Chicago issues invitation to investors

Bonds

Chicago will host a virtual investors’ conference May 6 with the municipal market looking for insights into how the city will use its $1.8 billion of new federal relief, manage rising pension payments and the long-term COVID-19 fiscal fallout.

The city has so far only sent out a “Save the Date” for the May 6 conference that is open to bondholders, real estate investors, and financial stakeholders. An agenda is not yet available.

The city will likely field a wide swath of questions from market participants covering use of the new stimulus dollars and whether the infusion of cash means the administration will scrap scoop-and-toss restructuring plans for budgetary relief.

Looming pension contribution spikes to bring two more funds up to an actuarial contribution and a new state mandate to raise a cost-of-living benefit for firefighters also are weighing on investor minds. Moody’s Investors Service issued a report labeling the latter a credit negative on Friday. The city carries a BBB-minus from Fitch Ratings, an A from Kroll Bond Rating Agency, and BBB-plus from S&P Global Ratings, all with negative outlooks.

For investors, questions over whether the city still will meet a 2023 target to reach structural balance and longer-term challenges including pandemic-related trends on downtown properties also await the finance team led by Chief Financial Officer Jennie Huang Bennett.

“I am very interested to see how the city uses its money and how disciplined they can be in trying to close their structural deficit versus funding expanded programs that will require steady revenues beyond federal aid,” said Howard Cure, director of municipal bond research at Evercore Wealth Management LLC.

“The city is going to get a lot of cash so I’m not as worried about the short-term. The credit factor I’m most worried about is how the city might deal with the impact of the pandemic on downtown commercial and industrial real estate” given the county assessor’s shift to those areas away from residential in assessments and the pandemic’s impact “as well as the higher end residential real estate,” said Richard Ciccarone, president of Merritt Research Services.

“What precautions are being taken in the event there is a flight?” Ciccarone asked. Property taxes are a key revenue source for the city with much of the revenue going to cover debt and pensions and raising rates draws a political backlash.

How the city will manage a looming $300 million spike in 2023 and whether it will use some of the stimulus to curtail planned scoop-and-toss borrowing also loom large on Ciccarone’s list of questions.

Chicago bonds don’t trade frequently and Refinitiv market strategist Daniel Berger hasn’t seen recent trades. He believes they likely have benefitted from current market conditions. Illinois is trading around a 100 basis-point spread to the Municipal Market Data’s AAA benchmark and Chicago Public Schools are trading around a 105 basis point spread. Both are 15 to 20 basis points narrower than just a couple weeks ago, outperforming the general market.

“We’ve seen increased optimism caused by the stimulus and optimism about the economy and there’s been inflows from high-yield buyers,” Berger said.

High-yield funds pulled in $821 million in the latest reporting week, according to Refinitiv Lipper.

The investors’ conference was begun under former Mayor Rahm Emanuel and continued by Mayor Lori Lightfoot after taking office in 2019. Past events have offered presentations and question-and-answer sessions with the mayor and other issuing authorities, such as the Chicago Public Schools, park district, and transit agency. While typically held in late summer or early fall, last year’s conference was put off amid the city’s management of the pandemic.

Stimulus and budget
When asked recently whether the city would cancel its scoop-and-toss plans given the looming infusion of new aid, Lightfoot remained non-committal but did stress that the goal is to avoid adding to structural budget struggles.

“We are looking at a range of different things that we will do,” Lightfoot said. “Obviously we are getting discretionary funds … . We are looking at lot at what happened in 2008 and 2009 when we had a similar, but smaller-scale economic meltdown and making sure that we understand the past so we don’t repeat any of the problems.”

When asked recently whether the city would cancel its scoop-and-toss plans given the looming infusion of new federal aid, Chicago Mayor Lori Lightfoot remained non-committal but did stress that the goal is to avoid adding to structural budget struggles.

Bloomberg News

Lightfoot referenced former Mayor Richard M. Daley’s spend-down of federal dollars from then President Obama’s stimulus package and then his use of most of the funds raised from the $1.1 billion lease of the meter system. That deal has drawn the public’s ire as rates continue to rise and the city has little funds left to show from handing it over to private operators.

“We don’t want to repeat that history … we absolutely want to look at ways we can address our structural fiscal challenges,” Lightfoot said. Lightfoot expects to bring a plan to the council in May or June.

The City Council late last year approved $1.92 billion of refunding and restructuring of general obligation and Sales Tax Securitization Corp. debt.

The city will push off $450 million of debt service owed in 2020 and $500 million owed in 2021.

The restructuring helps close an $800 million 2020 gap due pandemic-related tax blows and a $1.2 billion 2021 gap that’s due to $800 million in tax hits and $400 million in expected structural costs.

Late last year as debate heated up over direct relief for tax losses after President Biden’s November election, Chicago turned to short-term borrowing through the Federal Reserve’s Municipal Liquidity Facility to cover the $450 million of debt savings for the 2020 budget to leave the door open to avoid the restructuring if more aid came to fruition.

If the city goes through with the full refunding and restructuring plan for 2020 and 2021 relief and refunding savings, it would tack three years on to the city’s debt-service schedule, extend the life of the debt being restructured by eight years and add $1 billion to future debt service.

The traditional refunding piece will generate sufficient savings to blunt the present-value penalty so the overall transaction is projected to generate about $30 million of present-value savings.

Pensions
The city must cover a $300 million jump in contributions as the ramp to an actuarially based contribution hits for the municipal and laborers fund like it did for the police and fire funds in 2020. The city has $31.8 billion of net pension liabilities with its funds ranging from 18% to 42% funded.

The city must now absorb and additional $18 million to $30 million annually and about $800 million over the next three decades under HB 2451 that Gov. J.B. Pritzker signed over Lightfoot’s objections on April 5. It raises the cost-of-living adjustment to 3% from 1.5% for a group of firefighters who missed a cut off based on their birth date.

“The legislation is credit negative for the City of Chicago (Ba1/negative) because it will cause the city’s reported unfunded pension liabilities, and thus its annual contribution requirements, to rise,” Moody’s wrote in a report published Friday. “Pensions are the largest credit challenge facing Chicago.”

Moody’s applies its own formula to calculate the pension tab known as the adjustment net pension liability which for Chicago is at $46.6 billion, the highest relative to its revenue among all large local governments. “While significant, the roughly $800 million liability increase stemming from House Bill 2451 that the city has forecast is not outsized relative to the scale of the city’s already extremely-high liabilities,” Moody’s said.

The birth date had repeatedly been changed to encompass firefighters within the tier one group of benefits. The last change in 2016 moved the birth date to 1966 from 1955 and resulted in a $277 million increase in the actuarial accrued liability, Moody’s said.

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