Chicago’s City Council signed off on a $16.4 billion 2023 budget package and $1.85 billion of general obligation borrowing against a backdrop of debate over the city’s fiscal progress and efforts to combat crime and climate change.
The council’s action Monday came after several hours of debate with the budget winning approval in a 32 to 18 vote, followed by a 29-21 vote on the property tax levy and 40-10 vote on the GO borrowing along with other borrowing measures including a federal Water Infrastructure Finance and Innovation Act loan and interim financing mechanisms for O’Hare and Midway airports.
“Over the past three years, we have steered our city through some challenging fiscal storms,” Mayor Lori Lightfoot said. “Hard work pays off. With the passage of this budget, we have continued to take undeniable steps toward securing our government’s financial future. The rating agencies and our bondholders have taken notice and are rewarding our hard work.”
Lightfoot called upgrades over of the summer of O’Hare International Airport’ and Fitch Ratings recent upgrade of the city’s GO rating validation of her fiscal stewardship. “These upgrades are huge,” Lightfoot said. Her administration says the upgrades are expected to trim about $100 million off interest costs annually on future borrowing.
The Fitch action in October raised the city’s GO rating to BBB from BBB-minus citing pension funding progress and use of structural fixes for budget gaps. It also triggered an upgrade of Sales Tax Securitization Corp. bonds to AA from AA-minus and on Friday trickled down to the city’s water and wastewater enterprises.
Fitch raised $1.5 billion of second lien sewer bonds and $1.8 billion second lien water revenue bonds to A from A-minus; it links the issuer and general obligation rating to water and sewer ratings due to the city’s oversight of the system.
With a healthy fund balance, the budget directs surplus tax revenues to make a $242 million supplemental pension payment in addition to the $2.37 billion statutory payment. The supplemental contribution has the benefit of keeping growth of unfunded pension liabilities in check and staving off the need to sell off assets to meet annual retirement benefits given weakened returns so far this year. The new policy will continue into future years with supplemental payments tied to what’s needed to curtail unfunded growth because the existing actuarially based funding plan takes decades to reach healthy funding levels.
Fitch also put a positive outlook on the GO and, in turn, the water and wastewater bonds. The administration hopes for further positive momentum down the line from Fitch and possibly sooner from the other rating agencies. Moody’s Investors Service rates Chicago at the junk level of Ba1. S&P has the city at BBB-plus and Kroll Bond Rating Agency at A.
Market participants see the city’s ratings on the upswing with all eyes on whether Moody’s will lift the city from junk territory.
The positive Fitch outlook “indicates that there’s a high likelihood that we’ll be upgraded again in the next one- to two-year timeframe, assuming that we persist on the financial path that we’ve laid for ourselves,” Chief Financial Officer Jennie Huang Bennett said in a statement.
The city will sell $757 million of new money GOs later this month or early next month and has new money and refunding water and sewer bond deals planned for early next year.
The Civic Federation of Chicago endorsed the spending plan although the independent government research organization warned that the use of one-time revenues like federal relief could make maintaining balance in the future harder should the economy sour. The federation also called for the city to improve transparency around policing issues and progress in meeting a federal consent decree requiring broad reforms of the city police force.
“This budget is good news for taxpayers,” federation President Laurence Msall said. “There are no general tax increases and the city’s financial improvement as recognized by a recent Fitch Ratings upgrade should save taxpayers money on future borrowing.
“There is a lot of work that needs to be done to better communicate the city’s strategy for improving policing and reducing violent crime,” Msall said. “We have concerns that the federal Consent Decree is not being used effectively as a tool to improve constitutional policing. And while it appears the mayor is making progress, the lack of transparency around police staffing levels and resource allocation must be addressed.”
The $16.4 billion all-funds spending package dubbed the “stability budget” includes a $5.4 billion corporate fund and continues to spend down $1.9 billion of COVID-19 federal relief. The city is currently operating on a $16.7 billion budget with a $4.9 billion corporate fund.
Chicago headed into budget season with just a $128 million gap to close — the lowest in recent memory — but that was with the expectation of a roughly $80 million hike in property taxes based on an annual trigger put in place last year that allows for annual increases up to 5% based on inflation.
With citywide elections looming in February, Lightfoot scrapped the entire hike, which would have made budget passage a tougher task.
Even without a tax hike, the budget came under attack from multiple fronts including from some members who Lightfoot has tapped to lead committees and were once considered her allies.
Progressives were disappointed in the administration’s refusal to re-establish an environmental department, saying Lightfoot’s plan to create an office of climate and environmental equity falls short of what’s needed. Many speeches ahead of the vote focused on the need to do more to combat crime and bolster a police force stung by retirements.
Alderperson Tom Tunney, who is retiring and considering a bid against Lightfoot in the 2023 contest, took the administration to task for the additional borrowing authority without providing sufficient detail on existing project spending to ensure accountability. “I really feel like we need to do the first set of bonding before” another round that doubles the authority is approved, Tunney said.
Tunney also hit on the crime concerns. “My residents don’t feel safe,” he said.
Alderperson Brendan Reilly called the mayor’s recent comments that a vote against the budget represented a vote against the police as “intellectually dishonest” and attacked funding for the Chicago Transit Authority that’s been plagued by crime, service and cleanliness complaints. “We’re investing more Chicago tax dollars in a failing transit system that is not only unreliable, but is unsafe.”
Others offered a more positive assessment.
“This budget is a sound and solvent budget for the future of our city,” said Alderperson Scott Waguespack, chairman of the council’s Finance Committee. “We are improving the fiscal footing of the city” and the Fitch upgrade “says a lot about the plan” undertaken over the last three years.
“In any process, no one gets everything that’s being asked for” but the budget does move the city “in the right direction,” said Alderperson Jason Ervin, who voted for the budget.
The upcoming GOs will finance capital projects in the city’s $3.7 billion, five-year Chicago Works capital program and the $1.2 billion Chicago Recovery Plan that also relies on COVID-19 American Rescue Plan Act relief grants to fund a broad range of social programs.
The deal will also include the city’s first environmental, social, and governance-labeled bond series and will be structured to prioritize local orders.
The new $1.85 billion of GO authority covers capital spending planned through 2024. The other debt measures approved Monday include a $336 million federal WIFIA loan to replace lead-lined water service lines, an extension of $250 million of existing commercial paper authority and new authorization for a line of credit at Midway International Airport and a $50 million line of credit for unforeseen capital expenses at O’Hare International Airport’s rental car facility.
The city previously named teams for a series of GO deals expected over several years and will add the new borrowing capacity to the par amount of those deals.
The teams for the new money tranches previously approved include RBC Capital Markets, Cabrera Capital Markets, and UBS as senior managers on the upcoming sale; Barclays and Loop Capital Markets on the second sale; and BofA Securities and Cabrera on the third.
The city’s sweeping lead-pipe replacement needs that carry a projected $8.5 billion price tag. The federal government has already approved the WIFIA loan.