Chicago planning airport and GO refunding deals
Chicago is working on two refunding transactions including a second general obligation refinancing that would help plug a $700 million COVID-19-induced budget hole.
Chicago counted on about $210 million in expected savings from its nearly $1.5 billion January sale of general obligation refunding bonds and Sales Tax Securitization Corp. debt to help eliminate an $838 million shortfall in the $11.65 billion 2020 budget. It was among the one-shots that helped balance the budget on a cash basis with the structural fixes used for the remainder.
An additional $100 million of unexpected savings was earmarked to provide a cushion heading into 2021.
The city now anticipates a $700 million hit to sales, hotel, car rental and other economically sensitive taxes as a result of an economic shutdown. Mayor Lori Lightfoot’s administration previously said the $100 million would help close the 2020 hole and the city's chief financial officer said last week another GO refinancing is now in the works.
“The market is moving,” so the city can’t predict the exact level of savings on the GO refunding, CFO Jennie Huang Bennett said during a call with reporters to discuss the comprehensive annual financial report for 2019 that was published Thursday. “Tracking it very closely, we think we will be able to generate a material amount of savings to help with the 2020 shortfall.”
The city said sizing and structuring issues are still in the works, so officials could not provide additional information.
The city through its Sales Tax Securitization Corp. in January sold $1 billion of junior lien bonds, while the city issued $466 million of GOs. The proceeds refunded outstanding GO and motor fuel bonds and purchased $370 million of tendered bonds. The city took most of the savings upfront, stressing that it did not “scoop and toss” any maturities, achieving savings in all maturities.
The city established the STSC in 2017 to refund $2.7 billion of GO and sales tax revenue bonds for savings by issuing under a stronger credit. The higher-rated corporation benefits from a bankruptcy-remote structure that insulates repayment from city fiscal woes.
The city is also working on an O’Hare International Airport refunding. The city owns and operates O’Hare and Midway International Airport as enterprise funds, so any refunding savings would provide a cushion for airport and airline operations stung by the pandemic-driven drop in air travel. O’Hare received $294 million in federal relief funds and Midway collected $82 million.
In March 2020, S&P Global Ratings and Fitch Ratings placed O’Hare’s and Midway's revenue bonds on negative watch. Kroll Bond Rating Agency placed O’Hare and Midway on developing watch. Both airports carry single-A-level ratings.
The city’s $700 million hole hasn’t changed since it was announced by Lightfoot and the finance team a month ago. “We’ve been tracking the numbers very closely … and at this point we haven’t seen anything that makes it any worse than what that number was,” Bennett said.
The finance team has said it can manage the 2020 shortfall. “This shortfall will be addressed through a combination of expenditure reductions, delayed programs, and prioritizing pandemic response efforts that are reimbursable through federal assistance,” the CAFR reports.
The revenue blows are due to the loss of economically sensitive taxes on sales, transactions, transportation, recreation and income taxes. Losses from March and April totaled $175 million and, while the numbers are not yet in, the same is expected in May with seven months left in the budget year.
The gap for 2021 poses more challenges with current projections at $1 billion due to rising expenses and potential tax losses. The number remains guesswork as the economy could face further shutdowns if COVID-19 surges. The state is in the fourth phase of a reopening plan with non-essential businesses and restaurants open with some capacity constraints. The city will provide updated budget projections later this summer.
Lightfoot has warned that all options remain on the table from tax hikes, layoffs, and pension obligation borrowing to offset the blow but a property tax increase and layoffs are her last choices. Lightfoot is among the government officials pressing hard for federal relief to make up for tax losses.
The city and its airports are receiving $1.13 billion of direct aid, grants, and other earmarks from the Coronavirus Aid, Relief and Economic Security Act signed March 27.
The CAFR offered mixed results, as net pension liabilities rose along with the net position deficit while cash balances improved.
The city’s net position based on governmental activities — which covers debt, transportation, health, and public safety — decreased by $548 million with the deficit rising to $30.68 billion from $30.13 billion.
The net position on business activities — which covers the city’s enterprise funds like its airports and water and sewer funds — saw improvement, rising to positive $1.2 billion from positive $763 million.
The combined effect left the net position for 2019 at a deficit of $29.46 billion compared to $29.36 billion for 2018. The net position provides a fuller overall picture of the city’s financial health based on its long-term expenses, debt, and the value of assets.
The city closed 2019 with $7.9 billion in GO-backed debt, $2.6 billion of STSC bonds, $245.4 million in motor fuel revenue bonds, and $16.1 billion of airport and water and sewer debt outstanding for a total of just under $26.9 billion. It was nearly on par with 2018 levels.
The city closed the year with a general fund balance of $335.9 million. That included an unassigned fund balance of $184.6 million which is closely watched by rating agencies and investors as a sign of the city’s liquidity health.
The unassigned figure rose from $161.9 in 2018 and $155.5 million in 2017. The fund balance hit a low of $33 million in 2012.
“The 2019 CAFR demonstrates that the city’s finances are stable and its liquidity is substantial. The city has more than $4.2 billion in unrestricted cash, cash equivalents and investments citywide, including Enterprise Funds. This provides the city with a healthy starting point as headwinds going into what we know will be a challenging 2020,” Bennett said.
The $4.2 billion includes $1.5 billion in unrestricted cash and $2.7 billion in unrestricted investments.
The collective net pension liabilities of the city’s four funds rose to $31.8 billion in 2019 from $30.1 billion in 2018 and $28 billion in 2017 as rising contributions and investment returns failed to keep pace with costs and actuarial changes, according to the report. The funded ratios ranged from 18% to 42%. The city closed 2019 with an other post-employment benefits liability of $828.8 million.
The COVID-19 pandemic, not reflected in the funds' recently released valuation reports, cloud the funds’ already weak health. The frail funds won’t see any potential investment and demographic pains — which could pressure funded ratios and city contribution levels — from the coronavirus reflected until 2020 closes.
City pension contributions will rise to $1.81 billion for 2021 from $1.68 billion, on par with previous expectations. Chicago must come up with an additional $300 million when the 2022 payment rises to a projected $2.13 billion when the municipal and laborers funds join the police and firefighters funds in setting contributions on actuarial basis to target a 90% funded ratio in the coming decades.
The city has increased contributions to all four funds in recent years. Plans to raise the city's contribution levels were adopted under former Mayor Rahm Emanuel and signed off on by state lawmakers.
“We are very committed” to making scheduled contributions, Bennett said. “The city made that commitment in 2020 and we are working towards that ramp up going forward … that’s been a key component of our overall financial strategy which is to be able to get our pension funds to a better place financially.”
The new schedules don’t begin to make a dent in unfunded ratios from previous years and still fall short of standards that would lead to what’s known as an actuarially determined contribution, or ADC.
While the economic news for 2019 was positive, the report warns of pressures ahead. “The global COVID-19 pandemic, will have a significant negative impact on economic conditions in 2020, and likely beyond,” it warns.
The unemployment rate in the Chicago metropolitan area was 3.8% in 2019, home prices rose by 2.8 % to $290,000, and tourism and business travel increased by 2% over 2018 levels. The Chicago tourism industry supported an estimated 153,000 jobs in 2019.
The city’s GO bonds are rated at BBB-minus by Fitch, A by Kroll, junk-level Ba1 by Moody’s Investors Service, and BBB-plus by S&P with a negative outlook. The others assign a stable outlook.
Deloitte & Touche LLP performed the audit and no material weaknesses were found.