CHICAGO – Chicago's record tax hike to help stabilize its public safety pension funds has fueled further tightening of the city's general obligation trading levels, Municipal Market Analytics said.
Spreads on Chicago's general obligation paper began tightening after news circulated in late August that Mayor Rahm Emanuel would seek a record property tax hike to cover a state mandated increase to fund the city's public safety contributions.
The City Council's passage last week of a record $543 million tax hike to be phased in over four years drove a further narrowing of spreads by roughly 20 to 30 basis points on the city's 25 year paper to the MMA's top-rated benchmark of 3.06% as of Friday, said MMA partner Matt Fabian.
The latest movement brings the shrinkage to about 100 basis points over a two month period. Spreads previously had hovered at 300 basis points or higher.
"Amid a market starved for yield, and noting minimal (and, if anything, now more distant) risks of payment default, these improvements are likely sustainable," Fabian said in the firm's weekly outlook piece.
MMA has viewed Chicago GO paper as a good income opportunity for investors tolerant of headline risks.
Fabian agrees with the assessment offered by many analyst and buyside participants that passage of a 2016 budget with the property tax hike doesn't cure the city's fiscal ills but marks progress.
“What the budget does is minimize near term downgrade risk,” Fabian said, adding that the city’s market position has also been helped by its conversion of floating rate and short-term paper and its elimination of swap and bank credit risks.
The city's GO ratings range from a speculative-grade Ba1 from Moody's Investors Service to A-minus from Kroll Bond Rating Agency. Fitch Ratings and Standard & Poor's assign BBB-plus ratings and all but Kroll take a negative view on the credit. Kroll has a stable outlook.
The city is expected later this month to sell up to $500 million of GOs in a refunding issue that pushes off $250 million of debt for 2015 budget relief and up to $250 million for present value savings. The city's chief financial officer, Carole Brown, said last month what was then a 50 to 60 basis point tightening would translate into $33.8 million in interest savings on the upcoming sale.
Chicago paid a high yield of just under 8% on its July sale of taxable securities, a spread of 485 basis points to the 30-year Treasury, and it paid a high yield of 5.69% on its long tax-exempt bond, 252 basis points over the Municipal Market Data's top-rated benchmark.
