Chicago mayor seeks approval of new money, refunding debt
8 min read
Bloomberg News
Chicago Mayor Brandon Johnson asked the City Council to approve $1.8 billion in new money general obligation bonds, with $1.3 billion used for future infrastructure projects under the city’s capital improvement program.
The authorizing ordinance also includes bonding authority for $166 million of retroactive firefighter pay raises and $283 million for settlements, the latter of which have ballooned as the city’s legal department adopts a strategy of settling early rather than pursuing costly litigation.
The mayor and his team also seek approval of $2 billion in authority for refundings, noting that the city has $994 million of GO bonds and $701 million of Sales Tax Securitization Corporation bonds that can be refinanced over the next three years.
The new borrowing is part of a five-year, $18 billion capital plan.
Finance committee members ultimately punted on the bond ordinances until their next meeting in December. In a defeat for the mayor,
The city would start paying debt service on the 2026-2030 CIP debt, the fire retro payments and the settlement payments in 2027, according to a presentation shared by Chicago CFO Jill Jaworski at Monday’s finance committee meeting.
Alderpeople raised concerns about the city’s return to the practice of bonding to pay for settlements; the reveal of the bond repayment schedule a few hours before the meeting; and a perceived lack of transparency with the City Council about how bonding authority is being used.
“The only reason we are bonding is because this is an extraordinary cost, it’s much higher than our typical spend,” Jaworski told alderpeople of the settlement payments, while acknowledging these are “more of an operating cost.”
She added, “We are repaying these over a five-year period. … We’re spreading it out over essentially the budgets that would have had to pay for these costs.”
Alderpeople also dug into the bond repayment schedule.
“I have grave concerns about the backloaded nature of this,” Ward 34 Ald. Bill Conway said at the meeting about the proposed borrowing.
“Adding to the structural imbalance certainly is a potential issue,” Municipal Market Analytics Managing Director Lisa Washburn said. “That doesn’t necessarily mean that the borrowing is not something that they should be doing. I think what’s going to be more important is how that debt is structured.
“The things I would watch out for are capitalizing interest so they don’t have to pay for the debt in the near-term or backloading debt service significantly,” she said. “Either one of those two things would be a concern to me.”
Justin Marlowe, research professor at the University of Chicago’s Harris School of Public Policy and director of the Center for Municipal Finance, said the center has done some analysis of the structure of Chicago’s debt compared to peer cities. “By any measure, Chicago’s debt is more backloaded than any other big city’s,” he said.
Chicago is not too different from New York City and Houston, Marlowe said; but it stands out when compared to other big cities that have a different attitude toward debt.
“If you compare Chicago to Phoenix, San Antonio or Dallas, which try to repay their debt as quickly as possible, Chicago looks like we’re just continuing to backload all of our debt,” he said. “And it makes it appear as though we will never repay this debt.”
The metrics Marlowe and his colleagues looked at most carefully were: years to final maturity; debt service average life; and percent of debt that will be repaid within 10 years.
On the first metric, Chicago’s years to final maturity were longer than any city except New York. On the second metric, Chicago had the longest debt service average life, albeit only slightly longer than New York City’s. And on the third metric, Chicago had noticeably less, about 48%, lagging far behind places like Phoenix, he said.
Meanwhile, as the budget process “seems now to be careening toward more conflict,” Marlowe said, “we’re back to the same complaints, alders saying that they aren’t being consulted. … The decision-making process matters.”
At Monday’s committee meeting, Jaworski outlined a refunding strategy she called urgent, which involves plugging the budget gap with debt service savings.
“We are asking for $2 billion because in addition to calling the bonds at the call date, the other thing that we have been regularly engaged in over the last few years is using a tender process to buy bonds out of the market and refinance them at a lower cost,” she told the finance committee.
Jaworski added, the finance team is in the process of a tender transaction: “We have authorization available to do a STSC refunding which we are going to complete this week,” Jaworski said. “But because we’ve had far more bonds tendered than we have authorization to refund, when this authorization gets passed, we would be able to increase the size of our refunding, and we believe we could increase the savings by approximately $35 million,” which would go into the 2026 budget.
“So this is something that is critical for us, time sensitive. … We were originally planning to sell on Wednesday,” Jaworski said. “But if we can get this authorization, we will complete the sale on Friday, and be able to achieve those savings in addition to the $30 million of savings that we have already budgeted.”
