Chicago has finalized short-term borrowing plans to cover $450 million of planned 2020 budget relief that leaves the door open to scrapping scoop-and-toss debt restructuring should new federal COVID-19 pandemic aid come to fruition.
The city will pay 1.95% for the GO borrowing being done through a line of credit provided by JPMorgan.
JPMorgan offered the lowest rate, said Kristen Cabanban, city finance spokeswoman. The city reached out to several banks for rates on either a credit line or note issue, and market sources said the city was under the gun to either use short-term borrowing or restructure debt ahead of an early January debt service payment to close a 2020 budget gap.
The short-term borrowing, first laid out by Chief Financial Officer Jennie Huang Bennett in city council hearings in November, buys the city up to one year to avoid a long-term, scoop-and-toss debt restructuring to fully close an $800 million gap due to COVID-19 pandemic tax wounds.
Bennett told aldermen the finance team was “looking to time” a refunding, restructuring and new money once it had a “better understanding of the federal landscape,” referring both to prospects for a relief package and a major federal infrastructure package after President-elect Joe Biden takes office in January.
The latest stimulus/relief package with congressional momentum
Mayor Lori Lightfoot’s administration has not said how she would use the federal funding if it eventually comes to fruition but Bennett has said the debt restructuring is among the top options. If federal aid doesn't come through and absent some new infusion of revenue or dramatic tax recovery, the city would roll the short-term borrowing into a debt restructuring.
The 2021 budget relies on an additional $500 million to close a $1.2 gap with about $800 million of the deficit due to pandemic strains and $400 million to growing structural pressures.
The 2021 fix counts on $500 million of structural solutions and $700 million of non-recurring maneuvers like the debt relief. The city is raising property taxes by $94 million, will raise some other taxes, undertake management efficiencies, free up surplus tax-increment financing dollars, dip into $900 million of reserves for about $30 million.
The 2020 hole is being closed through the debt relief and federal CARES Act funding that covers eligible pandemic costs.
If the city goes through with the full refunding and restructuring plan for 2020 and 2021 relief and refunding savings, it would tack three years on to the city’s debt service schedule, extend the life of the debt being restructured by eight years and add $1 billion to future debt service. The traditional refunding piece will generate sufficient savings to blunt the present-value penalty so the overall transaction is projected to generate about $30 million of present-value savings.
The council last month approved the $12.8 billion budget that includes a $4 billion corporate fund and $3.9 billion of total borrowing authorization.
The council authorized up to $1.6 billion of new-money bonding over the next three years to support a proposed $3.7 billion capital plan. The restructuring and refunding authorization totals $1.9 billion under the general obligation and Sales Tax Securitization Corp. debt with plans to issue most under the STSC junior lien. About $950 million of the $1.9 billion represents the scoop-and-toss. An additional $400 million of refunding authority gives the city room should it opt to tender some debt or if additional refunding candidates are available, bringing the total authorization to $3.9 billion.
Bennett defends the scoop-and-toss as preferable to using reserves as the city attempts to preserve its bond ratings, future flexibility to manage pandemic expenses and losses and to stay on track to reach structural balance by 2023.
Moody’s Investors Service
Kroll Bond Rating lowered the outlook on its A rating to negative from stable Tuesday.
"The negative outlook reflects a constrained, COVID-19-induced, revenue environment, with uncertainty as to when the pandemic’s economic impact will subside. Reduced revenue generating activity comes at an inopportune time as officials strive to achieve structural balance by FY 2023 and sharp escalation in pension funding requirements looms," Kroll said.
Municipal Market Analytics warned this month in a weekly report the restructuring adds to the city’s credit and spread risks so using potential future federal aid to cancel some or all of the restructuring could benefit bondholders.
“Although most state and local borrowers are using scoop-and-toss refundings to create near-term budget space, the financial transaction originally proposed by Chicago would toss debt service a very long way, almost surely to the detriment of related financial flexibility and budget balance. Chicago bondholders should expect a higher risk of downgrade and/or spread widening over the next few months,” MMA said.
The city’s post-refunding/restructuring debt load covering the GO and STSC credits will total $11 billion.
