CHICAGO — The Chicago Park District is headed into the market with a $208 million new money, refunding, and restructuring sale that helps lay the groundwork to cover higher pension contributions.
Ahead of Wednesday's pricing, Fitch Ratings downgraded the district one notch to AA-minus and assigned a stable outlook. Fitch said its stable outlook reflects a recently approved pension overhaul "that materially improves the district's pension outlook from the previously projected asset depletion date of 2023."
Risk posed by the plan's continued reliance on contribution levels set in statute instead of an actuarially based calculation method drove the downgrade.
"Though reforms should gradually reduce the unfunded liability, a sustained period of poor market returns would reverse funding progress given the limited ability to increase funding," Fitch wrote. "The low funding level of the plan makes this risk even more acute."
The bonds will carry a first time rating from Kroll Bond Ratings Agency, which rated them AA with stable outlook. Standard & Poor's affirmed its AA-plus rating. After the sale, the district will have $868 million of GO debt outstanding.
The district did not ask Moody's Investors Service to rate the issue. Its officials had chided Moody's for downgrading it two notches to A3 in March, after another two-notch downgrade over the summer.
District officials did not comment this week on the move to add Kroll but forgo a Moody's rating.
The general obligation limited tax bonds will sell in four series. The A Series for $41 million with principal payments not beginning until 2032 will provide new money for the district's $250 million, five year capital program that runs through 2017. The program relies on a total of $160 million of borrowing with local, state, and federal grants, and donations funding the remainder.
Mesirow Financial Inc. is the senior manager with another five firms working in the syndicate. Public Financial Management Inc. is financial advisor. Chapman and Cutler LLP and Gonzalez, Saggio & Harlan LLP are bond counsel.
The B Series for $93 million, C Series for $47 million, and D Series for $27 million will refund existing debt with about $10 million in present value savings expected, according to a roadshow presentation attached to the offering statement.
The D Series carries a forward delivery date of Oct. 6, according to Mesirow banker Brian King.
The refunding includes a restructuring of some existing debt that extends its maturity to allow for the use of a limited tax security, freeing other revenues currently pledged to bond repayment.
"Management reports that the increased pension payments will be paid from operational levy growth allowed by the Property Tax Extension Limitation Law, personal property replacement taxes that will be freed from the 2014C bond refunding of outstanding alternate revenue source GO bonds, budget savings and various new revenues," Fitch wrote in its report.
The district has 8,300 acres of park land and 26 miles of public lakefront. It operates 10 harbors on Lake Michigan and six golf courses, and owns the downtown museum campus land, Soldier Field, which is home to the Chicago Bears, and Grant Park that runs along the lakeshore.
"We are not your average park district" based on size and assets, Chief Financial Officer Steve Lux said in the roadshow.
Officials also sought to stress the district's solid finances and reserves, the passage of legally uncontested pension reforms to stabilize its system, and independence from the city. The Chicago mayor, however, does control board appointments, which the City Council must confirm, handpicks the superintendent, and wields considerable influence on policy and tax decisions.
The link weighs on analysts' and investors' minds as the city grapples with its unfunded pension liabilities and reliance on property taxes to fund payments. Moody's cited the city linkage, as well as the district's reliance on an overlapping tax base, in its March downgrade.
"We are an independent legal entity with the authority to levy our taxes and fees," Lux said. "The park district has a history of conservative financial management in our budgeting and capital finance."
Fitch's latest downgrade followed a two-notch downgrade over the summer when it stripped the district of its AAA rating.
Kroll attributed its rating to the district's strong financial condition supported by available fund balances in excess of 10% of general fund expenditures for the past five consecutive years.
"KBRA considers the district's financial condition to be strong, based on a history of generally positive operating results, increasing levels of available fund balance, and an increase in the level of operating reserves in the general fund over the last three years," Kroll wrote.
The district carries a reserve of $96 million, about 38% of general fund expenditures. The fund must be maintained at $85 million under board policy. It also maintains $55 million in other reserves including $25 million in a long term liability fund that is designated to cover the district's supplemental pension contributions owed in 2015 and 2016.
The district received praise for proactively pursuing pension reforms even as rating agencies remain concerned over the lack of an actuarially required contribution component. State lawmakers last year approved the district's pension overhaul, assembled with the city's help after negotiations with impacted workers. It puts the district's fund on course to reach a 90% funded ratio by 2049 and full funding by 2054.
The district, with the city's aid, pursued an agreement with its unions "with an approach of shared pain" in which all parties "had to make sacrifices to make the pension fund sustainable," Lux said.
The changes raise the retirement age for some, cap pensionable salary and raise employee contributions. The annual cost-of-living increase is suspended in 2015, 2017, and 2019.
The district is phasing in higher contribution levels and will make supplemental payments of $12.5 million in 2015 and 2016 and $50 million in 2019. If the district doesn't make its scheduled contributions, the fund can ask the courts to compel it to comply. The district can use any available revenues to cover payments.
The district's pension fund closed out 2012 with unfunded liabilities of $550 million for a funded ratio of 43.4%. The unfunded liabilities shrunk to $484 million at the close of 2013. The reforms are projected to increase the funded ration from an expected level of 44% this year to 53.9% in 2024.
The legislation takes effect in January. Unlike state-level pension changes, labor has not filed a legal challenge to the changes although that remains a risk.
Fitch said the district displays strong credit quality but is challenged by the pension woes of Chicago and the school district and other overlapping governments that rely on the same tax base. About 60% of the district's general fund revenues come from property taxes.
"The stable outlook reflects Standard & Poor's expectation that the rating will not change during the next two years because we believe that management will take the steps necessary to maintain very strong reserves while making progress on the district's pension funding level," the rating agency wrote in its review.
