Chicago's new administration will take fiscal message directly to investors

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Chicago is billing Friday’s investor conference as a chance to hear directly from rookie Mayor Lori Lightfoot about her commitment to putting the city on a path to structural solvency.

“The biggest goal of this conference … is for investors to get an opportunity to hear from the mayor, hear what her vision is for Chicago” and show “why we think that her vision really puts the city on a path toward long-term financial sustainability,” Lightfoot’s hand-picked chief financial officer, Jennie Huang Bennett, said in an interview Monday.

“Importantly the mayor is really committed to long-term sustainability and reform,” Bennett added. “We clearly have a very big financial challenge that we are facing, but by the same token it's also a great opportunity.” After morning tours of city development projects, Bennett will open the program and then Lightfoot will address investors.

The big financial challenge comes in the form of an $838 million gap looming in the 2020 budget that is scheduled to be unveiled on Oct. 23. The deficit, announced by Lightfoot in her August State of the City address, covers both one-time operating costs coming up next year and ongoing costs. The city this year is operating on a $10.7 billion budget, with a $3.8 billion corporate fund.

About $280 million is due to rising pension costs as required contributions for the police and fire funds hit an actuarial level. The remaining shortfall is due to rising personnel, debt, and other expenses. While that’s costly, Bennett said it’s a plus that the public safety pension funds will soon be an actuarially required contribution payment plan. Another $300 million will be due in two years when the municipal and laborers funds hit an ARC requirement. The city has $30 billion of net pension liabilities and the system is less than 30% funded.

Investors and other market participants who attend the conference may hear some additional details beyond what was said during the State of City address, but no big news is expected as the city considers further cuts and efficiencies, tax hikes, and the use of debt measures to balance the books at least on an operating basis.

Last year, then Mayor Rahm Emanuel rolled out at the August conference his proposal to sell $10 billion of pension obligation bonds. The plan stalled after his September announcement that he would not seek a third term.

Bennett acknowledges that investors and rating agencies are clamoring for details.

“What they want to hear is the plan,” Bennett says. Lightfoot “will go into a little more detail on some of the options” for tackling the deficit, but Bennett cautions “we are still very early on in this process."

The Lightfoot administration remains tight-lipped. Although she provided some clues during her speech and in editorial board meetings, no formal plan has been laid out.

The State of the City speech was billed at the first step toward a transparent dialogue on the extent of the city’s woes and potential fixes with stakeholders from citizens and the business community to investors and rating agencies. While the market remains hungry for answers, Lightfoot did win praise for that strategy.

The budget forecast released last month also includes more detailed line item information and a broader look at the deficit than the city has offered in the past, by combining structural and operating pressures. A two-page citizen’s guide was released and five town halls are being held as the city attempts to build support for painful fixes.

"At this point we are putting together a plan not just for a 2020 budget, but for out-year structural balance and that's what we hope that investors will hear,” Bennett said.

The city’s finance team has not yet settled on how information will be released in October with respect to future budgets. “We will release more information than what’s been seen in the past,” Bennett says. “We are working through a time frame” on achieving structural balance.

The city continues to explore revenue ideas and cuts after trimming the deficit to $838 million from $1 billion the finance team estimated after examining the books when Lightfoot took office in May. The Emanuel administration had in May put the operating deficit at about $700 million.

The city faces a tricky balancing act in the use of one-shots versus structural fixes and Bennett said she “absolutely” hears the concerns of investors and rating agencies. The city needs to proceed cautiously in order to avoid triggering a downgrade, but it also has to guard against putting too much of onus on residents and business through higher taxes and fees.

“The size of the remaining structural imbalance and credibility of the city's plan to close the gap in a timely manner will be critical to the rating and outlook,” S&P Global Ratings lead Chicago analyst Carol Spain wrote in a recently published special commentary, “How Chicago Closes Its Fiscal 2020 Budget Gap Will Be Pivotal to the Rating.”


“There's not really a way we are going to bridge an $838 million gap in one year with all structural solutions and nor would the rating agencies expect that … but importantly what we have to do is demonstrate that there is a plan for long-term financial sustainability,” Bennett said. “One-shots are really a way for us to get to that long-term goal and give us the time it takes to put a full structural solution in place.”

