Chicago POB Deal Still in Play
CHICAGO – Chicago Mayor Rahm Emanuel’s administration is still weighing whether to proceed with a $10 billion pension bond issue, a decision complicated by the mayor’s announcement that he won’t seek re-election next year.
“The mayor’s announcement on Tuesday added another variable to the decision-making process and we are still in the process of making a final decision,” Chicago’s chief financial officer, Carole Brown, said in an interview Monday amid rising skepticism from market participants over whether the city will proceed.
The city is still evaluating how to execute a transaction with the “right structure” and address questions that would be posed by the market and aldermen, she said.
Brown previously said she expected to make a recommendation to Emanuel early this month.
“I have had conversations with the mayor and senior staff and I have more questions I have to answer,” Brown said. It’s more of an ongoing discussion now, she said.
The mayor’s looming exit has sparked market concerns about the city’s future fiscal direction.
Some believe the political uncertainty could curb appetite for the pension deal and drive up borrowing rates, making it harder for a POB deal to pencil out.
“Fiscal policies put in place by the Emanuel administration could be at risk with new leadership,” Nuveen Investments head of municipals John Miller wrote Monday in the firm’s weekly fixed income commentary. Emanuel raised a series of taxes to cover rising pension contributions.
A “political willingness to raise revenues again, especially soon after the mayoral and city council election, is a key risk to Chicago credit,” Miller wrote.
Brown’s comments suggest
if a deal is properly structured targeted savings could still be achieved despite Emanuel’s decision.
The pension idea was first pitched by mayoral advisor Michael Sacks during the city’s August investors’ conference.
Brown later told reporters she was reviewing the idea as a means to raise funded ratios to more than 50% from 26.5% and ease the size of looming contribution spikes by bringing down the $28 billion net pension liability.
Emanuel said in an interview late last week on WBEZ radio that the option remains on the table.
“It has to make financial sense -meaning securing people’s pensions -and not whacking our taxpayers any more than they need to be -- and they shouldn’t be,” he said.
If Chicago opts to move forward, the buyside will not see a broader plan that includes labor concessions and new revenue to more fully stabilize the pension system.
“I am not anticipating today that we would come with a package that included all the revenues we needed” to fully meet the pension funding schedule that puts all the funds on track to reach a 90% funded ratio by 2058, Brown said.
“From what we are hearing from market participants,” Brown said, the announcement “hasn’t really changed where they think an appropriately structured transaction would go out at.”
Chicago bonds’ secondary market yields fluctuated last week after the mayor’s announcement.
“I think if we proceeded the goal is to show demonstrable savings” over the current discount rate in the 7% range the city pays on its unfunded liabilities, Brown said.
The city is banking on a rate on the taxable paper in the 5% to 6% range.
While Emanuel’s decision not to run weighs on the evaluation process, other factors have not changed, Brown said. “We always knew we had to raise new revenue [in the future] and that doesn’t change,” she said. “My number one goal [in looking at a pension issue] was to lower the cost for taxpayers of our pension debt and to do it in a responsible way.”
The city would use the proceeds of any deal solely to pay down the unfunded liability.
Brown anticipates a schedule of level debt service repayment and that the proceeds would likely be distributed in a manner that gets all four funds to more than 50% funded.
The current ratios range from a low of 20.1% to a high of 48.3%.
“I think it’s clear we would be using the debt to stabilize the funds and to lower part of the unfunded liability, not to forgo contributions” as the state did with $2.7 billion of its $10 billion 2003 pension obligation bond sale, Brown said.
The infusion of cash would reduce the $28 billion net pension liability which in turn would lower the upcoming contribution spike needed to reach an actuarial based payment.
When the ARC requirement hits in the 2020 for police and fire funds, contributions jump by $280 million. The spike hits for municipal and laborers’ funds in 2022 when payments rise by $310 million.
“As far as I can tell you either have to have a significant tax increase or a significant cut in public safety, a significant cut in basic government services like garbage collection and other things. I’ve rejected those two. I’m trying to present an alternative third option,” Emanuel said.
Brown said she has not had any formal discussions with rating agencies, but sources said the city or its banking advisors have shared preliminary information.
A potential deal would likely use the city’s securitization structure – which carries double-A to triple-A ratings -- or some revenue structure that would garner higher ratings than the city’s general obligation credit, which has a junk Ba1 rating from Moody’s, triple-B category ratings from S&P Global Ratings and Fitch Ratings, and an A from Kroll Bond Rating Agency.
A GO deal is off the table, Brown said. If the city proceeds, Brown said, the aim is still to get into the market with a single deal this year.
“I have a higher degree of confidence we can get the rate we need in this market,” she said.
If a deal comes to fruition – and it would the largest ever from a local government – it would top a crowded city slate for this year that includes a roughly $1.5 billion airport sale, a $750 million Sales Tax Securitization Corp. deal, and $900 million of water and sewer borrowing.
Brown isn’t worried about oversaturation.
Volume has picked up but it’s still short of demand and underwriters are telling her given the depth and size of the corporate market it could absorb the pension issue.
“I just don’t think it would be a problem,” she said.
A POB deal already faced deep scrutiny from the City Council as well as mayoral and aldermanic challengers.
“While we are continuing to ask for the transparency and open discussions that are needed, and not just one meeting, I think it still gets passed as a legacy thing for Rahm,” said Alderman Scott Waguespack, Progressive Caucus chair.
“It’s an opportunity for opposition candidates on the aldermanic side to pressure their alderman to do their homework,” Waguespack said. “I don’t suspect many will listen. Despite the problems I bet it passes with little opposition. I’m hoping that’s not the case and working on other aldermen to vet it more seriously.”
Brown met recently with aldermen. A handout suggested a $10 billion deal – labeled by the city as fund stabilization bonds -- could generate more than $6 billion in long-term savings for the city.
Waguespack late last week sent Brown a letter with his list of questions he wants answered before any vote on POBs.
“For years, we have argued that new, progressive revenue sources are needed, and this proposal will not negate that need…what is the mayor’s plan to create new revenue sources to cover the new debt service this alone will generate?” he asked.
Other questions included: What is the target annual interest rate? What refinancing provisions will the administration seek? If the market goes into a recession within the first years of the deal, what is the plan to fund the city’s debt?
The city will be investing proceeds at market highs with some warning of a future downturn.
“This is the largest bond deal on the municipal level in recent memory and will double the city’s debt service, what do you expect the market appetite will be for something this large? Will the council will have the ability to review and either approve or deny the potential securitization of the issuance?” he asked. ◽
The mayor’s announcement adds another variable to the decision-making process, said Carole Brown, Chicago’s chief financial officer.