funding list for the $600 million. It's unclear whether the city will go forward with a GO refunding/restructuring or wait and eventually wrap the new money and refunding together.

"My concern is doing everything now" and approving all the authorizations for the entire year, Alderman John Arena said during the meeting. He's been a frequent critic of Emanuel's borrowing tactics.

Arena said he'd like to see the results of Tuesday's bond sale and a GO project list before giving blanket approval and he raised concerns about the costs of borrowing.

Previous bond proposals from Emanuel and predecessor Richard Daley have often passed through the finance committee with limited questions from just a few council members and a focus by others solely on minority and women-owned firm participation levels.

Questions Monday were more expansive. Some members asked whether the city considered taking legal action to try to reduce its swap termination payments, whether it was more fiscally sound to wait on some of the borrowing until the city's credit improves, and several pushed for more detail on the spending.

The amplified scrutiny and the administration's willingness to compromise illustrates Emanuel's weakened political might following his administration's handling of the fatal shooting of a 17-year-old African American by a white police officer who recently was charged with murder.

Council members are showing more independence and also are on the defensive about the city's finances after approving a property tax increase that will raise $543 million annually for police and firefighter pension payments when fully phased in. The committee advanced five bond ordinances allowing the issuance of 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, $200 million of sales tax bonds, and up to $200 million of water revenue bonds to cover swap terminations.

During the course of the year the city also intends to convert up to $500 million of floating-rate water revenue bonds to a fixed rate. It's the final action needed to fully resolve the $2.2 billion liquidity crisis triggered last May by rating downgrade-driven defaults on various bank contracts. Council approval is not needed because the original bond documents permit the rate conversion.

The city finance team's decision to seek approval on all of the planned 2016 issuance marks a departure from the past.

Getting approval for all of the year's issuance at one time provides the council with information on what "our plan is for the year" and also "allows me and the finance staff the opportunity to work with our underwriters and finance team on the most appropriate time to access the market," Brown said.

Brown and Holt said they want the city ready to act quickly should rates start to rise given the Fed's rate hike or if Gov. Bruce Rauner's proposal to temporarily freeze property tax rates makes headway.

The full council's consideration will come one day after the city sold $500 million of refunding and restructuring bonds.


The GO authority approved by the finance committee will cover the city's scoop-and-toss restructuring.

The city will push off $123 million in debt repayment this year, $139 million in 2017, and $73 million in 2018. The remaining authority would allow the city to refund debt for present value savings if market conditions are favorable.

Holt said the city wants to complete the scoop-and-toss up front to send "a clear message that we have dealt with it once and for all," which the city hopes helps its position with both rating agency analysts and investors.

The deal would price in the second quarter with Goldman Sachs running the books. Mesirow Financial Inc. and Estrada Hinojosa & Co. Inc. are co-seniors. Financial advisors are Public Financial Management Inc. and Public Alternative.

Chicago GOs carry a junk-level rating of Ba1 from Moody's Investors Service, with a negative outlook; BBB-plus ratings from both Fitch Ratings and Standard & Poor's, both with negative outlooks; and is rated A-minus by Kroll Bond Rating Agency, which revised its outlook to negative from stable Monday.

Kroll cited "a less certain environment for the city" in the wake of negative headlines over Chicago's legal, political and financial obstacles, and the police scandal.

"The current pension funding and associated litigation challenges are now compounded by a more adversarial relationship with the state administration," said analyst Harvey Zachem, a managing director.

Midway International Airport

The city is planning to tap about $900 million of the $1 billion Midway bonding authority to raise $500 million of new money, refund $200 million, and convert $200 million to a customer facility charge credit.

The deal would sell in the first quarter with Barclays running the books and Bank of America Merrill Lynch and Blaylock Beal Van LLC as co-seniors. Acacia Financial Group Inc. and Frasca & Associates LLC are advising the city.

Emanuel last year announced $250 million in upgrades that include an expansion of concessions, the terminal parking garage and security checkpoints.

The airport has a total of $1.5 billion of outstanding first and second lien bonds backed by Midway revenues. Fitch and Standard & Poor's rate the airport's second lien bonds A-minus with a stable outlook. The first lien bonds are rated A by both. Moody's rates the first and second lien bonds A2 and A3, respectively, with a stable outlook.

Sales Tax Debt

About $70 million of proceeds would finance the council's aldermanic menu of ward projects, funds that typically have come from GO borrowing. The other $130 million of authority would give the city refunding room.

Brown told council members that the city is attempting to follow suggestions by the rating agencies to diversify revenue sources used to repay debt. The move also should lower borrowing cost. "It's still higher rated than our GOs, so we would expect a benefit," Brown said.

The deal would sell in the second quarter with Mesirow as senior and Williams Capital Group and Melvin & Co. are co-seniors. A.C. Advisory Inc. is advisor.

Moody's dropped the city's sales tax bond credit to junk in May along with the GO because it caps the rating at the city's GO level. Fitch also caps the bonds at the city's GO level of BBB-plus.

The bonds carry a AA-plus rating from Kroll Bond Rating Agency and a AA rating from S&P, which downgraded the credit three notches from AAA in November. S&P also assigned a negative outlook.

Chicago remarketed $112 million of sales tax-backed bonds in June, paying between 140 basis points to 170 basis points to Municipal Market Data's top-rated benchmark. That was far below the 250 to 300 basis point spread the city paid on its GOs over the summer.


The city would tap the wastewater authorization to raise new money for projects in the third quarter in a deal led by Siebert Brandford Shank & Co.

William Blair and Ramirez & Co. are co-seniors with Swap Financial Group LLC as advisor.

The city has about $1.7 billion of wastewater debt that is now all in a fixed-rate mode after its conversion of $332 million of floating-rate debt from a 2008 issue. As part of the conversion, the city also issued about $100 million to repay a line of credit used to cover swap termination payments in the wake of Moody's GO downgrade last year.

Standard & Poor's rates the senior-lien wastewater debt A-plus and second lien A with a stable outlook. Fitch Ratings rates the second lien AA and negative. It does not rate the senior lien. The bonds are secured by net revenues of the city's sewer system after the payment of operations and maintenance expenses. Kroll Bond Rating Agency assigns a AA-minus to the junior lien. Moody's rates the senior lien Baa2 and the junior lien Baa3.


The city intends to tap the $200 million new money water revenue bond authority in a sale slated for the third quarter. Cabrera Capital Markets is senior manager with Janney Capital Markets and Backstrom McCarley Berry & Co. as co-seniors. TKG & Associates LLC is advising the city.

The $700 million water floating- to fixed-rate conversion, which includes $200 million that requires City Council approval for swap termination payments, would sell in the first quarter with PNC Capital Markets in the lead. Stifel and Ramirez are co-seniors with Columbia Capital Management and Sycamore Advisors as advisor. City officials said Monday the current swap termination cost, which is subject to change, is about $100 million.

The water conversion marks the final piece to resolve the downgrade-driven $2.2 billion potential liquidity crisis.

"We are doing this now so we can continue the practice of de-risking our balance sheet," Brown said in response questions about whether the city could cut its costs by waiting.

Fitch rates $37 million of senior lien water revenue bonds AA-plus and $2.2 billion of second lien bonds AA. It assigns a negative outlook. Moody's rates the senior lien water bonds Baa1 and the junior lien Baa2. S&P rates them A and A-minus, respectively. Kroll rates the second lien AA and stable.

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