CHICAGO — Chicago Mayor Rahm Emanuel has little time to savor Tuesday's election win as the city and the municipal market look for solutions to the city's daunting pension woes and the public school system's budget crisis.
Emanuel defeated challenger Jesus "Chuy" Garcia, a Cook County board commissioner, in a runoff election, capturing almost 56% of the vote.
The election "clears the mayor's plate to focus his time on the central issue at hand and that is bringing parties together on a solution to the step-up in public safety pension contributions" coming next year, said Richard Ciccarone, president of Merritt Research Services.
"The market may give the mayor a honeymoon but it will be a short one since he is the incumbent," Ciccarone said.
The city's troubled fiscal condition — illustrated by its battered credit ratings, the looming $550 million public safety pension contribution spike, and an up to $400 million budget deficit — emerged as a central theme the race.
The Chicago Public Schools also came into play as the district grapples with a $1.1 billion budget deficit driven by the need to fund a $700 million pension payment. While the city enjoys flexibility to raise revenues as a home rule municipality, CPS is up against state property tax caps.
Moody's Investors Service lowered Chicago one notch to Baa2 in February, and in March dropped the Chicago Board of Education, whose members are appointed by the mayor, two notches to Baa3, the lowest investment grade level. Both ratings carry a negative outlook. The fresh downgrades triggered swap termination events for both issuers.
Market participants said Emanuel's re-election may do little to ease worries among some investors over the city's solvency but it at least shouldn't worsen them in the near term. Market participants generally favored Emanuel's re-election over Garcia if for no other reason than their lack of familiarity with Garcia.
"The market generally does not like uncertainty," said Michael Johnson, managing partner and head of research at Gurtin Fixed Income Management LLC. "Emanuel is a known entity that has done a decent job managing the city's financial position considering its significant challenges."
While an Emanuel victory might not necessarily reduce market jitters since the city's fiscal pressures remain, it at least won't increase them, he said.
"Pensions continue to be the pivotal issue in terms of the city's financial position," Johnson said.
The city is saddled with $19 billion of unfunded pension obligations and the schools' tab is $9.5 billion tab.
Matt Fabian, partner at Municipal Market Analytics, said the city avoided a major negative in the market should it have elected an unfamiliar name who represented to some a potential step backward to a management style that drove the city's current mess.
"The onus is now on the mayor to do something and there is a lot of pressure on the city so it's hard to think positively about Chicago's rating or trading prospects at least in the near term," Fabian said.
Emanuel wants police and firefighter pension fund reforms that include benefits cuts in a legislative package that would slowly phase the city's increased contributions under the prior state mandate to make actuarially required contributions.
The city can't act on its own; it requires state legislation for any pension changes and changes in some other policy areas. Emanuel also would tap tax-increment financing surpluses and wants state approval for a Chicago-owned casino that could generate an estimated $100 million annually. He also wants to broaden the sales tax.
State legislative help has been hard to come by for Emanuel.
Lawmakers approved a casino plan but former Gov. Pat Quinn vetoed it, and police and fire reforms remain on hold as the legality of state pension reforms are before the Illinois Supreme Court.
Reforms approved by state lawmakers to the city's other two pension funds that cover laborers' and municipal employees are also the subject of a union-backed legal challenge.
Emanuel says a property tax hike is a "last resort," but acknowledges it would be needed without state legislative help.
Ciccarone said Emanuel needs a "contingency" plan to deal with the pension payment spike.
"You have to be ready to step in with a levy increase or some other combination of taxes and fees if a deal doesn't get done with the state," Ciccarone said.
Such a move would provide only a stopgap but at least calm the market, until the city can obtain a long term solution relying on a mix of new revenues and benefit reforms, the preferred solution, according to Ciccarone.
During the runoff, Emanuel sought to recast his image, acknowledging in commercials that he rubbed some the wrong way and that should listen more while arguing for more time to solve fiscal challenges he inherited four years ago.
Ultimately, he succeeded in turning the election into a referendum on which candidate was best qualified to deal with the city's financial reckoning. Garcia slammed Emanuel for the city's borrowing practices including debt restructuring and using debt to cover operations, but left himself open to attack over his refusal to release details on how he would tackle the pension strains.
At stake in the coming months are the city's future borrowing costs and its blemished reputation in the market. More conservative investors have for some time steered clear of the city's general obligation paper; the city paid 60 basis points more above the benchmark to borrow last year than it did in its previous sale.
Chicago's ratings on $8.3 billion of GOs range from Moody's Baa2 — two notches above speculative grade —to a high of A-plus from Standard & Poor's. Fitch Ratings and Kroll Bond Rating Agency fall in between at A-minus. All but Kroll assign a negative outlook. Kroll assigns a stable one.
When Emanuel first took office in May 2011, he inherited ratings of AA-minus from Fitch, A-plus from Standard & Poor's, andAa3 from Moody's.
Fitch assigns its BBB-minus rating to the Chicago school system's $5.6 billion of GOs, with a negative outlook. Standard & Poor's rates the district A-minus with a negative outlook. Both recently lowered the rating by multiple notches.
Kroll recently assigned the schools a first-time rating of BBB-plus with a stable outlook.