Lois Scott is one of the four founders of Women in Public Finance.
Lois Scott is one of the four founders of Women in Public Finance.

CHICAGO — Chicago plans at least $1.5 billion of borrowing later this year and in 2014 primarily to fund infrastructure work but it will come at a higher cost due to the city's credit rating deterioration over its pension woes, Chicago's chief financial officer Lois Scott warned city council members.

The city plans to issue general obligation paper, water and sewer revenue-backed bonds, and Midway airport debt. The level could rise depending on refunding opportunities, the finance department said in an email Thursday outlining planned financings.

No new O'Hare International Airport debt appeared on the list.

Scott told council members that the city, which has in recent years paid steep interest rate penalties because of both its own budgetary and pension challenges and those of Illinois, faces even higher rates following its three notch downgrade over the summer from Moody's Investors Service. The rating agency lowered the city's GO rating on nearly $7.7 billion of debt to A3 and assigned a negative outlook. It also hit the city's sales tax, motor fuel, water, and sewer credits with downgrades.

"That triple downgrade [of the GOs] means it is much more expensive for us to keep the city operating financially and limits our flexibility going forward," Scott said during a City Council Budget Committee hearing this week. Scott estimated that the downgrade will raise the city's GO borrowing cost by $1 million annually for every $100 million issued.

Standard & Poor's assigns a negative outlook to the city's A-plus GO rating while Fitch Ratings in June put the city's AA-minus rating on negative watch.

In addition to higher interest rates, the city's credit deterioration "limits our flexibility" in managing the city's finances and debt including affordable access to liquidity support. The city has a variable-rate demand bond portfolio of $2.5 billion and commercial paper portfolio of $1 billion supported by various liquidity facilities and letters of credit many which expire in 2014 due in part to new regulatory rules. The city recently released a Request for Expressions of Interest for LOC support.

The city will feel the effect of the GO credit ding when it sells roughly $425 million of new-money general obligation bonds in the first half of 2014 to raise $300 million of new-money to support its 2013 capital budget. Another $125 million of debt will be refunded under an ongoing restructuring to level out spikes in debt service which accounts for 11% of the 2014 budget.

Late this year or next, the city will sell $140 million of bonds for Midway International Airport projects and may boost the sale with a refunding component.

The city plans a $400 million new-money issue of water revenue bonds, and another $300 million of new money under the sewer credit. Both deals are slated for the second half of 2014 and the city is also eyeing refunding opportunities.

In the second half of 2014, the city intends to return to the market with another $450 million to $470 million of GOs that would include $300 million of new money for the 2014 capital budget and up to $170 million of refunding bonds under the ongoing restructuring.

Finance teams have not yet been named.

The city has a proposed $8 billion capital program for 2013-2017. The city in 2012 sold $2.7 billion of debt in 14 issues, according to Thomson Reuters.

During Scott's appearance alongside city budget director Alexandra Holt on the opening day of hearings on Emanuel's proposed nearly $7 billion 2014 budget this week, Scott warned that the city's pension struggles are front and center with the rating agencies.

"Fortunately, we're in a cycle where interest rates are low and the capital markets remain open to us," Scott said. "But we can't sustain much more of a credit weakening and really provide the city services that our public is demanding."

The city carries $19.5 billion of unfunded liabilities in its four pension funds that are collectively just 35% funded and the city faces a $600 spike in its 2015 contribution under state legislation to stabilize its police and firefighter funds.

The pension strains undercut advances the Emanuel administration made over the last several years in reining in spending growth and reducing one-shots.

"We have made great progress on the operating structural deficit. But we have a lot of wood to chop as it relates to pensions as well as our debt position and we need to address those. Even with substantial reforms, it will require revenue action long-term to bring our financial house into order," Scott said.

The city is banking on state action on pension changes as employer and employee contributions are based on a state statutory formula but legislative action on state level reforms has remained elusive let alone changes for local governments. Emanuel wants a "balanced approach" that pairs benefit cuts with increased contributions. He also wants lawmakers to pass legislation that delays the full impact of the pension spike until 2022.

The city closed a $339 million deficit this year to achieve a balanced budget proposal but faces $1 billion deficit next year absent action on pensions by state lawmakers. The 2014 budget proposed by Emanuel chips away at the gap through a mix of spending cuts, tax, fee and fine hikes including a 75 cent-per-pack increase in the tax on cigarettes that would raise an additional $10 million. If approved, the total tax collected on a pack of cigarettes in Chicago would become the highest nationally at $7.42. The tax increase would come on top of Cook County and state cigarette tax increases totaling $1 over the last two years.

Moody's rates the water and sewer senior lien at A1 and the second lien at A2. The city has $2 billion of water debt and $1.3 billion of sewer debt. The outlook is negative. Fitch rates the sewer and water bonds in the double-A category and Standard & Poor's rates them between the high single-A category and double-A category. Midway airport bonds are rated in the single-A category.

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