Investors and analysts gave Chicago high marks for its use of federal COVID-19 relief and noted concrete signs of fiscal progress, but crime, long-term return-to-work trends, and debt pose headwinds to the upward momentum.
The assessment came from market participants who attended the annual Chicago Investors Conference, launched a decade ago by former Mayor Rahm Emanuel's administration and continued by his successor Lori Lightfoot.
Investors from at least 50 firms holding more than half of the city's debt and seven of the top 10 municipal buyers were among the roughly 280 registered attendees last week, said Chicago Chief Financial Officer Jennie Huang Bennett.
The city sought to put its best foot forward in promoting its bonds as a good long-term investment, with a fiscal trajectory on the upswing after hitting a pension funding milestone to actuarially based contributions, deep investments in social programs, and a new source of revenue on the horizon from its first casino license.
"We do believe the city's message here is accurate," said John Miller, head of municipals at Chicago-based Nuveen, which is a major holder of paper from various city and sister agency credits. "Chicago has made tremendous fiscal progress over the past few years and managed the uncertainty of the pandemic well. Federal aid has definitely helped, but they've deployed these funds responsibly."
"The city has made a lot of progress in recent years financially and some of that is due to the generous" federal pandemic relief "but some of it is due to better decision making too," said John Ceffalio, senior municipal research analyst at CreditSights. "I think the city is more solidly investment grade than it was before the pandemic."
Chicago GOs have underperformed compared to local GO indexes and CreditSights sees the roughly 138 basis point spread on the city's 10-year GOs to Bloomberg's BVAL yield curve as "compelling." Chicago is rated BBB-minus by Fitch Ratings, A by Kroll Bond Rating Agency, Ba1 by Moody's Investors Service, and BBB-plus by S&P Global Ratings.
While on the upswing, deep near- and longer-term strains still weigh on market sentiment.
"We would like to hear more from the city on how it will be addressing crime in the near term and prioritizing public safety," Miller said. "They did a very good job discussing their plans to address crime over the longer term, but the short-term focus deserves greater urgency. There is a level of concern about rising crime and making sure residents and visitors feel safe."
"It is still quite a weak big city credit compared to its peers," Ceffalio said noting the city's high fixed costs and also weak pension funded ratios leave it at risk to investment returns.
The August 11 conference followed Lightfoot's release of a budget forecast that offered a rosier near-term picture of the city's finances with a
The city will follow with a $200 million customer facility charge refunding in September and an up to $900 million general obligation sale in the third quarter that will offer the city's first environmental, social, and governance bond of between $100 million and $150 million. Another $1.2 billion of issuance under the city's water and wastewater credits is also in the works.
Making the case
"We have cleared the city's budget of decades of deferred liabilities. We are now living within our means," Lightfoot said during her keynote luncheon address that followed various tours of city sites including O'Hare's terminal 5 makeover and the sites for a temporary and then permanent downtown casino.
Bennett kicked off the deeper dive into the city's fiscal condition.
With a roughly $2.28 billion contribution to its
Overall, debt has fallen by more than $340 million over Lightfoot's term, which began in 2019, with that number expected to grow to $860 million over the next year. The city's various reserve accounts have reached a peak of $1.1 billion — 22% of the corporate fund budget. The city expects a $134 million surplus this year and most will be set aside in an assigned fund balance account.
"The Chicago financial turnaround is now and we have the numbers to prove it," Bennett said.
While a projected budget gap of $474 million potentially looms in 2024 and $554 million in 2025 using a "baseline" forecast, Bennett said the numbers don't reflect future revenue from the casino — that is expected to generate at least $200 million annually once up and running — or a full post-pandemic revenue recovery the city is betting on in the coming years.
Market participants believe the city's true test will come once its $1.9 billion of American Rescue Plan Act aid is no longer propping up budgets — a worry they have for local and state governments across the country. Bennett counters the city's projections fully incorporate the end of federal pandemic relief. "The city has a plan for long-term stability," she said.
The city also promoted its new Joliet water contract, with a long-term value of $1 billion, and laid out details of Lightfoot's $750 million Invest South/West program and the $1.2 billion Chicago Recovery that spreads investments across neighborhoods to bolster affordable housing, mental health services, the tree canopy, jobs, and crime prevention.
Market
"The city is in a different place than it was five or six years ago and the magnitude of the problems the city is facing seem much more manageable," said Dennis Derby, senior municipal research analyst and portfolio manager for the global fixed income research team at Allspring Global Investments. "I think it's reflected in the city's narrow spreads. It's reflected in the budgetary presentations. It's reflected in the communication that investors get from the city."
ARPA relief deserves much of the credit for putting the city in the position to make progress as it "has lifted all boats," Derby said. "But we heard from the city that it realizes these funds are temporary and the city has shown a willingness to explore different solutions on revenue."
"The theme I got out of today is that everything really is predicated on the massive federal aid but I think they've done a good job trying to leverage the federal money as an investment in bigger initiatives and that's to their credit," said Triet Nguyen, vice president strategic data at DPC Data Inc.
But, Nguyen said the market is also looking for more evidence that "structural issues have been resolved" and that might not be known until the federal relief is exhausted.
The city did a good job painting an appealing picture, but Howard Cure, director of municipal bond research at Evercore Wealth Management LLC, said he'd like a deeper discussion into some of the negatives.
The city counters big-name corporate departures, like Boeing and Citadel, with the names and numbers of those moving to or expanding in the city — more than 170 companies including Google — but Cure thinks the city shouldn't shy away from a discussion of the reasons behind the departures that make the headlines.
"I understand they are trying to portray everything in the best light, but if there's a pro-Chicago, then there's an anti-Chicago. It would interesting to get a comprehensive view on that" given the impact on the city's larger tax base that is central to long-term fiscal stability, Cure said.
During a panel discussion where sister agencies laid out fiscal updates, Chicago Public Schools left out of the discussion the looming shift to an elected school board, which some investors worry will damage fiscal strides that have helped move the junk-rated district closer to investment grade.
Miller has concerns over CPS' future given enrollment losses during the pandemic. "The district's revenues are somewhat insulated from enrollment losses, but it's unclear how much budgetary flexibility the district will have to navigate this challenge," he said. "Positively, they're in the strongest financial position we've seen in years."
One panel on key economic initiatives dug into the city's violent crime troubles. The trends reflect national struggles in urban areas and Chicago has made some headway this year on some of the most troubling 2021 numbers, but it's a concern that's front-and-center for investors as it could impede the post-COVID revenue recovery.
"The city's focus on recruiting new businesses and jobs to downtown and other areas of the city is important to grow the tax base and revenues and to sustain the population," Miller said, but public safety issues remain.
Crime worries extend to the city's sister agency — the Chicago Transit Authority — which has been stung by headlines over shootings and other attacks. "The increase in carjacking and incidents on the CTA make it much harder for people to feel comfortable returning to work downtown, and feel safe returning to normal activity," Miller said.
For Lightfoot, the conference offered another opportunity to take her case directly to bondholders as she faces re-election next year. Lightfoot was new to elected office when she won in 2019 and investors liked what they heard about her fiscal plans to honor rising pension contributions and move toward structural balance, but there was little proof whether she would stick with those goals.
Lightfoot is now a familiar face and has made good on some of the promises. "The mayor appears to have a good command of the city's fiscal status and has hired and retained a strong fiscal team," the CreditSights report said.