It’s one thing to refinance if you’re going to reinvest the savings in things that create efficiencies in the future, Marlowe noted. Using those savings to plug holes in this year’s budget is a different matter.
“It’s been a part of the strategy for the last few budgets, but it seems like they’re leaning on it even more this year,” he said. “As to what that means for the city’s credit quality, the rating agencies will look at that and they will say it’s a one-time measure. … Bond investors look at this and they say, you can get away with this for a while, but it’s a governance issue. It’s a credit negative.”
Civic Federation President Joe Ferguson pointed to the recent downward outlook revision from S&P Global Ratings following the release of
“This all needs to be viewed against the backdrop of sound budgeting practices generally for a municipality,” Ferguson said. “The S&P negative outlook letter was really particular in identifying a couple of key things that are problematic and all but certain to result in a downgrade and those things are found in the bond authority that is being sought.”
The “poster children” for the “third rails” that S&P highlighted are borrowing for retroactive firefighter pay — “the city represented it had set aside funds for the firefighter retro pay and now it’s simply borrowing” — and borrowing for settlements and judgments, Ferguson said.
Driving home the city’s reliance on non-recurring solutions are Chicago’s increasingly frequent refundings — and particularly its tendency to tap its A-plus and triple-A-rated Sales Tax Securitization Corporation credit for debt service relief, MMA noted in a Nov. 10 outlook report.
“Since 2016, total GO and STSC (debt) has risen by almost 20%, while next-year debt service as a percentage of debt has remained relatively flat, illustrating how refinancing through the STSC has been used to regularly produce near-term savings without reducing principal outstanding,” MMA wrote. “Debt service typically drops from prior planned debt service for a year or two following STSC refundings, as the city resets its near-term obligations to help provide immediate relief.”
Notwithstanding the STSC’s strong legal structure, “its durability could be tested if sales tax growth falters or the city’s structural gap widens to the point that residual sales tax revenues can no longer comfortably maintain essential services and pensions,” possibly creating political pressure to tinker with the STSC’s legally constructed isolation, MMA said, adding, the continued use of that credit in this way only compounds the city’s fiscal challenges.
The City Council authorized $830 million of debt in February, by a narrow vote, noted Howard Cure, partner and director of municipal bond research at Evercore Wealth Management.
Now, using debt to pay for retroactive firefighter pay hikes “is a cardinal sin of budgeting,” Cure said. “Just terrible. No one thinks that’s a good idea, it’s just a bad debt practice and will be noted by the rating agencies.”
Municipalities can’t avoid debt service payments, as opposed to other expenditures, which can be cut, he noted: “This is then embedded in your fixed cost structure. It’s a burden that can’t be adjusted later on, unless they lapse into bad debt practices again, like scoop-and-toss.”
Even as infrastructure funding remains necessary, he said he will be looking at whether deferred maintenance costs are being addressed or whether “glamorous new projects with ribbon-cutting ceremonies” are being prioritized.
Both Ferguson and Cure also pointed to the report recently released by
“If you dig into the numbers, what you will see is a drop in TIF property tax revenue, including in places like the downtown LaSalle TIF district,” Ferguson said. “And that’s important because the spring 2024
It’s fair to question whether so much bonding authority is needed, Ferguson noted, particularly when the city already has unused bonding authority.
“The underfunding of capital improvement is one of those things that tends to be a signal of a city in downward spiral,” he said. And while the city needs to continue to commit there, Ferguson said, it must set guardrails that cannot be breached, to avoid a possible downgrade.
Ferguson will be waiting to see if City Council members come forward with an alternative budget framework that “calls the mayor’s bluff,” and whether City Hall can “have a real conversation about the degree to which we can close the gap through savings and efficiencies before we turn to debt and revenue.”
He added, “There’s actually plenty of time, if not to get this right, to get it far more right than what was presented in the mayor’s proposals.”
But a failure to budget in a sustainable way “would be a riskier move now that the rating is under pressure,” Washburn said. “In terms of the rating trajectory, it matters more today that the borrowing be done in a way that is as consistent as it can be with best practices.
“It’s going to be a big deal if they borrow so that they don’t have to pay debt service in the next year or two,” she added.
Moody’s Ratings rates Chicago general obligation bonds Baa3 with a stable outlook after a revision from positive in September. KBRA rates Chicago GOs A-minus, with a negative outlook.
S&P assigns Chicago a BBB rating with a negative outlook after an
The city’s finance team did not respond to a request for comment by press time.
