Civic group urges deeper scrutiny of Chicago's scoop-and-toss plans
Chicago Mayor Lori Lightfoot’s 2021 budget plan failed to win an outright endorsement from a prominent local civic group that is skeptical of the city’s assertions that $950 million of scoop-and-toss debt restructuring won’t add to the city’s debt costs.
The Chicago Civic Federation offered its “qualified support” for the city’s $12.76 billion budget that includes a $4 billion corporate fund, calling it a “reasonable plan given extreme economic conditions” confronting the city because of the COVID-19 pandemic’s blow to tax revenues, federation President Laurence Msall said at a City Council budget hearing Monday.
The group, whose large board is made up of civic and business representatives, raised concerns over the $1.7 billion financing that pushes off $500 million of 2021 debt service to help close a $1.2 billion 2021 budget gap due to a $800 million tax loss and $400 million in added structural costs. It also provides $450 million in 2020 relief to fully close an $800 million revenue hole.
"By and large, the Civic Federation supports the goals of Mayor Lightfoot and her team in preparing this budget, including relative restraint with property taxes, reduction in personnel expenses and working to increase public participation in the budgeting process,” Msall said. “Our support remains qualified because, disappointingly, the public has not been provided with nearly enough detail to independently evaluate the enormous proposed debt refinancing.”
“This is not only an enormous transaction. It comes with risks. While interest rates are at a historical low and it may be financially prudent to refinance debt for economic savings, the debt restructuring that is proposed extends the maturity date,” Msall said. The group published its analysis of the budget ahead of the Monday hearing.
The administration’s position that the restructuring won’t saddle the city with additional costs on a present value basis depends on capturing expected rates on the new bonds and its calculation that the value of $1 of costs in 30 years amounts to only 29 cents today.
Under an updated outline of the $1.7 billion transaction, the administration expects to generate $74 million in savings on the $750 million traditional refinancing piece, based on refinancing 5% rates on the existing debt at 4%. It projects the cost of pushing off $950 million in debt service owed in 2020 and 2021 that accounts for the remainder of the deal at $43 million based on the net present value calculation. The end result is a slightly positive NPV impact of $31 million, based on current rates.
Taking $950 million in relief in 2020 and 2021 with debt service reduced to $206 million in 2020 and $227 million in 2021, will add debt service in all but two years through 2047 and it will extend the schedule three years to 2050. Debt service will be about $207 million in each of those three years. That results in $2 billion being repaid instead of $950 million. The existing debt is being extended by eight years through the restructuring.
On a present value basis, when factoring in the $950 million of relief in 2020 and 2021 that will repaid through 2050, the added debt service results in $43 million of additional costs with the savings from the refunding piece helping to offset those costs.
Chief Financial Officer Jennie Huang Bennett said the city may issue notes to cover the $450 million in needed 2020 relief and cancel the restructuring if federal aid to make up for tax losses comes to fruition.
The administration on Monday submitted the formal ordinance authorizing up to $3.9 billion of debt. The ordinance permits up to $2.35 billion of Sales Tax Securitization Corp. bonds to refund and restructure existing general obligation and STSC debt providing some room to maneuver beyond the $1.7 billion, if needed, and another $1.56 billion of new money borrowing.
The authorization also paves the way for the city to borrow about $15 million through the STSC to cover cancelled layoffs that were originally included in the budget-balancing package. Lightfoot and labor leaders made the announcement over the weekend. The borrowing will be covered by higher-than-expected sales tax revenue on recreational cannabis sales.
The city would repay this debt over 15 years. “Although this solution for layoffs is one-time in nature, Chicago Federation of Labor has provided us with enough potential efficiency opportunities for 2021 to make the case that we will find ongoing structural solutions in the future,” city finance spokeswoman Kristen Cabanban said.
The city is trying to balance structural fixes with one-shots in a way that doesn’t damage its economic recovery or set the city off course to reach structural balance in 2023.
But Lightfoot must also come up with 26 votes to pass the budget and she’s seen push back on a $94 million property tax hike, the restructuring, and layoffs and has been pressed to dig deeper into $900 million of reserves beyond a planned $30 million draw. The vote is slated for Nov. 24.
Lightfoot is digging in on a portion of the property tax hike that enables the city to impose an annual increase tied to inflation although some reports suggested she could agree to delay the hike.
“I think it's prudent and given what our financial obligations are and the structural challenges we face I think this is the best solution we have to meet our financial obligations in the out years,” Lightfoot said of the inflation component Monday.
Moody’s Investors Service recently affirmed the city’s GO rating that is one notch below investment grade and Fitch Ratings affirmed the city’s rating that is one notch above junk. Both moved their outlook to negative. S&P Ratings rates the GO at BBB-plus with a negative outlook. Kroll Bond Rating Agency assigns it an A with a stable outlook.
While the administration has expressed optimism the budget in its proposed form could preserve the ratings, material changes to the mix of structural and one-shots could dim the city’s prospects for preventing a downgrade.