CHICAGO — The Chicago Park District plans to enter the market as soon as Thursday with $162 million of general obligation bonds after being stung with double-notch downgrades from two rating agencies over its deteriorating pension fund and city relationship.
The sale includes two limited tax GO series and two unlimited tax GO series, including one that also carries an alternate revenue pledge of harbor facilities revenues. Park District officials did not return calls to discuss the deal or the recent downgrades.
About $50 million of new money will help fund the district's capital program with the balance being current and advance refunding bonds for economic savings, according to a muni roadshow posted with the offering statement.
Ahead of the sale, the district lost its AAA rating from Fitch Ratings, which lowered the rating to AA and assigned a negative outlook. Moody's Investors Service recently downgraded the district two notches to A1 from Aa2 and assigned a negative outlook. Standard & Poor's affirmed its AA-plus rating and stable outlook. The district has $428 million of GO limited tax debt and $448 million of GO unlimited tax debt.
The district's pension shortfalls drove the Fitch downgrade. It closed out 2012 with unfunded liabilities of $550 million for a funded ratio of 43.4%, compared to $314 million of unfunded liabilities in 2010 and a funded ratio of 62%. The district has lowered its investment assumptions to 7.5% from 8%. It saw a return of 6.3% in 2012.
The fund is on a course to insolvency absent some change.
"The funding level of the district's pension plan has rapidly deteriorated and will reach 0% in under 10 years if current statutory underfunding of the actuarially required contribution continues," Fitch wrote. "The district has begun evaluating solutions but no near-term resolution is expected."
The district's pension woes overshadow its otherwise strong financial position supported by strong reserve levels and prudent fiscal management and budgeting that benefits from diverse revenue streams and flexibility to adjust fees and cut spending. The district's unrestricted fund balance in 2012 stood at $195 million or 76.9% of expenditures.
The district's sale is the first GO-backed issue to hit the market with the Chicago name attached after the city was hit last month with a triple-notch downgrade by Moody's to A3. Market participants said it could face an interest rate penalty steeper than the one already imposed on most local governments in Illinois, due to both its own credit hit and the Chicago name.
"It's guilt by association" but also "the characteristics of its own credit," said Richard Ciccarone, chief research officer at McDonnell Investment Management.
The district's pension benefits and payments are governed by state law and its statutory payments to the retirement fund have for years fallen short of the actuarially required contribution, or ARC, level needed to keep the fund healthy. The payment is tied to employee contributions which are based on a percentage of salary. The district's 2012 statutory payment amounted to just 31% of the ARC. The difference between the statutory payment and the ARC was about $23 million or 9% of spending.
The district's pension troubles are exacerbated by similar ones experienced by Chicago and the Chicago Public Schools, because all rely on the same tax base with an estimated market value of $181 billion in 2012. The district is independent of the city, but the mayor appoints its governing board.
"Fitch is concerned that pressure could be exerted on the district to let the city's needs trump those of the district," analysts said.
Chicago Mayor Rahm Emanuel is pushing state lawmakers to overhaul pension funding and benefits but action on a state plan that could then be applied to local governments has been at a political impasse. A legislative conference committee is currently hashing out a new plan.
The lack of state progress prompted the district to begin evaluating options to increase funding and launch talks with labor in hopes of brokering a solution that could be built into new contracts. Any benefit changes would require state approval and even with labor behind them face a legal challenge given the state constitution's strong pension protections. The district has set aside $25 million should it be needed to make a cash contribution.
Moody's attributed its downgrade to both the district's bleak pension status and "the large overall debt and pension burden on the district's tax base, which reflects significant debt and pension obligations of the city of Chicago."
Standard & Poor's offered a more positive assessment, saying its stable outlook reflects the belief "that management will take the steps necessary to maintain at least balanced financial operations and very strong reserves while making progress on the district's pension funding."
The district's general fund relies on property taxes for nearly 60% of its revenue. The district's tax levy makes up about 6% of a homeowner's bill and it has held its rate — which is subject to state caps — steady for years. The district owns 8,300 acres of green space, 585 parks, 231 field houses, 26 miles of lakefront property, and 10 harbors that generate $23 million annually. The district's five-year capital plan anticipates approximately $35 million of debt annually.
BMO Capital Markets is the senior manager for the deal. Acacia Financial Group Inc. is the financial advisor. Katten Muchin Rosenman LLP and Quintairos Prieto Wood & Boyer are bond counsel.