Chicago aldermen delayed a vote on $830 million of general obligation bonds at Wednesday's City Council meeting, but the move only postpones the decision until the next meeting on Feb. 26.
The bonds, which Mayor Brandon Johnson is promoting, would finance the city's capital improvement program, which includes infrastructure upgrades.
Some aldermen and the state comptroller have raised issues with the structure of the bonds.
Ward 9 Alderman Anthony Beale and Ward 15 Alderman Raymond Lopez moved to defer and publish the ordinance authorizing the bonds, a parliamentary maneuver that means the vote will likely happen at the next City Council meeting.
The City Council voted down a motion to send the ordinance back to the finance committee for changes, a sign that Johnson probably has the votes to pass the measure when it comes up again.
"Which really would be a travesty," Illinois Comptroller Susana Mendoza told The Bond Buyer. "Hopefully there will be further scrutiny of this deal. The reality is that some of these aldermen are going to be dead before the consequences of their vote have to be paid for. I think it's very irresponsible of them to be structuring a bond deal in this way."
The city's finance team had no immediate comment on the outcome of Wednesday's meeting.
"The debt structure is significantly back-loaded; there are no interest payments due for the first two years, and it's another 18 years before principal starts to be repaid," said Lisa Washburn, managing director at Municipal Market Analytics. "[The payment schedule] adds to the cost of the debt."
Fitch Ratings assigns Chicago's GOs an A-minus rating with a stable outlook following a July upgrade. It affirmed that rating — and the AAA rating on the city's Sales Tax Securitization Corp. bonds —
Rating agencies are taking a wait-and-see approach to the bond sale.
"While as a matter of public finance practice KBRA does not generally take a favorable view of backloaded principal amortization structures, we will reserve judgment until we speak to the city about the specifics of the planned financing," said Linda Vanderperre, senior director in KBRA's public finance ratings group.
Vanderperre noted that KBRA's January downgrade reflected "the mounting challenges confronting the city" and cited as a key area of concern Chicago's reliance on one-time budgetary fixes that perpetuate structural imbalances.
Michael Rinaldi, head of U.S. local government ratings and senior director at Fitch, said his team had yet to review the structure of this particular debt. But "it is quite common for local governments to structure debt service of a proposed bond offering to wrap around their existing debt service to avoid large swings in the debt service tax rate or tax levy from year to year," he said.
Rinaldi said Chicago's credit quality continues to suffer from its very high debt and pension liabilities. Fitch's rating sensitivities center on fiscal management practices and sizable structural budget gaps, which need to be addressed without relying on one-time fixes while maintaining improved pension funding levels, he said.
"The proposed GO offering has been part of their debt issuance plans for some time and was considered in our GO and STSC rating action in November," Rinaldi said. "We would not expect issuance of this debt to adversely affect their rating."
Moody's pointed to its January credit opinion, which noted revenue increases have been insufficient to prevent ongoing budgetary challenges.
"The city will need to achieve further adjustments to continue its positive momentum," Moody's said.
"Debt service is incorporated into our credit analysis primarily through our analysis of a city's fixed costs," said Moody's VP and senior analyst David Levett. "We use an implied debt service in our calculation, which represents the annual cost to amortize its debt over 20 years with level payments."
S&P had no comment by press time.
During a brief but heated debate Wednesday, alderpeople argued whether the GO bonds represent a run-of-the-mill bond sale or "fiscal insanity."
"The terms of this bond are ridiculous," Beale said at the meeting. "The first payment is not due until a new administration takes office. … If it's so good, let's pay it now. … Some of you all have been promised the world to vote for this bond issue. Are you all still waiting on the promise that you were given to vote for the last administration's bonds?"
"Our financial situation is dire," said Ward 34 Alderman William Conway. "Two prominent credit agencies downgraded Chicago to just above junk status. … And one reason they cited was that Chicago carries the heaviest debt load of any major city in the United States. … It is dishonest to suggest that there is only one way to finance road improvements."
The city's finance team and Finance Committee Chair Pat Dowell have stressed that the downgrades were not related to the city's capital budget, which these GO bonds would fund. Rather, they said, credit rating agencies have voiced concerns about Chicago's pension debt crowding out other spending.
"With uncertainty becoming the new normal when it comes to our federal funding streams … and an overwhelming number of voices providing feedback on the city's financial state … I urge you to look at the necessity [of] this bond issuance," Dowell said Wednesday, noting that $830 million is the ceiling on the debt and the city may issue less.
Conway said due to the payment schedule on the bonds, the issue will cost more than $2 billion over the life of the debt.
"Most of the credit rating methodologies do speak about it being a credit negative to have severely backloaded debt," said MMA's Washburn. She acknowledged the city does need to fund its capital budget, but added, "It's just how they're choosing to repay that debt, and what budgets are going to have to pay for that debt. It increases the burden for future taxpayers."
Some alderpeople criticized the late disclosure of information about the payment schedule, which they said they learned about after the finance committee meeting.
"It felt like we got snookered after the vote," Ward 32 Alderman Scott Waguespack said.
Mendoza drew a comparison to the
"The aldermen who are supporting this are saying this is no different than anything we have done in the past," she said. "It's not how it's always been done, but if it were, we should stop doing it. … You cannot just put this on the mayor. The City Council should be heeding these warnings from independent market analysts as well as the smoke signals that rating agencies have been sending out pretty much every day."
But Ward 28 Alderman Jason Ervin argued, "this is how you do financial planning and debt … if you're not in a position to increase the revenue."
"And it's clear that we don't want to do that," he said, a reference to the City Council's recent resounding rejection of the mayor's proposed property tax hike.
"When it's time for the Black and Brown communities in the city of Chicago to see something, now we want to pump the brakes," he said. "We don't want to raise revenue, but we still want to have the sidewalks and the streets fixed, all of those things."
Mendoza said she is concerned about the ripple effects on the state of fiscal backsliding by the city. "They're going to come to the state of Illinois and say we have a responsibility to bail them out," she said. "The governor is having to be the bad guy here.
"The city makes things monumentally worse for itself and then thinks that the solution is to come to Springfield and ask for a bailout," she added. "Well, that's not going to happen."
