CHICAGO – Chicago is joining the Chicago Public Schools in delaying plans to sell general obligation debt until the New Year.
Chicago initially planned as soon as November to sell up to $500 million of general obligation debt to restructure outstanding bonds for budgetary relief and for traditional present value savings.
The city doesn't "want to rush the deal with a shortened month because of the holidays," said finance department spokeswoman Molly Poppe. "We will price in early 2016."
Poppe said negative headlines from a police scandal that has drawn national scrutiny of the department's use of force and internal investigations of police officers were not a factor. The city's release last week of dash-cam videos that contradict police reports involving the shooting of a 17-year-old African American by a white officer have raised questions over the department's management and led to the ouster of the top brass.
Growing demands for action prompted the Monday announcement by U.S. Attorney Loretta Lynch that the Department of Justice Civil Rights Division would investigate the patterns and practices of the department.
Mayor Rahm Emanuel initially resisted calls for such a probe, but then embraced it as he faces a growing political crisis, protests, and calls for his resignation. "Our mutual goal is to create a stronger, better Police Department that keeps the community safe while respecting the civil rights of every Chicagoan," he said. Emanuel will take the rare step of addressing the City Council on the issue prior to its meeting Wednesday morning.
The scandal has no direct relationship to the city's financial condition, but the negative headlines still pose yield risk even if they don't stand to immediately influence the city's credit profile.
"It signals poor controls and sloppiness in one part of government that could serve as a canary in the coal mine for other parts," said Michael Comes, vice president of research and portfolio manager at Cumberland Advisors.
Howard Cure, director of municipal research at Evercore Wealth Management, LLC, believes the scandal poses real yield risk on several fronts. It could impact the overall perception that the city's economy is improving and could tarnish Emanuel's perceived strengths in talks with unions, he said.
"If you have a spike in crime because police officers are more hesitant because of the scrutiny" it could hurt the city's economic growth, Cure said.
"I think it's a detriment to the city," he said, if Emanuel's time becomes consumed with the scandal and his power appears diminished in negotiations especially with a potential teachers' strike looming.
Both factors could translate into yield penalties, Cure said.
Market participants steered clear in commenting on whether the city was wise to wait as it faces the potential for other headlines, both negative and positive. If state lawmakers and Gov. Bruce Rauner make headway in resolving their impasse over a fiscal 2016 budget, the city is likely to gain by securing its proposed re-amortization of police and fire pension contributions that trims $220 million off its scheduled contribution next year.
The city is also awaiting an Illinois Supreme Court decision on the constitutionality of its 2014 reforms to the laborers and municipal funds. Market participants generally believe the decision will go against the city and that thinking has been built into current trading levels, but some widening could occur especially if the city is downgraded.
A negative decision would actually ease budgetary pressures in the near term by cutting the payment owed next year by $100 million, but the funds would be headed toward insolvency in the next decade.
The GO refunding will mark the city's latest round of borrowing for budget relief. The deal would include a mix of tax-exempt and taxable securities.
The so-called "scoop-and-toss" maneuver provides budget relief this year by pushing off about $225 million of principal payments. The remaining authority would be tapped for refundings with traditional present value savings. Citi is the senior manager.
The city paid a steep interest rate penalty on its summer GO sale, with tax-exempt yields landing between 250 and nearly 300 basis points above Municipal Market Data benchmarks and the taxable tranche 485 basis points over Treasuries. The city's GOs rallied following Emanuel's decision over the fall to seek a $543 million annual property tax increase to address rising public safety pension contributions. Chief financial officer Carole said the city would see savings of about $34 million based on roughly a 50 basis point tightening. After the council passed the measure, spreads further tightened, shaving a total of 100 basis points off yield penalties in secondary market trading.
Chicago carries a Ba1 rating from Moody's, with a negative outlook; BBB-plus ratings from both Fitch Ratings and Standard & Poor's with both assigning negative outlooks; and is rated A-minus with a stable outlook by Kroll Bond Rating Agency.
The junk-rated Chicago Board of Education had planned to sell $1 billion of GOs late this year but it pushed the sale off as prepares financial documents including its audited financial results.