Investors welcomed the opportunity to meet and hear directly from Chicago Mayor Lori Lightfoot, but they remain hungry to see the details of how she will tackle an $838 million deficit.
Lightfoot, who took office May 20, spoke Friday's at the city's annual investors' conference. She laid out her strategies for building up Chicago’s neighborhoods and sharing information on city finances in a transparent fashion, and stated her willingness to sacrifice her own political fortunes to put the city on a path to structural balance.
“If politically costly to me and I need to sacrifice myself politically to do it so be it,” Lightfoot said.
But she didn't say how she would do those things. Investors will have to wait until the October release of Lightfoot's 2020 budget proposal.
“She's reiterating the same points that everything is on the table, that she's going to be tough, and there's going to be shared sacrifice,” said Brian Battle, director of trading at Performance Trust Capital Partners. “I’ve already heard that speech” but am “cautiously optimistic. The mayor is so far who she said she would be” on ethics reforms and other subjects but “we will find out” Oct. 23 if that remains the case.
Nuveen Investments’ head of municipals John Miller says overall the city’s economic numbers still look sound and the number being portrayed is a matter of accounting as the new administration has shifted what’s accounted for in the preliminary budget forecast. It now includes all operating and structural red ink while in the past left out some expenses.
“I think it was important to extend the tradition of conveying information and bringing together the investors and rating agencies,” even if no new information was garnered at the conference, Miller said. “When Mayor Emanuel decided not to run there was a great deal of uncertainty around the finance office." He said the mayor's pick of Jennie Huang Bennett as CFO is a good sign given her background both in banking and more recently as CFO at Chicago Public Schools.
“We knew we would be asking Chicago to make shared sacrifices to solve our fiscal challenges. We then had to lay our cards on the table early… and start an open and honest discussion about the path forward,” Lightfoot said Friday in her speech to investors. She disclosed in her August State of the City address last month the $838 million 2020 gap due to rising personnel, debt, and pension costs. Predecessor Rahm Emanuel's administration estimated the number at $700 million
“Transparency means we are taking a whole new approach to budgeting. The numbers you see are the numbers you get…honesty and integrity create financial certainty” and should “lay the foundation for long term fiscal growth and health,” she told a crowd of about 300 municipal market participants, including 100 investors at the downtown conference.
The city is looking at changing the tax on property sales from a flat tax to a progressive schedule, taxing ride sharing, and examining options for some form of a congestion tax. A property tax remains on the table although Lightfoot said it’s one tax that residents are asking her to avoid.
“It’s a tough sell” and the city is looking elsewhere first, Lightfoot said.
Lightfoot renewed her push for state help on pensions — at least by being included in an expected downstate and suburban public safety fund consolidation bill — but the city is not expected to be part of the mix initially, according to lawmakers. The city is carrying a $30 billion net pension liability with its four funds at a collective funded ratio under 30%.
The prospects for passage by state lawmakers of various tax hikes Lightfoot has offered up as options in the legislature's October veto session scheduled the week after the Oct. 23 budget announcement remains uncertain. Bennett has said the budget will offer a mix of structural solutions and one-time measures with information expected on a long-term plan toward achieving structural balance.
The city may get its wish to overhaul state legislation allowing for a Chicago casino. An independent report concluded the tax structure is too onerous to draw private financing and Gov. J.B. Pritzker’s deputy governor Dan Hynes said in a brief interview at the conference that “time is of the essence” on the issue. City profits would go to pay down its public safety pensions. The state finance team had met the day before with investors in town for the conference.
The mayor’s speech along with Bennett's did not offer any new insights into the fixes that will be unveiled Oct. 23.
Miller said he’s heartened that the city has outlined some potential non-property tax revenue ideas.
"My wish would be that she did this after the budget," said Howard Cure, director of municipal research at Evercore Wealth Management. "She's got a tough road" and “I’m still a little anxious just because she is new and doesn't have a finance background."
Cure credits Lightfoot for talking about key issues such as reducing crime levels that draw national headlines and developing strategies to turn around population loss and share economic prosperity with lower-income neighborhoods and communities, Cure said.
“She still has make sure the city has a balanced budget,” he said. Cure is also watching for how tough a stance she takes on current contract negotiations with the teachers’ union and on public safety contracts.
Cure said he was struck by the differences in Lightfoot's and Emanuel's agendas. Emanuel had typically highlighted the city’s top numbers for foreign and business investment and relocations. Lightfoot highlighted the need for good social policies that she believes lead to economic growth.
“Iit was worthwhile just to hear what the new administration has to say, their commitment to limiting aldermanic power and the hiring of a chief risk office” to rein in costs, said Dennis Derby, senior tax-exempt analyst and portfolio manager at Wells Capital Management. Once the budget is out that will show whether “it’s consistent with what we heard today.
“She’s very straightforward and very frank,” Derby said of the mayor.
“It’s a slow process of revealing their revenue strategy but the big picture hasn't come together yet and investors are anxiously awaiting the detailed picture,” said Richard Ciccarone, president of Merritt Research Services.
She might have showed people who had not heard her speak before that she is a “credible leader of the city's government and she's trying to be proactive but the engine is moving relatively slow and deliberate and we will have to see if that strategy works,” Ciccarone added.
Investors said they had hoped Lightfoot would take direct questions from the crowd when Bennett and Lightfoot sat down for a question and answer chat after her address. It was Bennett who asked the questions, but she said some of them originally came from investors.
A panel discussion on securitization and rating criteria signaled to investors that it is in fact the city’s securtization structure that will be used to refund outstanding general obligation debt to achieve $100 million in 2020 savings announced during the State of the City speech.
Bennett said after the conference the city was pleased with the turnout and the timing ahead of the budget’s release was designed to make sure the city was “meeting expectations of investors” with respect to hearing from the mayor “relating to city finances and her approach toward long-term sustainability.”
She said the city is eyeing using the current sales tax securitization structure, a junior lien, or tapping other revenues to achieve the refunding savings but all debt options remain on the table for the deal that she is aiming to complete this year.
Preserving Chicago's existing ratings remains part of the budget strategy. “It weighs a lot on us…the city’s ratings are very important…to access the capital markets at a competitive rate,” Bennett said.
Moody’s assigns a junk rating of Ba1 with a stable outlook to Chicago. Fitch has it at BBB-minus, Kroll Bond Rating Agency has it at A, and S&P has it at BBB-plus. All assign a stable outlook. Members of Moody’s sales team have talked to the city but the future relationship remains unclear as the city is not currently in discussion to resume rating new deals.
