Chicago aldermen cast off skepticism, pass securitization program

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CHICAGO – The Chicago City Council approved the creation of a new special purpose corporation to securitize city sales taxes and gave it authority to refund up to $3 billion of existing debt with the aim of trimming debt service costs.

Approval came Wednesday after a spirited, mostly cordial, debate among aldermen. Skeptics voiced misgivings over whether the promised savings were too good to be true and posed longer term risks and said they wanted more time and a third-party vetting.

Others called it a “no-brainer” and said it offered a welcome opportunity to lower debt costs as members are loathe to raise taxes to deal with about $260 million in red ink in the 2018 budget Mayor Rahm Emanuel will unveil next week.

The final tally was 43 in favor and five against.

“It was a good discussion,” Emanuel said after the vote. “We should not pay banks for higher interest will be graded better” and “result in much lower rates” allowing the city to put “more money toward things that our constituents are desperate for.”

The administration – led by Chief Financial Officer Carole Brown, who as a banker worked on a similar structure for the District of Columbia – pressed for the General Assembly’s Democratic majorities to include the new program in the fiscal 2018 budget package.

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 so-called bankruptcy-remote structure that includes a statutory lien is designed to insulate the debt from city operational risks.

Fitch Ratings has noted that similar structures used elsewhere have resulted in high-grade ratings. The city’s general obligation bonds are rated at a low of junk and a high of BBB-plus.

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 and will be assigned to the new corporation.

Brown, budget director Samantha Fields, comptroller Erin Keane, and a representative of the council’s finance and budget committees will govern the special purpose corporation.

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 GOs have been trading at just under a 200bp while it paid a record spread of more than 300bp on its last GO sale.

Brown has said the refundings will be completed for net present value savings but that doesn't mean the savings will be level throughout maturities. "Where we can, we will structure in accelerated savings while being mindful of the need to keep level overall debt service over the life of the bonds to mitigate any negative impact on the corporate fund," finance department spokeswoman Molly Poppe said Wednesday. "There may be immediate budgetary benefit due to the timing of the budget introduction and property tax levy collection.

Council members have amplified their scrutiny of city debt deals over the last two years after facing stinging criticism for serving as a rubber stamp on Emanuel and his predecessor Richard Daley’s bond deals for budget relief and Daley’s 2008 much-maligned 2008 parking meter lease.

“This has been a healthy and good debate and that’s refreshing here,” said longtime Alderman Edward Burke, who chairs the Finance Committee.

“The devil is the in the details and we don’t have all the details,” said Alderman Scott Waguespack. “We don’t know what the rates and covenants” will be and there’s “no guarantee of fiscal discipline” in the future.

“What’s the rush?” asked Alderman David Moore. “Without time to vet, my gut says no.”

Waguespack and Moore voted against the ordinance.

Most defended the plan. “This is a not a solution, but it does get us a little bit further down the road to putting our house and physical house in financial order,” said Alderman Joe Moore.

Budget Committee chairwoman Carrie Austin attacked the argument that more time was needed. “Here our CFO has found a solution and you want to say no?” she said.

Brown is aiming to first refund $600 million to $700 million later this fall and has said the city would tap the $3 billion authorization in roughly four deals over the next couple years to refund $500 million of sales tax bonds and high coupon mostly callable general obligation bonds.

She has left the door open to tapping other revenues that flow through the state – as permitted under the state law – in the future and to considering the program for new money down the line.

Market participants say the new credit will result in savings and that’s a positive but the city must show restraint in not using the program to add to the debt load. Some warn the lockbox structure is not a sure bet for holders until tested in a distressed situation and it puts the new bondholders ahead of existing GO holders and pensioners. The state lacks a bankruptcy law that would allow Chicago file Chapter 9.

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Securitization Budgets Primary bond market Sales tax Esoteric ABS City of Chicago, IL Illinois