Chicago POB Deal Still in Play

The Bond Buyer - - Front Page - By yvette ShieldS

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. ◽

Doug Good­man

The mayor’s an­nounce­ment adds an­other vari­able to the de­ci­sion-mak­ing process, said Ca­role Brown, Chicago’s chief fi­nan­cial of­fi­cer.

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