The public agency that manages Chicago’s convention center campus will dip into its tax subsidy reserves to cover a shortfall this year and is eyeing debt refinancing to tackle an expected fiscal 2021 tax decline.
The special $30 million fund is designed to offset shortfalls in the Metropolitan Pier and Exposition Authority’s tax collections from hotels, restaurants, auto rentals, and airport taxi departures that might otherwise trigger use of the state sales tax backup. The authority replenished the fund with proceeds from a bond sale late last year.
The fund will cover a now estimated $11.4 million drop in tax collections — to $155.4 million — expected in the fiscal year that runs through June 30 from the reserve. “The authority does not foresee or envision any draw on the state sales tax and believes that the $30 million balance will cover the entire amount,” acting Chief Financial Officer Jason Bormann told the board at its first virtual meeting Tuesday.
The agency revised projections for fiscal 2021 down by $51.6 million — to $122.7 million — as the more dramatic impact will be reflected in the new fiscal year, given the lag in tax reporting. The agency will explore refinancing options. “There will be a need to do a refinancing” so debt service “fits within our existing tax collections,” Bormann said.
The agency has used refinancings to keep debt service closely aligned with tax revenues and had already planned future deals with that aim in mind. The board signed off on modified financial plans at the meeting. Members also approved a new pre-qualified list of underwriters, with 11 in the senior and co-senior pool and 11 in the co-manager pool, both for a five-year term. The competitive selection process was launched in January.
The authority’s debt is repaid with collections from taxes but state sales taxes provide a backup pledge in the event of a shortfall. The backstop provides strong coverage ratios even amid expected declines and that offers some comfort to investors, who then don’t have to worry about default when economically sensitive taxes on hotels and restaurants dwindle.
But that backup is little help to the agency’s ratings because debt service payments are tied to a state appropriation — which was highlighted during the state’s budget impasse between 2015 and 2017. That means the agency’s ratings are linked to the state’s ratings in varying degrees.
Shows and conventions ground to a halt last month and the agency expects at least 75% of scheduled events to be cancelled in July and 50% in August and that’s an optimistic view that may be revised upward, warned MPEA chief executive officer Larita Clark. McCormick Place is currently serving as an alternative care site for COVID-19 patients, set up through a cooperative effort between the city, state and the Army Corps of Engineers.
“We prepared the budget assuming that campus events would begin ramping up slowly in July of this year and then return in full force in September,” Clark said. “Now we know that this probably represents MPEA’s best case scenario for fiscal 2021,” so revisions may be necessary.
The full impact of tax collection losses take some time to reach the balance sheet as the authority’s taxes on hotels, restaurants, and auto rentals collected by the state are reported on a three-month lag. The agency’s levy on airport taxi rides is reported on a one-month lag.
The agency saw the cancellation or postponement of 60 events as of April 20 that would have generated an $897 million of income for the city and state with 467,000 attendees expected and 639,000 hotel stays.
The agency experienced an operating loss of $11.3 million for March. Overall revenues are expected to fall by $93 million to $222.5 million from budgeted levels for an overall operating loss of $36.7 million for the year. The agency, which had budgeted for a $700,000 profit at the end of fiscal 2020, is reducing costs by 60% through workforce reductions and changes in service contracts.
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Tax collections year-to-date through March were reported at $134.7 million, fairly on par with budgeted expectations but again the collections are received on a one-to-three month lag. The level is about $5.5 million more than debt service, while the agency aims for collections to exceed debt service by $8.6 million.
MPEA, owner and operator of the 2.6-million-square-foot McCormick Place, which is the largest convention center in North America, drew $8.6 million from the reserve in fiscal 2019. Tax revenue growth remained solid at 4.5% for fiscal 2019 and was at 3% ahead of the last bond sale in late 2019.
The authority also owns two hotels, the Wintrust Arena and Navy Pier, which are privately operated.
The authority, which is governed by a board appointed by the mayor and governor, once enjoyed a AAA rating from S&P Global Ratings and a AA-minus rating from Fitch Ratings. Both cut the ratings to reflect state-appropriation risk after a technical default occurred in 2016 during the state’s two-year budget impasse that ended in mid-2017.
S&P now rates the agency BBB. It recently shifted its outlook on the state’s BBB-minus rating to negative, which contributed to the decision to move MPEA’s outlook to negative also.
Fitch had most recently rated the bonds BBB-minus but its recent downgrade of Illinois to BBB-minus moved MPEA’s rating to the junk level of BB-plus with a negative outlook.
Moody’s Investors Service already had the rating at the junk level, but is not asked to rate new deals. Moody’s recently moved the outlook to negative in tandem with action on the state’s Baa3 rating.
The authority has about $2.8 billion of debt.
S&P said in its outlook revision on MPEA that it’s also watching “to see trends in MPEA's operations and/or collection for the authority's tax revenues; as well as when social distancing measures are lifted; how quickly the convention and hotel business returns to more normal levels; and to what extent the sales tax revenues may be on a permanent new and lower growth trajectory.”
“If economic activity resumes in the next few months, MPEA management is able to maintain budgetary balance, and authority tax collections return to a stable trajectory, we could revise the outlook to stable,” S&P said.
