Emanuel gets OK to sell $850M in general obligation bonds to ‘nervous’ investors
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Mayor Rahm Emanuel got the go-ahead Monday to issue $850 million in bonds to bankroll capital improvement projects in what will be a test of an investment market “a little nervous” about the changing of the guard at City Hall.
The City Council’s Finance Committee approved the bond deal, paving the way for the city to issue general obligation bonds —backed by property taxes — for the first time in two years.
The list includes: $65 million for the police and fire training academy in West Garfield Park; $14.1 million to make Chicago Fire Department stations more accessible to women; $30 million for a new headquarters for Engine No. 115; $41 million for police and fire vehicles; and $21 million to repair existing police and fire facilities.
The menu of projects also includes: $171 million for new LED streetlights; $168 million for the aldermanic menu program; $24 million for bridge and viaduct improvements and shared and vaulted sidewalks; $26 million for other city vehicles; and $14 million for streetscape work and elevator installation along the downtown Riverwalk.
Another $155 million will be used to pay off short-term loans.
Two years ago, Chicago sold $1.16 billion in general obligation bonds, but paid a heavy price for a school financial crisis made worse by then-Gov. Bruce Rauner’s veto of a bill promising pension help.
The difference between the interest rate Chicago obtained and the rate the city would have paid if it had a AAA bond rating ranged from 3.3 to 3.5 percentage points, the worst spread in recent memory on a city bond deal.
Even more surprising: Chicago’s interest rate was a “full percentage point” higher than in 2016 — before aldermen approved Emanuel’s plan to slap a 29.5 percent tax on water and sewer bills to save the largest of four city employee pension funds.
Now, CPS is out of the woods, thanks to a $450 million windfall of state money and a continuing commitment to fund future teacher pensions. But there’s another problem: the upcoming change in mayoral administrations.
“The market’s a little nervous because it’s uncertainty and they like certainty,” Chief Financial Officer Carole Brown told reporters.
“In addition to a budget that’s gonna have to address pensions [the 2020 budget will include] two contracts [for police officers and firefighters]….The market’s gonna want to know that there’s a commitment from the next administration to do what needs to be done, including having the revenue to support the operation.”
Brown said she expects to meet with the “three rating agencies that we value” — minus Moody’s Investors — and “aggressively” market the bonds for “at least a week.”
The actual sale will likely take place during the last week of March with a closing during the second week of April, she said.
But, “more investor education” will be required to “put it in context of a changing administration” and to “let them know what framework we’re leaving,” she said.
“We’re gonna have to remind them of the controls we put in place to deal with the uncertainty we are about to face,” Brown said.
“We can say that the requirement to fund pensions is a statutory requirement. We can say we … ended some of the bad financial practices we inherited so the ability to fall back into that is difficult. … We’re back to an improving financial picture and we believe the next administration will want to continue that.”
Chicago’s newly-elected mayor will need to find $270 million immediately and $1 billion over the next four years to cover a spike in pension payments.
Three months ago, Emanuel urged the City Council to sign off on a $10 billion pension borrowing plan he said would save beleaguered Chicago taxpayers “as much as $200 million” in his successor’s first budget.
The mayor warned then that the window of opportunity was closing. But, the Council has yet to hold a single hearing on an ordinance setting up the structure for issuing pension obligation bonds.
On Monday, Finance Committee Chairman Pat O’Connor (40th), Emanuel’s City Council floor leader, was asked why he has yet to put the pension borrowing ordinance on the Finance Committee agenda at a time when Emanuel is putting the squeeze on aldermen to approve the $6 billion Lincoln Yards projects.
“I can surmise that what they’re trying to do is prioritize what’s important for them to get into place,” O’Connor said.
“And rather than put it on overload [at] one meeting, clearly if you’re talking about putting something in place that may or may not be used in the future, [it] takes less of a priority than trying to move those other projects forward.”