CHICAGO — Gary, Ind. will make a rare appearance in the debt markets with a short-term borrowing that city officials hope will help rebuild the long-struggling city's credit.
Gary's upcoming deal will be its first public offering since a small deal in 2007. The city council last week approved an ordinance that allows the issuance of up to $17.5 million of special revenue bonds — backed by casino revenue — to pay off debt and finance some capital improvements.
Mayor Karen Freeman-Wilson said the borrowing is a bid to repair the Steel City's battered credit image and get a credit rating for the first time in years.
"We believe if we do it as a short-term deal it may very well position us better for long-term debt in the not-too-distant future," Freeman-Wilson said. "If we're able to do it and show that we're able to make payments and maybe even do some early redemption, then we're in a position I think to ultimately give a level of confidence out in the market that Gary is much more stable than people think."
Located on Lake Michigan about 45 minutes from Chicago, Gary is one of the most distressed cities in the nation. Its population has shriveled to around 80,000 from 175,000 in 1970 when it was a hub of manufacturing for U.S. Steel Corporation. It now suffers from a myriad of economic and fiscal challenges as businesses and residents have fled.
One of its biggest problems, Freeman-Wilson said, is the impact of a state-based property tax reform enacted under former Indiana Gov. Mitch Daniels in 2009. The law caps tax bills at 1% of assessed value for homeowners, 2% for rental property, and 3% on commercial property. It's meant a decline in property tax revenue for most Indiana municipalities.
For Gary, it brought a 50% drop in property tax revenue. For the first few years, the city found relief by petitioning the state's distressed government board for replacement revenue. But that option ran out in 2012.
"When you pass sweeping legislation or property tax reform, you ought to have a sense of the impact that it will have," said Freeman-Wilson, Gary native and Harvard graduate who is in her first term as mayor. "I don't think that was done here in Indiana — or at least I'm naive enough to think it wasn't done; I can't imagine anyone planning this lot for Gary."
The property tax decrease has pushed the city to the edge, she said. "You see tremendous reduction in city services in terms of roads and the ability to maintain the city even in terms of appearance," she said. "This is something that really has to be remedied at the state level."
Part of rebuilding the city's credit is getting ratings in the first place, officials said. None of the three major ratings agencies maintain ratings on the city, which last issued general obligation bonds seven years ago.
"We understand Gary has been unrated for a long time, and part of that is because of some areas of volatility relative to our property tax collections and the changes overall in the state," Freeman-Wilson said. "So we're looking at other sources of revenue, trying to increase our [assessed valuation] and increase our collection rates. All of those things will make Gary a very good credit risk."
The city is still in the midst of putting together the final bond documents, according to finance director Celita Green. The sale date is expected within the next month to achieve a mid-May closing. It will consist of one-year bond anticipation notes the city wants to roll over into long-term debt next year, as the city's bond ordinance permits.
Gary officials plan to meet with the ratings agencies in the next few weeks, according to Green.
"Our goal is to get rated," said Green.
Green said the city and finance team plan to market the debt ahead of the sale. "We're hoping to meet with investors because we'd like to get better known in the market," she said.
The BANs will feature a pledge of casino tax revenue, one of the city's most reliable revenue streams. It brings in roughly $15 million a year, according to Freeman-Wilson. The dollars began flowing again recently after Gary settled a lawsuit with the owner of the Majestic Star Casinos that had frozen the money since 2008.
Siebert Brandford Shank & Co. LLC is the underwriter, chosen after the city issued a Request for Proposals last year. Curtis Whittaker at Whittaker & Company, with offices in Gary and Chicago, is financial advisor. Herbert Hardwick from Kansas City is bond counsel.
Gary's last sale was $5.3 million of GO judgment bonds in 2007, and before that the previous issue was 14 years earlier. It has $8 million of outstanding debt, some of which was floated for a $45 million baseball stadium. The city plans to pay off some of that debt with the upcoming borrowing, the mayor said.
Gary has very little debt in general: It carries no pension or other post-employment benefit obligation debt, both of which are the state's responsibility.
The lack of debt is one reason why Freeman Wilson said she has never seriously considered Chapter 9. Indiana does not allow its municipalities to file for bankruptcy, but a handful of state legislators have pushed since 2010 for a law that would authorize the move, and former Gary Mayor Rudy Clay reportedly pushed for the bill, which failed to pass the General Assembly.
Freeman-Wilson said the option doesn't make sense for Gary, where the problem isn't debt as much as its lack of revenue.
Lake County, where Gary is located, was Indiana's last county to finally agree to impose a local option income tax that the state authorized to help offset the property tax declines. The city, which led the lobbying for the new tax, received $10 million from the county tax last year.
Last week, the mayor asked the council to set aside 20% of that income tax revenue to help pay Gary's portion of a $571 million expansion of the South Shore Line commuter rail service. At least 10 other cities, Lake County and the Northwest Indiana Regional Development Authority have agreed to contribute to eight-mile expansion of the rail line through the county.
Freeman-Wilson said she sees it as part of a larger regional transit push that includes not only the train line but also a key expansion of the city's regional bus service.
Officials are also pinning their hopes on a public-private partnership that will privatize the Gary/Chicago International Airport and develop a swath of vacant land that runs to Lake Michigan.
The airport authority earlier this year tapped a private team includes team Guggenheim Securities and Loop Capital for the project. The deal features a $100 million investment in the facility and surrounding property over the next 40 years. That includes $25 million in the first three years, and a minimum goal of 30% local workers.
The city of Gary is also set to share in 20% of net profits of city property that is contributed, sold or leased for development.
In January, the Obama administration announced that Gary was one of seven cities selected for its Strong Cities, Strong Communities initiative. The administration will bring in a team of federal experts, and federal money, to work with Gary representatives for up to two years on various redevelopment projects.
"We don't feel if we don't get state relief we won't make it," Freeman-Wilson said. "We're making it; we're just being very resourceful in the process."