CHICAGO – Chicago will begin tapping a new sales tax-backed securitization-like borrowing program as soon as late October with plans to refund about $2.8 billion of sales tax and general obligation bonds in the coming years.
Mayor Rahm Emanuel will introduce the ordinance establishing the new program at Wednesday’s City Council meeting, according to a Tuesday statement from the city’s finance department.
The new borrowing program created for home rule units of local government as part of a $36 billion state budget package this summer is expected to achieve higher credit ratings and reduce debt service costs. The city’s hope is ultimately the program will help lift its GO ratings, the city statement said.
The program is designed to bypass the city’s weak bond ratings by insulating the bonds and assigned revenues from the risk of being dragged into bankruptcy. The city will siphon off and leverage a portion of its share of state sales tax revenues.
“As early as late October, the city will plan to refinance existing sales tax debt and existing expensive GO debt with this significantly cheaper corporation debt,” the statement read. “This refinancing is expected to save the city millions of dollars per year in debt service costs and help alleviate the city’s GO debt burden. Over the long term, it is expected to result in rating upgrades for the city’s GO credit.”
The city carries ratings that range from a low of junk to a high of BBB-plus. It cited GO upgrades won by other cities after they established similar programs but other factors also played a role in those rating changes.
The city intends to refund up to $2.3 billion of advance refundable, callable GOs and $500 million of existing sales tax-backed bonds. The ordinance will pave the way for the city to form an independent corporation for the sole purpose of issuing the debt on behalf of the city and establish a five-member board of city financial officials and council members.
City officials believe the new structure will achieve high-grade ratings based on rating reviews of similar structures used elsewhere in the country.
The city is billing the program as a continuation of Emanuel administration’s overhaul of city debt and other practices that include eliminating scoop and toss debt restructuring, shedding floating-rate GO risks and swaps, and dumping operating expenses from settlements and judgments on the city’s long-term debt load.
Emanuel announced at the city’s Aug. 9 investors’ conference his plan to launch the new program.
Some market participants have said the use of such a program illustrates a borrower’s distress, and buy-side skepticism has grown in recent years that some structures are not truly tested until they land in bankruptcy.
On the plus side, the program will lower city borrowing costs due to the higher grade ratings expected and could lure back buyers that have shunned city bonds since Moody’s Investors Service dropped it to junk in 2015.
