Coronavirus squeeze puts debt on the table for Chicago
Chicago is considering using debt to bide time for a post COVID-19 fiscal recovery, Chief Financial Officer Jennie Huang Bennett told City Council members Monday.
Bennett and various stakeholders and financial experts engaged in a deep dive into potential revenues sources available to close a $1.25 billion 2021 gap.
In a recent interview, Bennett also left other one-time practices like scoop-and-toss refinancing on the table, although she said the city was not considering asset leases and wants to avoid using reserves.
Such one-time measures, frowned on by credit analysts but finding more acceptance during the pandemic, were used by Mayor Lori Lightfoot’s predecessors and eventually phased out during the second term of her immediate predecessor, Rahm Emanuel.
“We are taking a look at every option. There is no option that we aren’t seriously taking a look at given the magnitude of the gap,” Bennett said in the interview. “The use of reserves is at the very bottom of the list” to preserve a future cushion should the pandemic’s economic blows linger. The city has a $550 million asset lease reserve and a $185 million 2019 ending balance.
The city faces a tough balancing act as it works to finish closing a $800 million tax gap in the current budget and a $1.2 billion hole in 2021 because of a $783.2 million revenue dive and $421.3 million in added personnel, pension and debt expenses the city had already expected in 2021.
Lightfoot’s administration wants to avoid damaging the city’s ratings and prospects for a longer-term economic recovery. The budget won’t incorporate any potential future federal aid given that congressional negotiations have stalled.
“We are looking at ways that we can try to bridge what is currently a very painful budget and create that bridge to long term revenues” such as those expected from the city’s first casino that is in the works, Bennett said during the first of two Finance Committee subject hearings to examine potential revenue sources. She emphasized that the administration is crafting a long-term plan to achieve structural balance.
The committee explored a financial transaction tax, employee head tax, lease tax, and gaming revenue streams at the Monday meeting. The second hearing is set for Friday.
“Borrowing by nature is a one-time solution” and may “be a part of what we are facing in order to build bridges to long-term structural balance,” Bennett said.
Aldermen quizzed her about whether the city would tap the Federal Reserve’s Municipal Liquidity Facility that allows the federal government to purchase debt from eligible governments.
With rates higher than most issuers can get in the market, the MLF has only been used by two highly stressed borrowers: Illinois and the New York Metropolitan Transportation Authority.
“It may be the facility. It may be in essence just going to the market directly,” Bennett said of a potential financing. The MLF provides a guaranteed rate, but the city has “good market access” and if it could “secure a better rate” it may go it alone.
The city long engaged in using debt to cover operations, scoop-and-toss refinancings, asset leases and reserves to balance budgets under Mayor Richard M. Daley. Emmanuel continued the practice until phasing them out.
The city previously announced plans for a debt refinancing with the goal of achieving at least $100 million in upfront savings. On whether the city might revert to using scoop-and-toss, Bennett said in the interview, “I think it’s a little early to tell now. We are still in the planning stages.”
The city refinanced debt in January — before the pandemic — for present value savings that was mostly taken up front.
“A number of municipalities across the country have used debt restructurings in order to help support what is essence is a once-in-a-lifetime crisis,” Bennett said in the interview.
“We know those revenues are going to come back, the question becomes when and how fast and so it’s important for us to plan for the worst …. but it’s really a one-time loss,” Bennett said.
Bennett said the city is reviewing its high value surplus assets but is not “looking at large asset sales.”
The city years ago leased its Skyway toll bridge, downtown parking garages, and parking meter system. The parking meter deal, which balanced Daley's final budgets, is unpopular as rising fees have fueled strong operator profits.
The city continues to explore pension obligation bonds, but is treading cautiously.
“We would need to pair any sort of a POB with some measure of pension reform. If we are not seeing changes in how we are paying for pensions then it’s very difficult to make the case that we have a broader comprehensive plan,” Bennett said in the interview, adding that the city is not looking to re-amortize its pension contribution schedule.
The city’s pension contribution rises to $1.81 billion in 2021 from $1.68 billion and is carrying $31.8 billion of net pension liabilities, and funded ratios for the funds are at 18% for firefighters, 21% for police, 24% for municipal, and 43% for laborers.
Lightfoot will unveil her proposed 2021 budget next month and has laid out grim declarations that layoffs and a property tax hike are last resorts but “everything is on the table.”
Testimony during the hearing underscored the city’s reliance on future casino revenue to stabilize city finances.
“A casino would generate enough revenues for us to make meaningful progress towards that long term structural balance,” Bennett said. “We want to make sure we do this right.”
The administration is heeding warnings that a move to implement video gambling in local establishments could hurt the casino’s value, although some aldermen are pushing for it.
A new casino could generate $1.2 billion of annual gambling revenue resulting in $170 million in new city tax revenue during the first year and $250 million going forward, Bennett said. That compares to between $12 million and $15 million from video gambling.
“At the end of the day it comes down the money and how much we can generate in order to help address our financial issues,” Bennett said.
Introduction of a competing gambling type could “cause a bidder to dramatically lower the amount of capital they would be willing to expend,” said Grant Govertsen, whose firm Union Gaming conducted an Illinois Gaming Board-commissioned study on the viability of a Chicago casino.
Potential operators have until mid-October to respond to a request for information that the city expects to use to gauge interest, financing, size, and location and hopes to issue a request for proposals next year although the timeline remains uncertain due to the pandemic. The RFI contemplates establishing a temporary casino while a permanent one is built.
Bennett, the heads of Chicago-based commodities exchanges, and other fiscal experts threw cold water on the idea of a financial transaction tax on trades that’s referred to by some aldermen and the Chicago Teachers’ Union as a “LaSalle Street” tax.
Business groups cautioned against re-instating a head tax on city-based employees and Bennett voiced concerns over the “disincentive” it provides to hiring. Emanuel phased out the $4 per employee tax during his first term. It generated about $23.5 million in its final years.
The administration is expected to seek to raise the personal property lease tax on cloud computing to 9% from 7.2% to bring it in line with other lease fees. Tax revenue has grown by more than 14% over the last 10 years and generated $328 million last year.
The heads of Chicago-based exchanges, CME Group chief executive officer Terry Duffy and CBOE chief executive officer Ed Tilly, warned they could take their businesses elsewhere if the city levied a transaction tax.
Tilly warned that such a tax would “force market operators to move in order to insulate investors from the added cost.”
Randy Bauer, a director at PFM Group Consulting LLC, testified “there’s a reason it’s been considered but is not in use by a major state or local government” as the loss of the exchange would result in job and other financial losses. “Ultimately it’s going to hurt you more,” Bauer said.
Laurence Msall, president of the Civic Federation, also warned against relying on any tax that requires state action. “There are enormous hurdles” in implementation.
The city can enact the proposed cloud lease tax and head tax using its home rule but would require state approval for a transaction tax.
The city operates on a $4.4 billion general fund that is part of an all-funds $11.61 billion budget. The city is typically holds an investor conference in late summer or early fall and while the city can't hold an in-person conference, Bennett said Chicago is in planning phases that could lead to some form of an investor meeting.