CHICAGO — Ordinances introduced to the Chicago City Council Wednesday authorize $600 million in new-money, general obligation borrowing and impose new oversight rules on some bond structures.
Mayor Rahm Emanuel's administration initially sought the $600 million GO authority earlier this year as part of a more than $3 billion package of GO, revenue, and airport bonding. Chief financial officer Carole Brown pulled the new money piece from the $1.25 billion GO ordinance in response to requests from some council members for more detail on how the proceeds would be spent.
Brown agreed to shave the authorization down to $650 million, the amount needed to cover the city's debt restructuring for budget relief in 2016, 2017, and 2018. The so-called scoop-and-toss maneuver pushing off principal repayments, which has been a regular feature in Chicago budgeting over the last decade, is supposed to be eliminated in 2019.
The push back against the GO borrowing and the city's plan to cancel water swaps marked a rare display of rebellion over city borrowing and, in turn, an effort on the administration to compromise. As the city's fiscal ills have worsened over the last year, council members have come under criticism for giving too little scrutiny to some proposals, including city borrowing and tactics like debt restructuring and the use of debt to cover judgments and settlements.
At the time, Alderman John Arena, a member of the council's progressive caucus, said he wanted to the see the results of the city's then upcoming $500 million GO refunding and a GO project list.
"My concern is doing everything now" and approving all the authorizations for the entire year, he said at the time.
The GO sale is slated for the second or third quarter with Goldman Sachs running the books. Mesirow Financial Inc. and Estrada Hinojosa & Co. Inc. are co-senior managers.
The city will head back into the market amid headwinds from a fresh downgrade and pension setbacks which could cut into the progress it made in trimming yield penalties after the City Council signed off on a record $543 million property tax increase last fall.
Since the sale January sale, Fitch Ratings has dropped Chicago's rating by two notches to BBB-minus, the lowest investment grade level, and assigned a negative outlook.
The move followed the Illinois Supreme Court's voiding last month of pension reforms that would have stabilized the city's municipal and laborer's funds The two account for half of the city's $20 billion unfunded tab that has dragged its ratings down over the last two years.
Kroll Bond Rating Agency also recently acted, lowering the rating to BBB-plus from A-minus and it too assigned a negative outlook.
Chicago GOs carry a junk-level rating of Ba1 from Moody's Investors Service and a BBB-plus from Standard & Poor's. Both assign a negative outlook.
On its last deal, the city's 10-year rate represented a spread of 253 basis points to the top-rated Municipal Market Data benchmark and 159 basis points over the triple-B benchmark credit. The city has seen only minimal fluctuations in secondary trading in the range of 10 basis points since the court's ruling.
Also Wednesday, the 11-member progressive caucus introduced the Financial Transparency and Accountability ordinance that is backed by the administration. It imposes new oversight rules on some city financial transactions. The rules were sought by the group in response to the city's costly swap terminations.
The group initially resisted Emanuel's request earlier this year to borrow at least $100 million to cancel swaps tied to floating-rate water revenue bonds and questioned why the city wasn't doing more to challenge the swap costs.
The administration said it commissioned an analysis in 2014 by two outside legal firms with regulatory expertise to explore the possibility. It found Chicago had no legal claim to assert because the city entered into the swaps knowing the risks and entered into the contracts because officials believed at the time the transactions made financial sense.
"While I believe that the administration could take a more aggressive legal position, it is clear they are not of the same mind," Arena said. "All of this led to us putting forth a draft of an ordinance and the mayor and CFO Brown agreed that a more robust requirement for reporting and disclosure to the Council should be required for any non- traditional fixed rate debt that might be considered."
The city faced termination events on swaps, bank credit support, and short-term lines after downgrades last spring put banks and counterparties in a position to demand repayment of $2.2 billion of debt. The city has paid $250 million so far to terminate swaps and owes $100 million on the water deal. Once paid off this year, the city will have resolved its liquidity crisis.
Both ordinances will be reviewed at an upcoming Finance Committee before advancing to the council for a vote.
Also on Wednesday, Emanuel indicated he's still hopeful that Gov. Bruce Rauner will sign legislation reamortizing the city's public safety pension payments. It trims $220 million off what's owed this year.
Emanuel portrayed the issue as a choice between the legislation or a tax hike. Rauner said Tuesday he opposes the plan, but could support it if lawmakers agree to some of his governance and policy proposals which have driven a prolonged budget impasse.
"I believe when you evaluate 'should I sign an agreement that makes necessary reforms or should I ask taxpayers to pay more in property taxes' the governor will see the wisdom that the signature is better to do than to ask property taxpayers to pay $220 more in property taxes," Emanuel said in response to reporters' questions after the council meeting.
