Tempered praise for Chicago's proposed budget

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CHICAGO — Chicago Mayor Rahm Emanuel’s proposed $8.58 billion 2018 budget helps the city along the way to structural balance, S&P Global Ratings said.

Positive comments, however, were tempered by looming pension clouds and remaining pressures to achieve structural balance.

The budget “makes incremental progress toward structural balance and takes on one of the administration's key priorities to end the practice of pushing out debt service payments through ‘scoop and toss,’” S&P wrote in a commentary Thursday.

Analyst Carol Spain said the agency doesn’t expect a single budget to fully address the city's challenges but it does mark “a positive step toward addressing the city's long-term fiscal sustainability.”

From a credit perspective, the rating agency considers the budget as holding the status quo although its does phase out scoop-and-toss borrowing a year early, and the city’s new securitization borrowing program will lower debt service costs.

“Given the challenges Chicago has faced in recent years, a status quo budget is notable,” Spain said. The budget maintains the city's reserve position and the structural gap has narrowed. The city relies on a similar level of non-recurring revenues to 2017.

After raising various taxes to cover higher pension payments, the Emanuel administration has yet to identify how it will cover a big jump in payments that looms in the next few years when an actuarially based contribution is reached.

"In our view, although Chicago has stabilized its near-term budget position, this high and rising fixed cost leaves it exposed to future pressures," Spain said.

Emanuel on Wednesday presented his proposed $8.6 billion 2018 budget to the City Council during which he sought to highlight financial gains and the early end to scoop and toss.

The city had planned to bank $100 million in debt relief in 2018 from scoop and toss and $158 million in 2019 but can now absorb those costs because of the debt service relief anticipated from the securitization, said chief financial officer Carole Brown.

The budget tackles about $114.2 million of red ink and raises $124 million to help Chicago Public Schools close a budget gap. It relies on $119 million from a tax-increment financing surplus and debt service savings from the city’s refunding of debt using its new securitization structure.

The city’s new sales tax securitization bonding program that will be used to refund about $2.8 billion of sales tax and general obligation bonds and is projected to free up $94 million from the city’s corporate fund in 2018. Brown said the city intends to achieve net present value savings from the refundings to ease debt service pressures in future years too, but will be banking a good amount of savings upfront.

The city’s 10-year GO spreads have narrowed by more than 100 basis points to the Municipal Market Data’s top benchmark in recent months.

John Miller, co-head of fixed income at Nuveen Asset Management, attributed the spread tightening in part to the market’s favorable view of the inclusion of the new borrowing program in the state budget passed in July.

“This paves the way for a very highly rated new bond indenture, potentially carrying a AAA rating,” Miller wrote in a review of market developments over the last quarter. “If executed, this could provide a technical benefit of less GO paper outstanding as well as a fundamental benefit of lower debt service costs to the city.”

Chicago is rated from a low of junk by Moody’s to a high of BBB-plus by S&P and Kroll Bond Rating Agency.

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Budgets Rahm Emanuel City of Chicago, IL Illinois