More debt savings in Chicago's backup plan to close 2020 gap

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Chicago Mayor Lori Lightfoot’s administration says it expects to squeeze another $15 million of savings from a $1.3 billion debt refinancing as part of a backup plan to close a remaining $50 million budget gap without state help.

The debt restructuring that now is projected to generate $215 million in upfront savings will be introduced to the City Council at its meeting Wednesday, vetted by the Finance Committee next week and possibly approved along with the budget at a meeting ahead of Thanksgiving, the city’s chief financial officer Jennie Huang Bennett said in an interview Tuesday.

The city will seek authority for up to $1.5 billion of borrowing but still intends to refund only $1.3 billion with a deal sized at $1.2 billion as originally planned. The city typically seeks some additional room on bond measures for flexibility in structuring.

Lightfoot’s proposed 2020 budget relied on the state passing changes to the city’s tax on real estate property sales, allowing the city impose a graduated tax with higher rates on high-end properties, to help erase a more than $800 million deficit. The proposed changes that would take effect next July would raise $50 million for the 2020 budget and $100 million in future years.

Consideration of the measure during the General Assembly’s veto session that ends this week is no longer anticipated. The administration has struggled to build support in the legislature with some local Chicago-based state lawmakers refusing to sign on unless Lightfoot commits a portion of the new revenue to combat homelessness. Lightfoot has resisted that pressure.

The city is also pressing lawmakers during the brief session to approve tax structure changes to an authorized Chicago casino in order to make it more financially viable. The 2020 budget doesn’t rely on casino funds, but getting a casino built and operating is central to the city’s longer-term plan to achieve structural balance by 2022. Revenue from a casino would go to toward the city’s deeply underfunded public safety pension funds.

“We are still pursuing the real estate transfer tax,” but the backup plan gives the city some time, Bennett said. “The casino is our main focus” in this week’s veto session.

Reliance on the state for any form of action was a concern for council members, rating agencies, and investors. Now the city plans to close the 2020 gap without any state legislation, although the city’s longer term solvency requires action or other new revenue sources.

In addition to the $15 million in additional refunding savings, the backup plan that also will be introduced Wednesday relies on $20 million in additional savings from a hiring slowdown and $15 million from other health care and overtime savings.

Lightfoot, who traveled to the state capital Tuesday to press her agenda, had warned that a property tax was on the table if her state political agenda fell through, and that could make the budget a harder sell for the council. The city acknowledged Tuesday that the property tax levy is headed up by about $65 million, which is more than the $18 million increase for the city’s libraries that was previously announced.

Bennett said the non-library hike is due to a $33 million increase previously approved to support bonds sold earlier this year and about $15 million comes from new property.

The additional $15 million in refinancing savings comes from structural changes as a result of further work by the city and its finance team. “We created a more efficient tax structure,” Bennett said.

The city has reduced the amount of taxable refunding bonds that will be part of the deal. The city is still planning to tap both its general obligation credit and Sales Tax Securitization Corp. to back new bonds that would refund GO and motor fuel tax bonds that can be current refunded.

The majority of the bonds would be issued under a new lien subordinate to the senior lien that backs nearly $3 billion of STSC bonds issued to refund GO and sale tax bonds through a bankruptcy-remote, lockbox structure that state allowed the city to establish in 2017.

Some taxable bonds may be included but at a lower level than originally anticipated. Municipal bond yields have been headed up — with the Municipal Market Data’s 10-year AAA benchmark now at 1.60% up from 1.40% in early October and 1.50% when the budget was unveiled in mid-October — but Bennett said extra savings are additionally available as the team sifts through refunding opportunities.

“We were also fairly conservative in our rate assumptions,” Bennet said of the original $200 million in projected savings. “It’s also a more efficient structure” with plans to amortize the more expensive outstanding debt quicker.

The city continues to eye selling the bonds in one deal either late this year or early next. Bennett believes the targeted savings can be achieved even if rates move upward due to conservative assumptions. “We are looking to get into the market quickly but we have some cushion,” Bennett said.

Some market participants question how the city can capture so much upfront savings without pushing off principal payments, but Bennett said it’s possible through the estimated 1.5% to 2% in coupon savings. The current structure being eyed also would trim one year off the final 2040 maturity off the bonds being refunded.

Bennett said she was not yet ready to name the members of the underwriting team.

The city is aiming to preserve its GO ratings and has had what it considers “constructive conversations” with analysts, but it’s unclear where the rating agencies will land on the subordinate lien. “The GO is of the most importance to us,” Bennett said. “Our goal is to avoid any downgrade.”

On the potential ding a second lien might take, Bennett would say only “stay tuned.”

The city’s GO ratings range from junk to the single-A category while the STSC ratings won triple-A ratings from Fitch Ratings and Kroll Bond Rating Agency. S&P Global Ratings initially rated the securitization structure AA but dropped it to AA-minus last year after a methodology change on priority lien debt. A pending Fitch review stemming from Puerto Rico bankruptcy related court rulings could impact the STSC.

The $11.65 billion proposed budget plugs an $800 million hole with a mix of 60% permanent and 40% one-time maneuvers and some proposals have been questioned by stakeholders including whether the federal government will sign off on Medicaid-related ambulance payments and whether a proposal to raise ride-hailing fees can withstand possible litigation. The budget counts on higher emergency collection fees to raise $160 million with the ride-hailing fees generating $40 million.

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Refunding bonds State and local finance Budgets Lori Lightfoot Chicago Sales Tax Securitization Corp City of Chicago, IL Illinois