CHICAGO – Chicago Mayor Rahm Emanuel’s administration is billing the creation of a new special purpose corporation that will securitize city sales tax revenue to refund about $2.8 billion of existing debt as a boon for the city in his sales pitch to City Council members.
“This refinancing will save the city millions of dollars per year, help alleviate the city’s GO debt burden, and in the long run may result in ratings upgrades for the city’s GO credit,” according to briefing documents the administration shared with council members ahead of an Oct. 5 Finance Committee session.
The committee will weigh in on the ordinance establishing the new borrowing corporation. If advanced, the council probably would take the measure up during its Oct. 11 meeting. That’s a week before Emanuel will unveil his proposed 2018 budget outlining how he intends to deal with about $260 million in red ink.
Chief financial officer Carole Brown will also seek approval for a deal team. She has previously said her aim is to get into the market with the first deal as soon as late October. Overall, the city initially intends to tap the corporation to refund its $500 million of sales tax bonds and $2.3 billion of its roughly $9 billion of general obligation bonds in a series of deals over the next couple of years.
Brown, budget director Samantha Fields, and comptroller Erin Keane -- along with the chairperson or a representative of the City Council’s Finance and Budget committees -- will govern the five-member special purpose corporation.
The city will assign its sales taxes collected by the state directly to the corporation, which will use the funds to pay debt service. All sales tax revenues not needed by the corporation will then go to the city.
The city received $715.2 million in sales tax revenues in 2016 with $39.4 million going toward sales tax bond debt service and $675.8 million into the city’s general fund. About $660.9 million of the $715.2 million was collected by the state. Under the new plan, state collected funds will be assigned to the new corporation. The remainder represents use taxes that are directly collected by the city and won’t be subject to the pledge.
“The corporation would be considered bankruptcy-remote, and all debt issued by it would have a statutory lien attached to it. This means that even in the unlikely event of a municipal bankruptcy, bondholders would still be paid,” the city documents read.
That is expected to translate into higher ratings and lower borrowing costs. Bankers have told the city the bonds could sell at a spread under 100 basis points to the Municipal Market Data’s top-rated benchmark. City spreads have narrowed since the July passage of a state budget and Emanuel’s announcement he intended to move on the new borrowing program. They have tightened further in recent weeks with a trade in the 10-year range Tuesday landing at a 185 basis point spread, said IHSMarkit’s Edward Lee. That compares to 300 basis points in early summer.
The new borrowing program created for home rule units of local government was included in the $36 billion fiscal 2018 state budget package.
The promise of interest savings should win over many council members given a looming gap the city needs to fill in the 2018 budget. Tax increases won’t prove an easy sell, given that aldermen already have agreed to a big property tax increase, a new sewer/water fee, and other fee and tax increases to deal with past red ink and city pensions. Cook County is facing push-back for levying a sweetened beverage tax, the state in July passed an income tax hike, and Chicago Public Schools have won additional room to raise its property tax levy.
Though the city initially warned this summer it must close a $114.2 million gap, Emanuel then committed $80 million to cover Chicago Public Schools’ security costs to help it close a remaining deficit. The city faces additional costs to continue a police hiring plan and implement police reforms bringing the deficit to nearly $260 million.
“We are still working through options” to close the gap, finance spokeswoman Molly Poppe said Tuesday. The city is currently operating on an $8.2 billion budget.
On the flip side, the administration also could face tough questioning. After Moody’s Investors Service cut the city to junk in 2015 triggering a potential $2 billion liquidity crisis, council members have scrutinized city borrowing more carefully. They were criticized for serving as a rubber stamp under former Mayor Richard Daley, who did not seek re-election in 2011.
The city carries ratings that range from a low of junk to a high of BBB-plus. City documents cite success by other municipalities that have used a similar structure, noting the improvement in New York City’s ratings since the 1998 creation of the New York City Transitional Finance Authority, which leveraged income taxes and sales taxes, and Philadelphia’s rise from junk after creation of the Pennsylvania Intergovernmental Cooperation Authority in 1992, using a 1.5% wage tax on city residents. Other factors contributed to upgrades.
Some market participants have said the use of such a securitization program illustrates a borrower’s distress. Buy-side skepticism has grown in recent years that some structures are not truly tested until they land in bankruptcy. On the plus side, the program will lower city borrowing costs and the new name and higher ratings could lure back buyers that have shunned city bonds.