CHICAGO – Illinois’ fiscal 2018 budget package establishes a new local government borrowing program sought by Chicago to provide a fresh avenue to lower borrowing costs.

The new borrowing mechanism is labeled “assignment of receipts” in Public Act 100-0023, one of three pieces of legislation that made up the budget package which became law last week when lawmakers overrode Gov. Bruce Rauner’s veto.

The new borrowing mechanism was first laid out in the Senate’s bipartisan budget package known as the “grand bargain.” When that faltered, backers put a revised version into the final budget plan.

Lisa Washburn, managing director at Municipal Market Analytics
“You can’t know the value of these structural protections until they are tested,” said Lisa Washburn, a managing director at Municipal Market Analytics.

“The proposal is meant to extend the ability to home rule municipalities throughout the state. The ability to borrow at lower interest rates will help local governments save money,” legislative documents say.

The new program allows the state’s 200 home rule municipalities to dedicate – or assign -- tax revenues they receive from the state to a special limited use entity such as a trust or corporation which in turn would leverage those revenues in a way that bypasses the local government’s own coffers.

The goal of the structure, by making the revenues owned by a special entity, is to shield the bonds from the threat of being dragged into a bankruptcy proceeding. Insulating them from a municipality's general credit, in theory, should allow the bonds to obtain stronger ratings, draw more investors, and lower costs.

Statutory lien language was added to the new version. It would apply to any borrowing and the assigned receipts without any further action and would enjoy contractual rights.

“Obligations issued by an issuing entity shall be secured by a statutory lien on the transferred receipts received, or entitled to be received, by the issuing entity that are designated as pledged for such obligation,” the law says.

For example, the home rule municipality and an issuing entity would enter an assignment agreement for, say 0.25% of that municipality's share of sales tax revenues. Bonds would be sold and all dedicated revenues would go directly to special purpose entity for bond repayment.

Under the legislation, the state pledges to “not limit or alter the rights and powers vested in the state entities…with respect to the disposition of transferred receipts so as to impair the terms of any contract” and the assignment is not “subject to disavowal, disaffirmance, cancellation, or avoidance by reason of insolvency of any party, lack of consideration or any other fact, occurrence, or state law or rule.”

Local bond counsel firms helped craft the legislation for Chicago as a means to bypass the taint of its battered ratings, including junk-level status from Moody’s Investors Service. A city council approved sales tax issue had been put on hold as the city awaited the fate of the new bonding program.

Chicago officials won’t say how soon they might tap the new program and to what extent. “The city is still examining it and determining application to the city,” said Chief Financial Officer Carole Brown’s spokeswoman, Molly Poppe.

The new program offers both positives and negatives and investors will likely ascribe some value to the security features, said Lisa Washburn, a managing director at Municipal Market Analytics.

“Some investors would view this as a positive,” she said.

Washburn was skeptical of the original language and its ability to mitigate a borrowers’ general creditworthiness. The program and the addition of the statutory language help as “they’ve made things a little tighter” but she said her skepticism remains.

“You can’t know the value of these structural protections until they are tested,” Washburn said, citing challenges leading up to and then during Detroit and Puerto Rico’s bankruptcy proceedings involving structures the market had viewed as airtight.

The elevation of the structure also could put “bondholders and pensioners on a collision course” with both believing they hold top status, she said. Opening up a new avenue for borrowing also could further burden a local government’s debt load if it’s not solely used to replace another form of borrowing or refunding to lower costs, Washburn added.

Revenue streams that municipalities could tap include their share of personal property replacement taxes, gambling, sales tax, local government distributive fund revenue, and motor fuel tax revenues.

Chicago paid punishing spreads of between 339 to 347 basis points over the Municipal Market Data's triple-A benchmark on its last general obligation sale in January due to it weak ratings, so any savings would be welcome.

The city’s airport and water revenue backed deals have fared much better, but its motor fuel revenue and sales tax credits have been dragged down with its GO rating.

"It provides another mechanism of structured financing for a municipality which is intended to remove any bankruptcy risks as other states have provided," James Spiotto, a municipal restructuring expert and co-publisher of MuniNet Guide, said in an earlier interview about the original bill. "This type of securitization-like structure has had the effect of providing greater liquidity and better credit acceptance so you can reduce borrowing costs," and is a variation on a national trend that has worked in other states.

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