Chicago to pocket $200 million in upfront refunding savings
Chicago Mayor Lori Lightfoot will make a dent in the $800 million budget gap by booking $200 million in upfront savings from a $1.3 billion refinancing.
The city will refund callable general obligation and motor fuel tax bonds with a mix of bonds backed by its general obligation credit and by its higher-rated Sales Tax Securitization Corp.
The deal represents a one-shot, so it won’t help solve the city’s structural budget woes, but Chief Financial Officer Jennie Huang Bennett is stressing that 60% of the measures Lightfoot will propose Wednesday to wipe out the $800 million gap will come in the form of recurring solutions.
Bennett said the finance team has had discussions with the rating agencies and is hopeful analysts and the buy side will find the mix of fixes palatable.
Bennett is also hoping the market views favorably the city’s decision to forgo any pension obligation bonding or to backtrack on the elimination in recent years of scoop-and-toss debt restructuring or borrowing for settlements and judgments.
They are frowned upon practices begun by former Mayor Richard M. Daley and continued by Lightfoot’s predecessor, Rahm Emanuel, who then eliminated them in his final term.
In discussions with investors and rating agencies, “there is not an expectation that we would address the budget gap with all structural solutions” given the deficit’s size, Bennett said in a phone interview with the financial press after the debt restructuring details were announced Monday.
“This is one of the one-time measures we are using as part of the budget” that will address 2020 challenges and help the city “get to a structurally balanced budget” in the coming years, Bennett said.
While the bonds could sell as soon as December, the city is still hashing out details on the finance team that is expected to include a majority participation of minority-owned firms, the number of sales since the refundings will involve two credits, and the amount under each credit.
The administration will include authorization to establish an STSC junior lien as part of the budget package Lightfoot will unveil Wednesday in a City Council address. The city has nearly exhausted an up to $3 billion authorization approved in 2017.
The Emanuel administration heralded the STSC structure, engineered by then-CFO Carole Brown, as a means to achieve $700 million in savings over its first five years in addition to long-term present value savings.
The city sought state legislation allowing for home rule units to securitize revenues that flow through the state to achieve refunding savings by bypassing the city’s weaker GO ratings that range from junk to the single-A category.
The corporation, a bankruptcy-remote entity that is insulated from city financial woes, won triple-A ratings from Fitch Ratings and Kroll Bond Rating Agency. S&P Global Ratings initially rated the securitization structure AA but dropped it to AA-minus last year after a methodology change on priority lien debt.
Bennett believes a subordinate lien might not necessarily result in lower ratings.
Strong legal protections that guard against state interference are built into the structure as well as sturdy debt service coverage ratios, but the market still imposes a cost for Chicago’s name.
Some market participants labeled the STSC structure scoop-and-toss lite, because the STSC pushed out the final maturities of debt being refunding by a few years and took upfront savings that left some present value savings on the table. The structure also locks up pledged sales tax revenues for use elsewhere, which the city has countered is offset by the refunding savings.
While booking most of the savings upfront, “this is not scoop-and-toss," Bennett said.
"Debt service in every year will be at or lower ... importantly we are not going to increase debt service,” she said. “This is a true match” of maturities and “we are not extending the final maturity” beyond the current 2040 dates.
Due to the low rate environment and strong demand for paper especially higher-yielding paper, the city expects to trade in rates that now average 4.9% for rates in the range of 3% to 3.5%. Lightfoot first announced a refunding without any additional details in her state of the city address over the summer with the aim of achieving $100 million in savings.
The debt refinancing is the latest in a series of maneuvers announced to help whittle away at a deficit driven by rising pension contributions, debt service, and personnel costs.
Lightfoot announced the cancellation of credit lines to achieve $22 million in savings, will propose raising the ride-share tax to generate $40 million, and will raise the restaurant tax to generate $20 million. She is also eyeing a parking meter hike.
A property tax hike remains on the table, which Lightfoot has warned may be needed if state lawmakers don’t approve a change in the city’s tax on property sales and changes to a proposed casino’s tax structure.