Lois Scott is one of the four founders of Women in Public Finance.
Lois Scott

CHICAGO - Chicago city council members who have long scrutinized the level of minority and women-owned participation in city bond deals are now turning their attention to the overall racial makeup of non-minority-owned firms assigned to work on city debt sales.

The heightened scrutiny came during the City Council Finance Committee's review of two city borrowing ordinances at a meeting Monday.

One authorizes the sale of up to $900 million of new money and refunding general obligation bonds planned in two separate issues. The other allows for up to $1 billion of new money and refunding of Midway airport revenue bonds, although the city is planning a roughly $550 million sale.

The committee signed off on both ordinances, but only after grilling the city's chief financial officer Lois Scott on the diversity of individuals working on the sales and on staff firmwide. The ordinances are expected to come up for full council approval Wednesday.

Alderman Walter Burnett, an African American, initiated the deeper look into staffing "diversity" at the non-minority and women-owned underwriters and was joined by others, who extended the questioning to include the legal firms. Several said they expected Scott to have that information at her ready when she brings future deals before the Finance Committee for its approval.

"I think that's a disgrace," Burnett said of firms that lack diversity among the members of their team assigned to the deal and overall. "They are making big money off these deals and why should we help them make big money if they don't help anyone else?"

Scott and her predecessors have long come prepared to Finance Committee meetings with a detailed breakdown of the percentage of participation by minority and women-owned firms - and more recently veteran-owned companies - on city bond sales. That includes a more detailed breakdown of the level of percentage assigned to Latino-owned firms and African-American owned firms.

The city has long abided by a goal to give at least 25% of work to minority-owned firms and another 5% to women-owned firms and typically exceeds that threshold. Scott and her finance team also now provide details on the level of work that goes to locally based firms.

"I think there's a good representation of women and minorities" and local firms among the overall teams, Scott said. Council members praised the levels and mix of minority firm ownership but said going forward they wanted information on the individual staffing makeup.

Hit with the new line of questioning, Scott on Monday went through the various firms and cited from memory individuals the city is working with who are African American or Latino. Burnett said the "message" he hoped to send firms with the questioning was to promote African Americans from within to improve the mix on teams working on a deals involving public money for a "diverse city."

Council member Latasha Thomas questioned the partnership makeup and lawyers assigned to work on the city's deals at the lead bond counsel firms.

A representative from Chapman and Cutler LLP, bond counsel on the GO sales, and Mayer Brown LLP, bond counsel on the Midway deal, said they did not know the partnership mix at their respective firms. Mayer Brown's team on the deal includes one African-American and a woman, both associates. Chapman's team includes two women.

The $550 million Midway sale will include $200 million of new money and $350 million of refunding. It's expected to sell in either the late first quarter or second quarter.

Barclays is senior manager and Citi and Morgan Stanley are co-senior managers. Another eight firms round out the team as co-managers.

Mayer Brown and Sanchez Daniels & Hoffman are co-bond counsel. Chapman and Cutler is pension disclosure counsel, Ricondo & Associates is airport consultant and Frasca & Associates LLC is advisor. About 33% of the sale's underwriting fees go to minority or women or veteran owned firms, Scott said.

Wells Fargo Securities is the senior manager on Chicago's next GO deal, of $450 million mostly for refunding and debt service restructuring, sale slated for sale in March with William Blair & Co. Inc., BMO Capital Markets, and Cabrera Capital Markets LLC serving as co-senior managers.

Columbia Capital Management and Kalotay & Associates are advisors. About 38% of underwriting fees will go to local firms and the same to minority-owned, women-and veteran firms.

The refunding piece includes between $180 million to $200 million of refunding for traditional present value savings and another $120 million to $130 million of restructuring to delay final bond repayments by as much as 10 years from their original maturities.

Loop Capital Markets LLC is senior on the later, mostly new-money GO sale, tentatively sized at about $200 million, with William Blair, Goldman Sachs, and Ramirez & Co. serving as co-senior managers.

A.C. Advisory Inc. and independent advisor Marty Luby are advising the city. The deal would sell in the second quarter. About 55% goes to local firms and 70% to minority, women, and veteran owned firms.

Chapman and Sanchez Daniels are co-bond counsel with Duane Morris LLP and Shanahan & Shanahan LLP serving as disclosure counsel on both transactions.

About $90 million of the new money proceeds will go to cover the cost of city legal judgments incurred last year.

At the finance committee meeting, Scott defended the city's ongoing practice of tinkering with the city's portfolio to stretch out debt repayment schedules to ease budget pressures, a tactic frowned on by rating analysts and investors as a sign of fiscal stress. It was begun under the prior administration and continued after Mayor Rahm Emanuel took office in 2011.

"We are taking to take advantage of a future window" where there are lulls in the debt service schedule, Scott told the committee. Critics say that stymies future debt plans.

The GO sales are Chicago's first since being slapped with two, triple-notch downgrades over its huge pension funding shortfalls. The city's $8 billion of GOs are rated A-minus by Fitch Ratings with a negative outlook, A-plus with a negative outlook by Standard & Poor's, and A3 with a negative outlook by Moody's Investors Service.

On the other hand, the city could benefit from a market perception that its credit has bottomed out and its bonds' value may increase after Illinois lawmakers passed state level pension reforms in December. Lawmakers have pledged to tackle pension reforms for Chicago and other local governments next.

The city is carrying $19.5 billion of unfunded liabilities, with several of its funds headed toward insolvency and a $600 million spike in contributions for its public safety funds loom next year.

The finance committee also signed off on a measure to double the city's commercial paper program to $1 billion. The city is reviewing bids from banks.

"The program will ensure the city has liquidity for unseen needs, such as retroactive salary payments and judgments," Scott said.

The airport sale continues the Midway debt restructuring Chicago started with a $326 million deal in November, a plan that had been on hold when the city pursued a plan -- ultimately abandoned -- to privatize the airport.

Ratings agencies view the Midway restructuring favorably.

"Collectively, the two sets of transactions will enhance the capital structure risk by the reduction of variable rate debt to approximately 17% from the current 25% level, the elimination of both put bonds" with mandatory tenders in 2015 and 2016 "and a reduction to the maximum annual debt service spike," Fitch Ratings said.

Fitch assigns an A-minus to Midway's second lien bonds and rates the first lien A. Moody's Investors Service rates the second lien A3 and the first lien A2. Standard & Poor's rates the Midway second lien A-minus and the first lien A. The airport has $1.4 billion of debt.

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