CHICAGO – Chicago’s departing budget director, Alexandra Holt, stops just short of saying “hands off” city reserves or backing away from changes to financial and debt practices viewed favorably by investors and rating agencies, but her message is clear.

“The city has made a lot of steps toward stabilizing” its finances and improving financial practices and “hasn’t touched reserves,” Holt said.

“Before there’s any attempt or thought about changing them or rolling back….there ought to be a really careful consideration of balancing both the short-term needs with the long term needs,” Holt said in an interview after Mayor Rahm Emanuel’s recent announcement that his first and only budget director would soon depart.

“We’ve taken a balanced approach. I think it’s really important to maintaining that balance,” she said. Holt took the job in 2011. Not since early in former Mayor Richard M. Daley’s tenure has a budget director lasted more than two to three budget cycles.

During her tenure as a key member of the city’s finance team managing an $8 billion budget, the city has moved closer toward structural balance, worked toward shedding faulty debt practices and stabilizing a pension system that dragged one of the city's bond ratings down to junk.

"Alex Holt stepped into the role of budget director under some very difficult budgetary circumstances for the city of Chicago, and the city has made significant progress under her leadership," Chicago Civic Federation president Laurence Msall said. "Despite continued inaction in Springfield, the city is working toward addressing its extraordinary pension crisis, has significantly reduced the structural deficit and has eliminated the use of asset lease proceeds to prop up the operating budget. While there is still substantial work to be done, the federation commends the reforms and efficiencies Alex’s team has incorporated into the budget, along with the phasing out of shaky financial practices such as scoop-and-toss financing and borrowing for judgments.”

The hardest stretch in her tenure was the first six months when the new Emanuel administration inherited a more than $600 million deficit. She sees whittling that deficit down as one of her biggest accomplishments.

Looking at that structural deficit with the budget cycle beginning in a few months and having to digest and learn so much in a short time, making initial cuts, and proposing a balanced plan in the fall was the toughest time, Holt said, adding she also had to learn how to talk to the press.

The city headed into its 2017 budget season with a $137 million gap to close, down from $654 million when Emanuel took office. The city better aligned its spending with recurring revenue through savings, more efficient work rules and service changes, and by holding down healthcare costs while raising new revenue through various taxes and fees. General revenue growth from an improved economy also helped.

In early 2015, Emanuel announced a series of changes in the city’s debt practices pledging to end scoop-and-toss debt restructurings by 2019 while also phasing out the use of debt for operating expenses like judgments and legal settlements which he said “mask the true costs of government.”

The changes also included canceling interest rate swap agreements and shedding general obligation floating-rate risks, moves triggered after Moody's Investors Service dropped Chicago general obligation bonds to junk citing its mammoth pension obligations.

Market participants praised the steps but also believed the city should have acted sooner to shed what they considered shoddy financial maneuvers and didn’t buy the excuse that they were inherited from the Daley administration. Emanuel’s team had countered that first they needed to tackle the structural deficit.

Alexandra Holt is leaving her position as Chicago's budget director.

The Moody's downgrade triggered termination events that could have forced the city to come up with $2.2 billion. The city resolved the potential crisis largely by pushing $700 million of costs onto its debt tab to deal with defaulted credit lines and paid $395 million to cancel GO and revenue bond related swaps.

Holt argues that the city has made real headway on the debt front although at a high cost. About $225 million of the city’s $1.1 billion general obligation sale earlier this year went to cover settlements and judgments while $440 million restructured debt to smooth out the city’s debt service through 2019. The city paid a record high spread of more than 300 basis points to the MMD’s top-rated benchmark on that sale but city officials say the deal marks the end of those frowned-upon tactics.

Holt told city council members earlier this year during a Finance Committee appearance with chief financial officer Carole Brown the city put all the scoop and toss borrowing in the 2017 sale to send to investors and rating agencies "a clear message that we have dealt with it once and for all.”

The city’s liquidity status benefits from $620 million in long-term reserves. The city established a $5 million liquidity fund with additions expected of $5 million from 2016 and $5 million in 2017, and has a $93 million unassigned fund.

Holt leaves with new funding streams in place to improve the city’s collective $33.8 billion of net unfunded pension liabilities.

The city passed a record property tax hike that phases in a $543 million annual increase to cover rising police and firefighter pension payments. A water-sewer surcharge was enacted to stabilize the municipal employees' fund and a 9-1-1 surcharge is funding higher laborers’ fund payments.

The city is still waiting on the state for final approval on the changes to the laborers’ and municipal funds; without it the two funds are headed toward insolvency in the next decade.

The General Assembly passed city legislation but it got caught in state budget gridlock and Gov. Bruce Rauner vetoed it. The General Assembly again passed it this year but the House vote lacked Republican support and it faces another veto unless the state resolves its budget mess and passes state pension reforms.

Other budget and pension challenges loom that could get in the way of the city’s goal to structurally balance its books by 2019.

Among the various growth scenarios outlined in the 2016 annual financial analysis, if the economy sours and the city sees stagnant growth it could face an estimated $581 million budget gap in 2018. On the pension front, the city faces another big jump in pension payments as its ramp up to actuarially based contributions hits in 2023.

Holt said the next round of increases heighten the need for the legislative overhaul to be approved quickly so the funds can begin to see greater investment returns.

Holt said keeping tight control on city costs will be “critical” to managing through challenging economic times and in dealing with the jump in pension payments that looms. "What we’ve tried to do is to stabilize city finances “so those kinds of increases are manageable,” she said.

The city’s Moody's rating is unlikely to move out of junk status until pension funding status improves and the city’s current restructuring takes a long time for any improvement to occur. Fitch Ratings, Kroll Bond Rating Agency and S&P Global Ratings shifted their outlooks to stable from negative on their BBB ratings of $9 billion of GO debt due to the pension restructurings.

Holt said she’s also proud of efforts to improve budget transparency and the establishment of a team to help the department better manage performance issues and hires that have improved the department’s analytic capabilities. She plans to take some time off after handing the baton in late June or July to Samantha Fields, commissioner of the city’s Department of Business Affairs and Consumer Protection.

Holt said she doesn’t think Fields’ lack of financial experience will hinder her in the new role because the overall budget team is “really strong and will support her” and she will benefit from her knowledge in city operations and “having worked with aldermen,” which are skills and knowledge that can't be taught.

Holt is a lawyer who previously worked at Baker & McKenzie after stints with the city beginning in 1992 as a deputy commissioner in the Chicago Department of Environment and as a managing deputy budget director.

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