CHICAGO (Reuters) - A plan aimed at lowering Chicago’s borrowing costs with a new debt structure that protects investors from the city’s financial problems won final city council approval on Wednesday.
The 43-5 vote clears the way for the city to refinance up to $3 billion of existing debt using the new structure, with the first issuance expected as soon as next month.
Mayor Rahm Emanuel plans to refund all $700 million of the city’s sales tax revenue bonds and about $2.3 billion of its $9.8 billion of general obligation (GO) bonds through a new corporation. That entity will be assigned all of the city’s sale tax revenue collected by the state of Illinois, which totaled $661 million in fiscal 2016, and will pledge that money to pay off the bonds. Revenue not needed for debt service will eventually flow back into city coffers.
City aldermen who voted against the proposal cited the lack of third-party vetting of the plan, distrust of the bond market, and concerns over extending maturities on existing debt for their opposition.
Supporters contended the move will help the city save money for its budget by lowering interest rates on its debt.
“This takes us from a situation where we have difficulty selling our bonds to the point where people will be lining up to get them,” said Alderman Patrick O’Connor.
A chronic structural budget deficit and a huge unfunded pension liability that totaled $35.76 billion at the end of 2016 have led to low credit ratings and increased borrowing costs for the nation’s third-largest city.
The debt structure, which was authorized for home-rule Illinois governments like Chicago by the state legislature in July and used in a few other major cities, gives bond investors a statutory lien to shield debt from municipal bankruptcy, which is currently not allowed under state law.
Carole Brown, Chicago’s chief financial officer, said last week the city could sell as much as $700 million of bonds in late November in the first of four issues using the new structure. She also said the debt should fetch higher ratings and could lower borrowing costs by 2 percentage points.
Reporting by Karen Pierog; Editing by Matthew Lewis