CHICAGO - Chicago will hold on to its A-plus rating from Standard & Poor's as it heads to market with a $400 million general obligation deal, its first since being hit with three-notch downgrades last year by Fitch Ratings and Moody's Investors Service over its pension crisis.
Standard & Poor's affirmed its rating on $8 billion of GOs, and negative outlook, this week as the city prepares to price as soon as Thursday of next week. Wells Fargo Securities is the senior manager.
The rating agency's decision to leave the rating intact and not act on its negative outlook - revised last September over the city's near and long term pension woes - provides some relief for the city after being stung by Moody's in July and Fitch in November.
They rate Chicago GOs A3 and A-minus, both with a negative outlook. Fitch affirmed the rating this week but Moody's has not yet released a rating on the sale.
Proceeds will fund capital projects, equipment purchases, cover legal judgments, and refund outstanding debt both for economical savings and as part of an ongoing restructuring of the city's GO portfolio that smooths out debt service to achieve a debt service levy target.
The use of proceeds to cover one-time expenses like judgments and restructuring to pushing out debt have come under fire from local watchdog groups and some city council members. The city has defended it as necessary as it tackles its fiscal woes.
The city is carrying a collective $19.5 billion of unfunded liabilities in its four pension funds for an overall funded ratio of 35%. The city's laborers and municipal workers funds are headed toward insolvency after 2020. The city faces a $600 million contribution spike, from $480 million to $1.1 billion, in 2015 as state legislation aimed at stabilizing the police and firefighters funds takes effect.
"The negative outlook reflects our view of the risks involved in how the city will address its upcoming, large pension payments," said Standard & Poor's analyst Helen Samuelson.
Chicago's credit is also strained by the city's past reliance on reserves to balance budgets, high debt levels, and plans to use portions of its general fund balances to balance the 2014 budget.
The city's $7 billion budget for 2014 - which includes a $3.2 billion general fund -- relies on $30 million from an unassigned 2012 general fund balance and another $20 million from a $75 million uptick in revenues last year. It relies on a total of $97 million in one-time revenues, a figure that has come down since Mayor Rahm Emanuel took office in 2011 but which remains a negative factor.
The city's credit strengths include its strong and diverse economy, strong liquidity and strong management. The city retains $625 million in reserves from its asset leases, an amount that equals 20% of expenditures.
While the city benefits from home rule status that allows it to raise taxes, its hindered by a "political unwillingness historically to raise property taxes to meet budgetary challenges, particularly with respect to looming pension payment increases," Standard & Poor's said. "In our view, the city also has a limited capacity to cut spending given that nearly two-thirds of 2012 general fund expenses were in the area of public safety," analysts added.
With no backup plan made public, the city is relying on state lawmakers to act this year on reforms that would both shore up its systems over the long term and provide relief from the $600 million spike.
"We could lower the rating by the end of 2015 if the city substantially draws down its reserves" to address the payment spike, Standard & Poor's said. "In order for us to affirm the rating and return the outlook to stable, we would need to see the city successfully absorb its higher pension costs while maintaining balanced budgetary performance and reserves at or near their current level."
The sale includes $109 million of new money in an A series, $108 million in a refunding B series, $43 million in a taxable C series, and $127 million of taxable refunding bonds.