Chicago's $500M GO Deal Kicks off $4.1B Borrowing Plan
CHICAGO – Chicago will offer its long planned $500 million general obligation refunding next week with plans for another $3.6 billion of new money, refunding, and restructuring GO and revenue-backed borrowing in its 2016 pipeline.
Chicago's chief financial officer, Carole Brown, will present the new borrowing plans, slated throughout the year, to the City Council's Finance Committee Monday, and a vote could be taken at the council's meeting Wednesday.
The previously approved $500 million GO deal prices Tuesday with Citi running the books. About $208 million will push off debt principal for relief captured in last year's budget and the remainder will refund debt for present value savings.
City GO spreads in secondary trading have hovered at around 250 basis points recently. Chicago paid steep yield premiums of between 250 and 300 basis points on sales last year.
The city carries a junk-level rating of Ba1 from Moody's, with a negative outlook; BBB-plus ratings from both Fitch Ratings and Standard & Poor's with both assigning negative outlooks; and is rated A-minus with a stable outlook by Kroll Bond Rating Agency.
The city is "laying out our fiscal plan for the full year," finance department spokeswoman Molly Poppe said of the plan to bring all the new deals before the Finance Committee Monday.
The city last year had 12 deals totaling $4.2 billion, according to Thomson Reuters. A large share of that borrowing was in the form of conversions of floating-rate and short-term debt to a fixed rate to deal with defaults triggered on bank contracts by the city's credit deterioration accounting for a good chunk of the borrowing.
About $1.9 billion was issued for the O'Hare International Airport enterprise credit. The city sold $2.6 billion in 2014 and $2.7 billion in 2013.
The authorizations being sought include up to $1.25 billion of GO bonds. The figure includes $700 million of new money to cover two years of capital expenditures. The borrowing level is in line with the roughly $350 million of new money issued annually over the last five years.
The remaining authorization allows for $125 million for traditional refunding for present value savings and $300 million to cover two years of scoop-and-toss restructuring for budget relief, in which the city sells new debt to pay for current year debt service.
"This will be the last scoop-and-toss restructuring," Poppe said.
One ordinance will authorize the sale of up to $900 million of Midway Airport-related bonds including $500 million of new money, $200 million of refunding, and $200 million that will be converted to a customer facility charge credit.
Another allows for the issuance of up to $200 million of new money and refunding sales tax bonds. The city will cover the cost of its annual aldermanic capital menu with the proceeds.
One ordinance would allow for the issuance of up $700 million of water revenue bonds to convert outstanding floating-rate paper to a fixed rate and cover the costs of swap termination payments.
The deal marks the final piece in the city's costly resolution of a liquidity crisis triggered when its credit deterioration led to defaults allowing banks to demand repayment of $2.2 billion in GO and revenue-backed floating-rate and short-term paper and swaps.
A separate water ordinance allows for the issuance of up to $200 million of new money borrowing and another deal is expected for up to $400 million of wastewater revenue borrowing.
No O'Hare related borrowing will be sought but could come later in the year if needed.
The size and scope of the new borrowing and expected costs will likely face greater scrutiny. Council members have been criticized for asking too few questions of Mayor Rahm Emanuel's administration and the former administration of Richard Daley about city borrowing practices.
That, in effect, gave the city a free pass to use long term debt to push off principal repayment and to cover operational costs like settlements and judgments.
They are practices Emanuel vowed last year to phase out in the coming years. The pledge was reiterated in the offering statement on the upcoming sale.
Tuesday's sale will offer $498 million of fixed-rate tax-exempt securities and about $2 million of taxable. The bonds mature between 2020 and 2038.
As the city heads to market, officials can boast of solving a potential liquidity crisis and winning approval for a big property tax hike that will ultimately bring in $543 million annually to cover rising police and firefighter pension contributions.
On the flipside, the city faces ongoing legal and political uncertainties that could add to its fiscal ills, led by $20 billion of unfunded pension obligations. Emanuel also faces a political backlash over his administration's handling of a controversial police shooting that has prompted a U.S. Justice Department review.
The city is awaiting an Illinois Supreme Court decision over the constitutionality of reforms adopted for two other pension funds that cover municipal workers and laborers. If the ruling goes against the city, the funds are headed toward insolvency in the next decade.
On the political front, the city will need to come up with an additional $220 million this year to cover its rising police and fire pension contributions if the state doesn't approve stalled legislation to re-amortize of the payment schedule that eases the increases in the next few years.
The offering statement lays out those risks, warning potential buyers of the factors that stand to influence the trading value and liquidity of the city's GOs.
Brown and deputy comptroller Jeremy Fine also outline the risks in an investor presentation but seek to cast a favorable light on Chicago's progress.
The city warns of the potential for further credit blows noting that ratings agencies have said further downgrades could occur if pension reforms are voided or unfunded obligations climb, reserves are tapped, or the structural gap grows.
The city warns that tax increases imposed by overlapping governmental units could harm its economy or make it more difficult to further raise taxes. Delays in state funding due to an ongoing state budget impasse could hurt city finances and the city faces potential cuts because of the state's own budget mess.
The precarious financial condition of the Chicago Public Schools also poses risks. The school system is banking on $480 million in state pension help in its current budget and faces a $1 billion gap in its next fiscal year.
"Any failure of CBOE [Chicago Board of Education] to resolve its current or future deficits or resolving them by budget cuts and or increases in property taxes, without state assistance, could have an adverse effect on the city's economy and or property tax base," the city's offering statement says.
The city has issued roughly $350 million annually over the last five years for capital projects, equipment, settlements and judgments. It also has issued between $90 million and $170 million to cover debt service as it was coming due for budgetary relief in recent years.
Both are practices Emanuel pledged last year to phase out as part of an overhaul of debt practices.
"The city currently intends to curtail the use of long term general obligation bonds to fund settlements and judgments in future budgets," the offering statement reports, while saying scoop-and-toss restructurings will end with the 2019 property tax levy.
The offering statement provides an update on the city's short-term borrowing program; the previous program was shed after the city paid off existing debt following the credit deterioration-driven defaults.
The city is authorized to have up to $1 billion outstanding. It currently has bank support for $750 million with about $240 million outstanding. The city is "evaluating" whether to seek more.
Three lines for $250 million each are provided by JPMorgan, Bank of Montreal, and Bank of China. The city has previously said that its line with Bank of China represents a first of its kind for the bank.
"This short term liquidity program allows us to meet any unforeseen financial obligations," Fine said in the investor presentation.
Brown and Fine said the city has put $50 million in reserves over the last five years bringing them up to $630 million. Daley had dipped into reserves drawing them down from a high of $880 million in 2009 to $580 million.
"We've shown a demonstrative commitment to raising revenues, maintained healthy fund balances and reserves, and with a proven record of implementing reforms we have strong access to external liquidity and have completely eliminated our variable rate debt and bank exposure," Brown said in the presentation.