Chicago preps deal amid heated budget debate

RBC Capital Markets will price for Chicago $806 million of bonds on Thursday, a refinancing that will help close the city's fiscal 2024 budget gap.

The city remains in the midst of a heated 2025 budget debate that looks likely to go down to the wire, with the City Council recently voting down the mayor's proposed property tax hike and negotiations still underway on how to replace that revenue and close a nearly $1 billion budget shortfall.

Meanwhile, Kroll Bond Rating Agency and S&P Global Ratings have warned Chicago it runs the risk of a downgrade if it does not pass a balanced budget on time. The rating agencies also flagged the city's reliance on one-time fixes to close the budget gap, its pension payment burden and Chicago's reliance on economically sensitive revenue sources.

State statute requires the city to pass a budget by Dec. 31.

According to the investor presentation for the $126.595 million Series 2024B refunding bonds, the city made supplemental pension payments of about $306.6 million in fiscal 2024, and Mayor Brandon Johnson's 2025 budget recommendation calls for a $272 million contribution in fiscal 2025. Rating agencies and investors have called the advance pension funding policy an important piece of Chicago's credit profile.

The $546.31 million refunding Series 2024A senior lien and the second lien refunding Series 2024A and taxable $133.37 million Series 2024B bonds are being issued through the Sales Tax Securitization Corporation, according to the investor presentation.

The refinancing deal's senior sales tax securitization bonds received AAA ratings with a stable outlook from Fitch Ratings and KBRA, the latter of which had placed the city's general obligation bonds on Watch Downgrade. They were rated AA-minus by S&P, which placed Chicago on CreditWatch negative. The second lien bonds received AA-minus ratings from Fitch and S&P and an AA-plus rating from KBRA.

Fitch assigned the GO refunding Series 2024B bonds an A-minus rating with a stable outlook. KBRA assigned an A rating (Watch Downgrade), and S&P assigned a BBB-plus rating (CreditWatch negative).

"The risk of a downgrade is very real at this point," said Justin Marlowe, director of the Center for Municipal Finance and research professor at the University of Chicago's Harris School of Public Policy. "The problem now is a governance problem. The budget is no more challenging today than it has been in the past. I think the finance team at the city is doing a good job of providing the mayor and City Council with options. They have responded well to the current market conditions. But policymakers need to pass a budget, and they need to pass a budget very soon.

"Every day that this goes on, it continues to feed the narrative that Chicago does not have its act together, and the rating agencies have no choice but to respond to that," he added.

Marlowe said the bonds that will be used to close the budget gap are nothing new, and while "in a perfect world, we wouldn't have to do that," the city is taking advantage of favorable municipal market conditions. Right now, Chicago can borrow and its bonds "will price in a way that suggests a stronger credit than Chicago actually is," due to market strength, he said.

As to the budget debate now playing out in public, Marlowe recommended in an op-ed last year that the City Council expand and reorient its City Council Office of Financial Analysis, or COFA. He told The Bond Buyer he hopes the current high-stakes budget debate, in which the City Council has moved away from its previous rubber-stamping role, "will be the thing that motivates the City Council to realize that it has a much bigger role to play in the budget."

A strengthened COFA, Marlowe wrote, could go beyond its current summarization role and provide "council-focused budget analysis." Legislative budget staff in other cities release budget resolutions that explain the council's shared budget priorities and suggest to the mayor what to include in the proposed budget.

"[COFA 2.0] could compare the previous year's budgeted spending to actual spending, reveal spending patterns by neighborhood, and estimate the costs to improve key performance indicators, such as crime clearance rates and street pavement condition," Marlowe wrote. "This information is readily available and many other cities present it in their budget documents."

Recently, it's been remarkable to see "alders putting forward a public counterproposal for a budget ? they're not staffed up to do that sort of detailed budget analysis," Marlowe said.

Also noteworthy, he said, is the shift from conducting budget negotiations behind closed doors to having it out in public. The tax increment financing sweeps that are part of this budget, and were in recent budgets, were previously decided through quiet negotiation between the finance department and alderpeople, Marlowe noted. This time, those talks are very public.

It's unclear if this is a deliberate attempt at transparency from the mayor's office or a failure to communicate with key stakeholders, Marlowe said.

"Radio silence" from the mayor's office, combined with how the mayor set expectations ? Johnson promised on the campaign trail not to raise property taxes, and he has also railed against cuts to city services ? have created "a very different political dynamic," Marlowe said.

Previous administrations bought some goodwill with the rating agencies through an orderly budget negotiation process and the advance pension payment policy. But the rating agencies are signaling that might change, as is Municipal Market Analytics, which warned earlier this year that "Chicago's credit profile and perhaps ratings may have begun to shift downward."

"There is a concern that Chicago can't get out of its own way," Marlowe said. "The Lightfoot administration did a lot to alleviate that. That goodwill is now gone."