City sells $1.16B in bonds, but pays a heavy price for CPS crisis

Chicago sold $1.16 billion in general obligation bonds Thursday, but paid a heavy price for a school financial crisis made worse by Gov. Bruce Rauner’s veto of a bill promising $215 million in pension help.

The “spread” between Chicago’s interest rate and the interest rate the city would have paid if it had a AAA bond rating ranged from 3.3 percent to 3.5 percent, according to Matt Fabian, a partner at Municipal Market Analytics.

Fabian called it the “worst spread” in recent memory on a city bond deal.

Even more surprising was the fact that the interest rate on Chicago’s general obligation bonds was a “full percentage point” higher than it was a year ago — before the City Council approved Mayor Rahm 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.

Market factors beyond the city’s control were working against the city.

The recent interest rate increase and prospects for higher inflation under President-elect Donald Trump meant the “universe of potential players has shrunk,” Fabian said. There’s more yield in “safe” bonds that carry a AA or AAA rating, he said. Fewer investors “need to reach to get the added yield” of a Chicago bond.

But the overriding factor was the financial crisis at the Chicago Public Schools.

“Investors are afraid that CPS might be pulled into bankruptcy in some way or that a new bankruptcy provision might be created or that CPS might have to default on its bonds. And that’s going to directly affect the city,” Fabian said, arguing that the CPS penalty would cost taxpayers millions over the life of the bonds.

There is little doubt that Rauner’s veto of the teacher pension bill “chased away investors and made the universe of buyers smaller,” Fabian said.

“CPS can’t fix its budget problems without the state’s help. And the state, through the governor has shown no interest in providing it,” he said. “Until a plan for CPS materializes, these are the kinds of interest rates the city and the district are gonna have to pay.”

The governor’s veto and the continuing budget stalemate in Springfield were not the only concerns for investors.

So was the $1.16 billion borrowing itself. It includes $440 million in “scoop-and-toss” borrowing, $105 million more than previously planned, that extends for another generation debt that should be retired today.

It also includes $225 million to bankroll settlements and judgments against the city — $100 million more than previously planned.

Emanuel has promised to eliminate both dubious financial practices by 2019. That’s also the deadline he set for eliminating a structural deficit that’s already 80 percent smaller than the one he inherited.

“The fact that this bond sale was still funding scoop and toss and that . . . they’re borrowing to pay interest on the these bonds — those are not the things that healthy cities do,” Fabian said.

“The mayor has made progress. But the city budget is still a mess. . . . The city needs another year or two at least to fully eliminate its budget gap,” he said. “In a few years, if everything else works out, these borrowing costs will begin to come down.”

The Emanuel administration tried to put the best possible face on the transaction, noting that the bonds were “three times over-subscribed” and attracted 145 investors.

“The city continues to address our financial challenges and work to end bad financial practices of the past, and these bonds represent a critical milestone in this effort,” Chief Financial Officer Carole Brown was quoted as saying in an emailed statement.

“This deal represents our final borrowing for scoop and toss, following through on Mayor Emanuel’s commitment to end this practice by 2019. This is also our last borrowing for routine settlements and judgments, continuing the Mayor’s commitment to end the legacy of using long-term debt to pay for operating expenses.”

Moody’s: Bankruptcy, Skipping Pension Payments Options for CPS

The credit rating agency Moody’s Investors Services outlined three “painful” options for how  Chicago and its public school system could get out of money trouble.

The school district could consider another property tax levy to pay off its growing debt or skipping its pension payment to the Chicago Teachers’ Pension Fund, Moody’s says in a pair of reports issued to potential investors Thursday. 

The boldest option was floated as a last resort: Chicago Public Schools should consider seeking state authority to file for bankruptcy. 

Bankruptcy and skipping a pension payment would require changes to state law and bankruptcy has been raised by Gov. Bruce Rauner and Illinois Republicans in the past, but was quickly dismissed by Mayor Rahm Emanuel and others. A spokeswoman for the school district on Thursday said all three options would create more financial problems and would be bad for city taxpayers. 

These reports come one week before the city plans to borrow more money to cover its debt payments and one month after Mayor Rahm Emanuel sent a letter to the credit rating agency accusing it of bias. The city hasn’t requested a credit rating from Moody’s in two years.

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“It has become increasingly clear that Moody’s rating methodology and agenda are far from objective and independent,” Emanuel wrote in the December letter. “This is not to say that the City should be rated AAA, but… your current rating does not accurately reflect the City’s credit or our ability to pay debt service when due.”

The report about the City’s finances does acknowledge some of the steps Emanuel has taken to improve both the city’s and the school system’s finances. Specifically, it notes the additional property tax levies that have been created to fund the pensions of city workers, police officers and public school teachers. 

But, the report says, “contributions will remain insufficient to keep reported unfunded liabilities from growing for at least 15 more years.”

The reports issued Thursday are meant to help potential investors decide whether to lend Chicago money.

Matt Fabian, a partner at Municipal Market Analytics, says the city is on the right track, but it’s delicate.

“In general, the city is doing the right things,” Fabian says. “But it’s just started doing the right things. And it’s depending on time to give it more financial flexibility. Maybe it will have that time, and maybe it won’t.” 

He says risks faced by the city and its school system are probably the top two conversations in his professional world.

“The problem with Chicago is not so much the economy, and it’s not even really the pensions, long-term,” he says. “It’s the political issues.”

For instance, raising taxes too quickly could trigger a political backlash, which Moody’s also acknowledges in its report. But going slowly increases the risk that something else — like a recession — could make the financial problems worse.

Dan Weissmann contributed reporting for this story.