June 18, 2015
On June 17, 2015 the Chicago City Council approved the largest borrowing of Mayor Rahm Emanuel’s tenure, totaling $1.1 billion. The issuance pays for the current costs of refinancing the City of Chicago’s variable rate debt, ending its outstanding swaps, extending the life of other long-term bonds and paying for a variety of judgements and settlements.
Newly appointed Chief Financial Officer Carole Brown presented the Mayor’s debt restructuring plan to the Finance Committee on June 15, 2015. Although the Committee debated the ordinance authorizing the borrowing at length, the full City Council approved the measure two days later with no debate and only three “no” votes. The votes in opposition were reportedly based on concerns that the borrowing continued previous negative budget practices and would be difficult to discontinue due to ongoing budget deficits.
In her presentation to the Finance Committee, Ms. Brown explained that the bond ordinance would allow for three actions: the inducement to sell bonds to support 2015 capital spending; permission to hire a dissemination agent to assist the City with its ongoing disclosure requirements with the SEC; and the authorization to sell $1.1 billion in new bonds.
With the City Council’s approval on June 17, it is expected that Chicago will enter the bond market immediately to sell the new bonds and use the proceeds to pay off its short-term lines of credit that currently have more than $900 million outstanding.
Prior to this authorization, the largest bond offering by the City under Mayor Emanuel was in March 2014 totaling $883.4 million. The proceeds of that issuance were split among capital projects, bond refunding for economic savings and some operating costs. The $1.1 billion of bonds to be sold this year do not include any capital funding and are intended to refinance debt and cover operating costs. The following expenses, according to Ms. Brown’s presentation, have already been paid for using the City’s short-term debt and need to be restructured for repayment using long-term bonds.
- $192 million to pay for costs associated with terminated swaps;
- $181 million to end the lease agreement associated with the CTA’s Orange Line;
- $170 million to “scoop and toss” principal due in FY2015 for budgetary relief;
- $151 million to refinance remaining General Obligation variable rate bonds;
- $85 million to pay for a variety of judgements and settlements against the City;
- $75 million to fund retroactive pay increases owed to police officers;
- $40 million to account for fees associated with variable rate debt from its bond rating downgrade; and
- $35 million to make the annual debt service payment on the Michael Reese property.
The bond issuance will also include an estimated $170 million to make the interest payments on the loan for the first two years of the bonds, also known as capitalized interest.
Many of the costs associated with the borrowing came after Moody’s Investors Service downgraded the City’s bond rating below investment grade. The City was forced to refinance all of its outstanding variable rate General Obligation debt totaling $918 million and pay termination costs for its swaps portfolio due to the downgrade. Although a large portion of the variable rate debt was refinanced using new fixed rate bonds earlier this month, $151 million was repaid using short-term lines of credit. The City’s was also charged $192 million in termination costs by the counterparties to its swaps that were associated with the variable rate bonds as well as $40 million in other fees related to the variable rate debt. Moody’s issued a report on Friday, June 11, 2015 calling the elimination of Chicago’s variable rate debt and swaps a credit positive.
Due to the downgrade, the lease agreement on the CTA’s Orange Line also increased in cost. The City paid $181 million to end the contract that will be refinanced as part of the new borrowing.
Although the Mayor has publicly stated his intention to end the practice of “scoop and toss” refinancing – a form of borrowing for operating costs where the city uses long-term debt to pay for the principal due on other bonds to balance its budget –the new bonds will be used to fund $170 million of old debt due to be repaid in FY2015. The City expects to issue another $55 million in “scoop and toss” debt during the current fiscal year and another $300 million over the next three years before ending the practice in FY2019, according to materials made available to the City Council this week.
Another practice that the Mayor has pledged to end is the use of borrowing to pay for judgements and settlements but $85 million of the new authorization will be used to pay for amounts owed due to litigation against the City. The majority of these costs, totaling $62 million, were paid to the private operator of the City’s parking garages using shot-term debt. The settlement was associated with the opening of the new parking garage in the Aqua building in violation of the terms of the agreement between the City and the garage operator. The private company that operates the city’s parking meters was also be paid $19 million to settle another contract dispute using the short-term lines of credit. These costs will now be refinanced into long-term debt as part of the authorized bond issuance.
Based on these descriptions the City is using long-term debt to fund $767 million or roughly 70% of the new funds to pay for operating costs (judgements, settlements, swaps terminations, debt service and salaries).
Beyond the $1.1 billion authorization, the ordinance also acts as an inducement to sell future capital bonds, allowing the City to proceed with capital projects, then later sell long-term capital bonds to reimburse the project cost. In her presentation to the Finance Committee, Ms. Brown explained that by selling the bonds later this fall the City would reduce its cost of borrowing by not incurring near-term interest payments. According to the ordinance, the reimbursements are not expected to exceed $300 million. The final amount of the capital borrowing will not be known until the ordinance to approve the issuance of the bonds is presented to the City Council later this year, but the current measure allows for the capital spending to commence based on the Council’s intention to authorize the bonds on a later date.