Options
Lightfoot announced during the State of the City address debt refunding plans to achieve $100 million of savings in 2020. Market participants have said they believe that involves further use of the city’s securitization structure that was tapped over the last two years to refund nearly $3 billion of general obligation bonds by leveraging city sales taxes in a bankruptcy-remote structure.

Bennett said the city hasn’t decided on a security structure and that it could include a combination, but it would capture much of the savings upfront and so would be considered by rating agencies as a one-shot. Bennett’s aim is to complete the deal in 2019.

Lightfoot shot down Emanuel’s $10 billion pension bond proposal as too big and too risky a gamble given the arbitrage play and weight on the city’s books, but she did not rule out a smaller deal during editorial board meetings. Bennett would say only “all options are on the table.”

Emanuel inherited scoop-and-toss debt restructuring to mask rising debt service costs, but eliminated it in his final years. Bennett declined to take the option off the table.

Bennett did describe a re-amortization of the city’s current pension schedule, which is designed to move all four funds to a 90% funded ratio by 2058, as “very low on the list” of options. Healthy funded ratios will take decades to achieve under the plan and any move to delay that even more could trigger a downgrade.

Tapping the city’s $550 million reserve set up with a portion of proceeds from the 2005 Skyway toll bridge lease is also “low on the list,” Bennett said.

While talk has circulated that the city might try to leverage revenues from an as-yet-unbuilt casino, Bennett said that couldn’t be accomplished until the city wins state approval for tax structure changes needed to make the casino viable and the timing of that is uncertain.

Lightfoot is stressing the need for help from Springfield whether in the form of help on pensions or from several new taxes under consideration, including a change in the city’s transfer tax on property sales and a tax on legal and accounting transactions.

"Given the size of the gap, we need help from Springfield whether it's this year or next year. It's about the long-term plan," Bennett said.

The city, Bennett said, hasn't decided if the 2020 proposed budget, scheduled to be released one week before the legislature's veto session and several months before the start of the 2020 session, will include any measures that need state legislative approval. Taxes could prove a hard sell as the state doesn’t want to alienate voters ahead of a November 2020 referendum to allow the state to move to graduate income tax from the current flat one.

Bankruptcy is “not an option. We are not talking about it,” Bennett said.

Illinois law doesn't allow for Chapter 9 filings, though it has been suggested it as a future path for Chicago, if its pension funding pressures can’t be eased given state constitutional protections against benefit cuts.

Bennett keeps in contact with the rating agencies and the mayor has met informally with Kroll Bond Rating Agency and Fitch Ratings. Formal meetings are expected after the budget’s release. The Emanuel administration stopped asking Moody’s Investors Service to rate new deals after the agency dropped Chicago to junk. It assigns a Ba1 rating to Chicago. Fitch has Chicago at BBB-minus, Kroll has it at A, and S&P has it at BBB-plus. All four agencies assign a stable outlook.

Members of Moody’s sales team have talked to the city, but the future relationship remains unclear. “We will have to see,” Bennett said. “We are not intending on having them rate debt immediately.”

No new money deals are planned for some time. A refunding of O’Hare International Airport debt and water and wastewater refunding bonds are expected next year. The city sold new money general obligation bonds earlier this year and the timing of the next deal would depend “on the state of the capital plan and any capital needs,” Bennett said.

Balancing act
The city doesn’t want to alienate business or stymie economic growth and that’s part of why Lightfoot opposes reinstating a corporate head tax or taxing financial exchange transactions.

“That I think is probably the toughest part of it. The city has a lot of tools in its toolbox especially as a home rule unit, especially given it has a fairly large presence in the state to address its financial issues, but we have to strike the right balance as it relates to ongoing solutions, one-time solutions, how is it we are decreasing the expenditure profile, driving efficiencies,” Bennett said.

The city also is working to avoid a teachers’ strike that would place a black mark on Lightfoot’s first year.

“I think it's a balance we have to strike. We want to make sure the contract is affordable. It’s got to fit in with what CPS can afford otherwise we can't make it sustainable long-term” while also providing teachers a fair deal, said Bennett, who previously served as CFO at the school district, a job she left public finance banking to take.

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