CHICAGO – Chicago Mayor Rahm Emanuel’s decision Tuesday not to seek a third term stunned the municipal market, raising uncertainty over the city’s future fiscal stewardship.
“I’m not shy, and together we’ve never shied away from a challenge,” Emanuel said when he announced the decision with his wife Amy Rule by his side. “Today, the time has come to make another tough choice. As much as I love this job and will always love this city and its residents, I have decided not to seek re-election.”
The decision stands to shake up future city fiscal, tax, and bonding policies as well as efforts to increase funding for city pensions. It comes with broad bond market implications because the mayor controls the leadership of other borrowing entities. They are the Chicago Public Schools, the Chicago Park District, the Chicago Housing Authority, and the Chicago Transit Authority.
The announcement also raises more immediate questions over whether the Emanuel administration will move forward with a $10 billion pension obligation bond issue that could prove a harder sell with the buyside now that uncertainty looms over the city's future leadership. The city's finance department could not immediately be reached to comment. A decision had been expected as soon as this week.
The city’s decision, market participants say, will hinge on rating agency analysis because the city wants to preserve its general obligation rating and higher-grade securitization credits under a structure that would likely tap the securitization.
Market participants were caught off guard. Many investors who had attended the Aug. 2 annual city investors’ conference expected Emanuel to run, with local market participants expecting a tough contest in which Emanuel would be forced into a runoff. Still, their money was on Emanuel whose campaign would be helped by a $10 million war chest and the lack of a high-profile rival.
“It’s certainly a shock to Chicago and investors are not going to like it because Rahm has proven to be practical when it comes to city finances. I don’t know who's going to be front-runner now so there’s a lot of uncertainty at a critical time for the city as we are just getting our finances in order,” said Brian Battle, director of trading at Chicago-based Performance Trust Capital Partners.
“He’s a known commodity,” he added. “Without Rahm’s plan, we don’t know whose plan is going to be deployed” on pensions. “He came into a very difficult position and did some unpopular and difficult things to do as a politician” like raise taxes. “Rahm Emanuel was the guy who did it, so you have to give him credit for raising revenues.
“The city has also done some financial engineering that’s provided some short-term solutions,” Battle added, citing its launch with state approval of a securitization program -- along with other home rule units – leveraging taxes that flow through the state. The city is refunding $2.7 billion of general obligation and sales tax debt through the program and is considering using it if it sells POBs.
"I’ve been pretty impressed with the mayor,” said Howard Cure, director of municipal bond research at Evercore Wealth Management LLC. “He inherited a very structurally weak budget and I think he’s made a lot of improvements and is striving to achieve structural balance while dealing with pensions and getting rid of bad debt practices.
“I have less comfort in the unknown. There’s a lot of anxiety in the unknown,” Cure said. With Emanuel, “you know what you are getting and there’s still work to be done but the city is on the right track.”
The next mayor will be challenged to maintain fiscal discipline, win labor concessions, be supportive of the business climate, improve schools and deal with public safety problems.
Emanuel received credit at the city’s August conference, even from buyside representatives who typically are negative on the city’s fiscal condition, for fiscal gains on the budget, reserves, and enactment of dedicated revenue streams to begin tackling the $28 billion net pension liability tab.
The structural deficit is down to $98 million from $635 million when he took office and reserves are up to $155 million from $34 million in 2013.
Pensions remain Chicago's most daunting challenge. The city will contribute $1.18 billion next year, rising to $1.67 billion in 2021 as actuarial funding requirements hit for two funds and then $2.1 billion in 2023 when the two other funds are required to receive actuarially based city contributions. The city has raised property taxes, enacted a water utility charge, and 9-1-1 fee to fund higher payments, but has not said how it will tackle the upcoming funding spikes.
Chicago’s finance team has said a $10 billion pension borrowing could raise the funded ratio to more than 50% from 26.5% and ease the looming payment spikes but would not erase the looming need for additional tax revenue.
The new mayor will inherit a more stable CPS that has erased a $1 billion deficit through new state funding and property tax levies for pension and capital funding but the junk-rated district’s stability is precarious.
Emanuel, who represented Chicago in Congress before serving as chief of staff to President Obama, jumped into the mayor’s race after then Mayor Richard M. Daley decided after 20 years not to seek re-election in 2011.
Emanuel inherited a growing fiscal storm. Daley had relied heavily on reserves established from the now much-maligned $1 billion parking meter lease to erase red ink leaving Emanuel a more than $600 million structural deficit. No action had been taken on the city’s mounting pension woes, with two of four funds on the path to insolvency.
While Emanuel has received credit for fiscal gains and the decision to shed fiscal gimmicks like scoop-and-toss debt restructuring, he’s been attacked for maintaining some of the gimmicks through his first term and being too slow to rescue the pension funds.
The Emanuel administration’s defense has been to stress that his first term was focused on laying the groundwork to solve debt strains by cutting the deficit, bolstering education results by extending the school day and pre-school, and improving the city’s economic development.
In May 2015 Moody’s Investors Service cut the city’s GOs to junk over its pension woes and an Illinois Supreme Court outlawing benefit cuts. That triggered various defaults on $2.2 billion in financial contracts supporting cash flow credit lines and swaps which were eventually solved in large part through new borrowing.
Emanuel won praise for his two choices for the city’s top fiscal post, both respected names in the national public finance community. His first choice was former banker and financial advisory firm owner Lois Scott. She moved on by choice in 2015 and banker Carole Brown, who also had served as Chicago Transit Authority board chair, took the reins.
Emanuel's decision not to run will also raise uncertainty about city bond practices and banker relationships, said one local banker.
Speculation over whether Emanuel would run again had been rising as he had not yet formally filed for the race. The deadline is Nov. 26. One municipal source close to Emanuel said the decision was made over the weekend and the source attributed it to the mounting pressure he was facing with the McDonald police case and the crowded field and lengthy campaign and his own sense of accomplishment on schools and city finances.
The trial of officer Jason VanDyke on charges that he murdered Laquan McDonald begins this week. The administration came under fire for its handling of the shooting and initial refusal to release police video. It drew national headlines and resulted in a U.S. Department of Justice civil rights investigation that in turn led to a stinging report on discriminatory police tactics.
“We will stand ready and eager to work with whoever is lucky enough to come next and ensure a smooth and positive transition. We owe our city nothing less,” Emanuel said.
Emanuel was facing a long list of 12 announced candidates. Emanuel won a 2015 runoff against Jesus “Chuy” Garcia, a Cook County board commissioner.
More high-profile candidates are now expected to jump into the contest.
Municipal Market Data did not see any immediate impact on city spreads in secondary trading, said MMD strategist Dan Berger. The city’s tax-exempt GOs spreads have steadily narrowed from far into junk territory with a 2015 maturity trading last month at about 160 basis points to the AAA benchmark scale. The city’s spreads were around 230 basis points a year ago.
Moody’s rates the city Ba1. In July it shifted its outlook to stable from negative. Fitch Ratings has the city at BBB-minus with a stable outlook and S&P Global Ratings has it at BBB-plus with a stable outlook. Kroll Bond Rating Agency rates the city at A and stable. It upgraded the city two notches earlier this year.
