CHICAGO — The Illinois Finance Authority has approved plans by the long-struggling East St. Louis to retire its debt by restructuring bonds early, thereby freeing it from state financial oversight.
The authority also laid the groundwork for the Chicago-area Pace suburban bus service to borrow for capital projects.
The IFA board at a meeting late last week approved a resolution allowing East St. Louis and bond trustee Bank of New York Mellon Trust Co. NA to use trustee funds on hand to defease $2 million of remaining bonds from a 2010 issue a year early. The issue matures next November.
The bonds had refunded debt from a $21.4 million debt restructuring issue sold in 1994 by the IFA's predecessor agency, the Illinois Development Finance Authority, under the state's Financially Distressed City Assistance Program.
The program aids any home rule unit of local government designated as financially distressed by helping it restructure debts and access the market.
The city, located on the Illinois side of the Mississippi River across from St. Louis, suffered from a steady loss of population and dwindling tax base since 1960. The city's financial strains mounted throughout the 1970's and 1980's and by the 1980s "operating deficits had paralyzed the delivery of essential services," according to IFA documents revisiting the city's saga.
The city sought out the distressed designation in 1990 and to this day remains the only home rule city to have done so. As part of the designation, the governor appointed a five-member East St. Louis Financial Advisory Authority to provide fiscal oversight.
The authority has held sway over the city's three-year financial plans, budgets, most expenditures, and all contracts including any loan agreements tied to the debt restructuring bonds. Under the law, the city must balance its budget.
"This irrevocable direction will enable the defeasance of the Indenture and end the city's reporting obligation to provide balanced budgets and audits to the East St. Louis Financial Advisory Authority and to the IFA as required under the Illinois Financially Distressed City Law," IFA executive director Christopher Meister said in board documents.
With the restructuring bonds retired, the oversight board will be disbanded.
Financial oversight has not provided a panacea for the struggling city and East St. Louis leaders often butted heads with the panel over its budgets with multiple revisions often needed before winning advisory authority approval. Revenue from its casino has fallen in recent years and bills are mounting, according to local press reports. Local reports last year cited the panel's warning that it was ready to seize control of the city's budget due to concerns over pay raises for several top city officials.
The complex debt restructuring was crafted in 1994 by a special task force that included agreements on various bond claims, pension claims, litigation, and federal claims. The city was able to settle with various federal agencies and the Internal Revenue Service.
The city settled an IRS claim of $14.5 million for $1.4 million and a U.S. Department of Labor claim of $12.1 million for $1 million while the U.S. Department of Housing and Urban Development waived it rights on a claim for $1.6 million.
The bonds were sold October 1994 backed by the city's full faith and credit and the state's moral obligation pledge. The city also pledged revenues which included state aid. The bond indenture allowed for the state comptroller to directly intercept for bond repayment all of the city's share of sales taxes, income taxes, riverboat gambling taxes, public utility taxes, and other revenues before the state handed them over to the city. A debt service reserve was also established.
Day-to-day supervisory oversight temporarily halted nearly a decade ago after the city balanced its budget for 10 consecutive years, a requirement of the law. Because the bonds were still outstanding, the city still was required to provide audits and budget reports annually.
"In fact, the city did not provide balanced budgets and audits within the timeframes required" and the "FAA immediately resumed its oversight functions over the city."
With defeasance of the remaining bonds, the city will be freed of any reporting requirements.
The IFA board also approved a resolution authorizing an intergovernmental agreement with the Pace bus system to serve as its conduit issuer for state approved bonding authority of up to $100 million to fund various projects. The Regional Transportation Authority of Illinois, which provides financial oversight for Pace, the Chicago Transit Authority, and Metra commuter rail must approve the agreement.
The idea is not universally popular.
The RTA last month laid out its case for the state to centralize and expand its borrowing powers for Chicago area transit needs. A state-appointed task force is currently reviewing the governance structure of the Chicago region's transit system and may recommend changes to Gov. Pat Quinn and lawmakers.
Of the three service boards under the RTA's auspices, only the CTA is an active issuer with unlimited borrowing power under state statutes. State lawmakers gave Metra the power to issue up to $1 billion of debt in 2008 but it remains unused. More recently Pace was given authorization to sell $100 million.
"The service boards' separate bonding authority has been costly, wasteful," RTA board chairman John Gates said in his proposal released last month arguing for expanding RTA powers.
"The service boards are not in a position to individually borrow money for capital projects in the most cost-effective and consistent manner," he said. "All of the service boards have substantial capital needs and yet only the RTA is positioned to borrow in a regional and financially prudent manner," Gates said.