The Chicago Park District is returning to the market with a new money and refunding issue to fund projects and free up future revenues to help with supplemental contributions under its pension revamp that staves off insolvency.
The $144 million general obligation deal will raise $56 million of new money and pay down short-term financing used to fund projects. Most of the remainder will refund 2011 bonds. About $10 million will refund 2013 bonds so that series is taxable; the rest is tax-exempt.
The district is holding investor calls this week ahead of an Oct. 5 pricing. Cabrera Capital Markets LLC and Piper Sandler are senior managers. Three series will carry a limited-tax GO pledge and two others an unlimited pledge with alternate revenue sources pledged to repay bonds.
Harbor revenues will repay one series and personal property replacement taxes on corporations, trusts, partnerships and utilities repays another.
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The revamp, however, did stave off any rating erosion and should bolster the bonds’ appeal and the bonds could catch the eye of ESG buyers.
“We do think the pension ‘fix’ makes the bonds more attractive generally,” said John Ceffalio, senior municipal research analyst at CreditSights. “We think the mission of the district will appeal to environmental, social and governance and/or impact-type accounts.”
The Park Employees' Annuity and Benefit Fund reported $848 million of unfunded liabilities and a 28.7% funded ratio for 2020. Applying differing actuarial standards for accounting purposes, the fund reported $1.93 billion in net pension liabilities and a funded ratio of just 15.3% for 2020, S&P said. Before the overhaul it was on course to exhaust assets by 2028.
Kroll Bond Rating Agency revised its outlook to stable from developing on the AA rating ahead of the district’s $146 million taxable refunding last month after the governor signed the legislation.
“The stable outlook reflects the recent pension reform which created a pathway for the district to fully fund its pension plan by 2057,” Kroll said.
Moody’s Investors Service, which has not been asked to rate district deals for seven years because it links the credit off the city’s junk rating due to governance ties, revised its outlook on the district's Ba1 rating to stable from negative in July in tandem with its revision of the city’s outlook to stable.
Moody’s called the legislation a positive for the rating “because it promotes higher contributions to the district's severely underfunded retirement system.”
During their spring session lawmakers signed off on the overhaul laid out in House Bill 0417. It ramps up payments to an actuarially based payment, shifting from a formula based on a multiplier of employee contributions. The statutory multiplier formula is blamed for the city and state’s underfunded pension quagmires. The funding plan targets full funding in 35 years, unlike most Chicago and state pension plans that target a 90% ratio.
The ramp moves up contributions through 2023 before full funding is required in 2024. To help keep the fund from sliding backwards during the ramp period the district will deposit an upfront $40 million supplemental contribution this year. The 35-year clock was set to Dec. 31, 2020 to reach the 100% funded target by 2055.
The new schedule removes the imminent threat of insolvency but will take decades to reach healthy funded ratios. The new schedule doesn't put the fund at even a 40% funded ratio until 2039 and that remains a concern of rating agencies.
The park district’s package establishes a new tier three for employees hired after January 1, 2022, raising their annual contribution to 9% of their salary from 7%. Employees in the new tier three can claim full benefits two years earlier, at 65, and existing tier two employees can opt into the new tier, trading higher contributions for a lower retirement age.
The legislation expands the sources allowed for making contributions from a tax levy to “any source legally available.”
The bill gives the district up to $250 million in borrowing authority that won’t count against its bonding limits based on its tax collections. The district has said it would tap that authority only to cover payouts in the event of a negative cash situation that could occur based on market performance and would require the liquidation of assets.
The reform package followed several years of negotiation between the district and labor after state courts tossed the previous reform deal in 2018 concluding it ran afoul the state constitution’s stringent pension clause that protects promised benefits against impairment or diminishment.
The district’s supplemental contribution total $122 million once it makes the 2021 payment. Property tax hikes will be needed down the line but to ease the burden, the district is freeing up personal property replacement tax revenue through refundings.
“The park district will continue with this practice with the 2021 refundings and in the future to free up additional PPRT revenues to supplement contributions toward the pension” fund, the district reports in offering documents.
One of the series in the deal for $21.6 million will remove the PPRT-alternate source and solely carry a limited tax pledge.
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Despite the pension strains and COVID-19 pandemic hits to program-related revenue, the district managed through a $99 million 2020 revenue hit from the shut-down of park programs and events at Soldier Field, home of the National Football League’s Chicago Bears, by trimming expenses and an $18 million draw on reserves.
Property taxes made up about $300 million of its nearly $500 million original 2020 budget but fee related income from programs, harbors, parking and events makes up about 19% and that tanked.
Some programming resumed in the summer of 2020 but capacity restrains remained in place and harbors were closed for most of the summer. With city and state restraints lifted in June this year and revenues on the upswing, the district expects a surplus.
S&P maintained the negative outlook warning that with lingering pandemic impacts given the rise of cases due to the Delta variant and pension pressures the rating could be strained.
“Despite the recent passage of pension legislation that will provide additional tools to help stabilize the plan's funding trajectory, the district's pension fund remains funded at distressed levels and, further, we have yet to see clear evidence of fund stabilization in the form of, for example, stabilization in funding levels,” S&P said adding it hopes to resolve the outlook next year.
The district's most recent tax-exempt issue last year has performed well but is currently evaluated well behind the double-A GO bond levels.
The non-callable 5% 1/1/30 was priced at 148 basis points over the AAA and as of Monday was evaluated by BVAL at 39 bps over the AAA and 22 bps over their AA GO benchmark yield, according to Ceffalio and Pat Luby, senior municipal strategist at CreditSights.
“With the current weakness in the Treasury and municipal bond markets, we would expect the 10-year maturity in the new bonds to be priced in the neighborhood of +45 to +50, which may be cheap enough versus comparably rated local GOs to attract income buyers, but we would expect the new bonds to underperform comparably rated GO bonds,” Ceffalio and Luby said.
The district hits the market with the longer term use of the district-owned Soldier Field in play.
Discussions are heating up over whether the National Football League's Chicago Bears will remain at stadium just south of downtown on the Lake Michigan shoreline or seek out a new stadium. Speculation over a move to the suburbs rose after it was disclosed that the team is a bidder for Arlington Park racetrack which is up for sale.
“Were this to occur, we think the direct fiscal effects on the district would be limited,” S&P said.
The Bears pay approximately $6.5 million per year in lease payments under a lease that runs through 2033 and the district otherwise primarily benefits from parking fees at Bears events.
“Were the Bears to leave Soldier Field, the district would then be able to book other events from August through October, which we believe could generate enough revenue to offset losses from the lease and parking revenues that the Bears currently generate,” S&P said. The stadium is also home to the Chicago Fire soccer team.
Mayor Lori Lightfoot wants to keep the team and offered to make improvements that “makes sense for taxpayers.” Hotel taxes and a city and state subsidy repay $400 million of bonds issued in 2001 through the Illinois Sports Facilities Authority to expand the stadium.
The district is one of the largest municipal park districts in the world with 8,800 acres of green space in 600 parks, 245 field houses and 26 miles of lakefront property. District-owned land houses the Museum of Science and Industry, Field Museum of Natural History, DuSable Museum of African American History, Adler Planetarium, John G. Shedd Aquarium, and the Art Institute of Chicago.
Update: The story was updated with comments on secondary market trading levels.
