Two Wall Street rating agencies on Thursday gave their highest rating to Mayor Rahm Emanuel’s plan to isolate sales tax revenue in a special fund and use it to refinance $3 billion in city debt.
Fitch and Kroll gave the “sales tax securitization bonds” an AAA rating, the highest investment grade rating available. Standard & Poor’s gave the bonds an AA rating.
The high rating paves the way for dramatically reduced borrowing costs.
Standard & Poor’s said the structure that isolates sales tax revenues provides “a degree of separation between the city and the pledged revenues” that makes that money “neither legally nor practically available for operations.”
“Prior to the payment of debt service, the sales tax revenues are separated from the city’s cash flow and operations, which, in our view, significantly lessens the risk that the revenues could be diverted to address the city’s ongoing budgetary challenges,” S&P wrote.
“The language provided in state statute reduces the likelihood that a bankruptcy court could rule that the pledged revenues are property of the city.”
In a press release, Emanuel called the high ratings “a direct result of our hard work to address the city’s many legacy financial liabilities.”
Emanuel is counting on the new structure to generate $94 million in savings next year and a similar amount in 2019.
Investors have warned the city not to rely on that money because it won’t always be there.
The thumbs-up from Wall Street came on the same day that the “Sales Tax Securitization Corporation” held its first meeting, approved its bylaws and articles of incorporation and authorized the city to issue $3 billion in bonds in multiple stages.
The waves of borrowings are expected to begin the week of Dec. 4, with the refinancing of $575 million in existing sales tax bonds. That will be followed in January by the refunding of $905 million in general obligation bonds, with more refinancing continuing next year.
The five-member board includes the chief financial officer, budget director and comptroller along with chairmen of the Finance and Budget Committees.
The “securitization” structure is certain to dramatically reduce borrowing costs — because bondholders would get paid first, even if the worst happens and the city goes bankrupt.
Only after debt service is paid would sales tax revenue start to flow back to the city.
That makes it popular with investors, but not so popular with a handful of aldermen, who have likened the set up to the widely despised parking meter deal.
“What we are seeking to do today is to take a public asset — sales tax receipts — and turn that over for 40 years to Wall Street, to the banks. I will be 60 years old before the public regains control of that money,” Ald. Carlos Ramirez-Rosa (35th) said last month on the day the City Council approved the borrowing.
“We are setting ourselves up for a long-term loss for a short-term gain. When we privatized the parking meters, yes, we got a lot of money. And if we move forward with this, we’ll get a $3 billion credit line. But we will lose $660 million a year in sales tax receipts.”
After the Council vote, Emanuel “totally rejected” the parking meter comparison, even as he acknowledged that the 75-year, $1.15 billion deal that privatized Chicago meters cast a “shadow” that forced him to approach the deal in a different way with more analysis and lead time.
“One is taking something the city owns and selling it. We don’t own that debt. We have to make payments on it. It’s there already. And we’re refinancing it at a much lower interest rate,” the mayor said then.
