CHICAGO — Chicago expects to tap an array of federal stimulus debt programs in its sales of up to $2.85 billion of new-money and refunding general obligation and airport bonds that were submitted to the City Council for approval yesterday, chief financial officer Gene Saffold said.
The finance department submitted authorizations seeking approval to sell up to $875 million of new-money and refunding GOs, up to $1.5 billion of new-money and refunding O’Hare International Airport revenue bonds and up to $500 million of Midway Airport revenue refunding bonds. The city expects to sell the GOs and Midway debt later this year and the O’Hare bonds in the first quarter of 2010.
“These bond issuances will provide key financing for infrastructure improvements throughout the city and at O’Hare, as well as achieving interest-cost savings,” Saffold said.
The city is exploring the use of the Build America Bond program that provides a 35% direct-pay interest subsidy on the new-money pieces of both its GO and airport sales. It is also looking at opportunities to use its $133 million allocation of recovery zone economic development bonds in the GO sale, Saffold said during his keynote address at The Bond Buyer’s Municipal Finance in the Stimulus Era conference here yesterday.
The GO ordinance asks the council to designate Chicago a federal recovery zone. The city also expects to take advantage of the alternative-minimum tax holiday in the stimulus act for airport bonds and is examining opportunities to tap its $200 million recovery zone facility bond allocation.
Saffold praised the availability of the programs and the benefits they provide in lowering borrowing costs as well as the influx of more than $1 billion in federal funds from the stimulus, but he lamented that the programs have not taken broader action to directly help local government operations.
Faced with rising personnel and other costs amid a decline in key revenue streams like sales, income and real estate transaction taxes, Saffold and his budget team are working to close a $520 million deficit in the $6.2 billion budget Mayor Richard Daley will propose later this month.
“Our issues are really about the budget challenges we face” and the stimulus funding is not really “geared” to address those issues, said Saffold, a veteran public finance banker who was named CFO in March.
In addition to dipping into a mid-term reserve account, officials have cut spending on services, slashed positions, and slowed capital spending to address dwindling revenues in 2009 with additional cuts looming in 2010. All are measures Saffold said run counter to the government’s effort to spur economic growth.
“More cuts are going to dilute the strength of any kind of recovery,” he said.
Saffold said he hopes the expiration of some stimulus bonding programs will be extended and says he has a “gut” feeling that the 2011 deadline for the BAB program will be extended. He also said he hopes federal authorities consider supplying operating support for local governments.
The city and such affiliate as the Chicago Transit Authority and Chicago Public Schools are receiving about $1 billion in formula funds allocated in the stimulus act and are hoping to also snag a share of the $28 billion in grant funding.
Siebert Brandford Shank & Co. was named the senior manager on the city’s GO issue. Fitch Ratings recently revised its outlook on the city’s AA rating to negative. It attributed the action to the size of the deficit and the effects of the recession on housing and employment levels in Chicago and its use of one-time measures to help balance the budget this year. Standard & Poor’s rates Chicago’s GOs AA-minus while Moody’s Investors Service rates them an equivalent Aa3, both with stable outlooks.
In addition to benefitting from the AMT holiday on the new-money piece of its O’Hare sale, the city expects to benefit on the refunding tranche as well. Some airport bonds classified as private-activity bonds are subject to the AMT, which in effect, eliminates many deductions and credits and creates a tax liability for a wealthy individual who would otherwise pay little or no tax on interest on the bonds, driving up the issuer’s interest costs.
The stimulus package exempted all tax-exempt bonds issued in 2009 and 2010 from the AMT and permits issuers to current-refund bonds subject the AMT that were issued within the last five years.
The up to $1.5 billion O’Hare deal would provide new money for the ongoing $3.3 billion first phase of the three-phase $8 billion O’Hare Modernization Program that includes the reconfiguration of existing runways and construction of new ones.
The city last year opened the first new runway. The runway plan is designed to expand capacity to a yearly 1.2 million flights from the roughly one million it can now handle and relieve delays that occur in poor weather conditions when runways are closed down by shifting to a parallel design from an intersecting pattern.
O’Hare has about $4 billion of general airport revenue bonds outstanding in three liens that are rated from the mid- to high single-A range on the third lien to the high double-A category on the first senior lien.
The Midway transaction, which will sell later this year, will include the refunding of $150 million of auction-rate securities. City officials did not move to restructure the debt following the collapse of that market in late 2007 and early 2008 because at the time they were working on a long-term lease of the airport. As part of any lease deal, the city would have retired all of Midway’s $1.2 billion of debt.
Chicago was poised this past spring to enter into a $2.52 billion groundbreaking agreement to lease the airport to a private consortium under a federal pilot program that permits the privatization of up to five airports, but it was canceled in April over the group’s inability to raise financing for the 99-year lease transaction.
The city retains the Federal Aviation Administration’s single slot in the lease pilot program for a large hub airport, Saffold said yesterday. Officials will refund existing Midway airport using a floating-rate structure to provide flexibility should the city opt to again pursue a lease deal. “We are continuing to look at opportunities to bring that [lease] back to life,” Saffold said.
Banc of America Securities Merrill Lynch is senior manager on the O’Hare transaction and JPMorgan is senior manager on the Midway deal.