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Illinois Handing Struggling Cities A Lifeline Or An Anchor?

Forbes Online

Tuesday, February 6, 2018  |  Commentary  |  By Caitlin Devitt - Debtwire contributor

Bonds, Bonding, Borrowing, Debt, Credit Rating , Chicago (16) , Local Government (60)
Prudence may not be the first word that comes to mind when you think of an Illinois politician. But prudence might be just what’s needed now that the State of Illinois has approved a new borrowing tool for its cities. If past behavior is any indication, it may be like handing a new credit card to a cash-strapped college student.

Last year as part of its FY18 budget, Illinois authorized home-rule governments to borrow against their sales tax. The agreement gives investors a first lien on local home rule sales tax revenue. The money is intercepted monthly for bondholders during the life of the debt, usually 30 years, and gives investors a statutory pledge that is supposed to make the revenue untouchable in the case of Chapter 9 bankruptcy (not currently allowed in Illinois) or other type of restructuring.

Bankers are spreading the word across the state, pitching the tool to financial advisors and the governments as a smart way to lower borrowing costs. Several cities are considering taking advantage of the deal, according to market participants.

Two cities have so far issued sales tax securitization bonds. The City of Chicago, for whom the legislation was most likely written, issued $1.4 billion of debt in two refinancing transactions, with plans to tap the market for another $600 million or so in the next two years.

The Village of Bridgeview sold $47 million in December under the new debt structure.

Both cities carry junk-level ratings. The program works best for cities with low ratings, where the spread differential between the new debt and existing general obligation interest costs will be the greatest.  Interest represents a significant cost for local governments, and a 2% decrease in the rate can translate into millions of dollars of savings over the life of the debt.

Both Chicago and Bridgeview achieved solid savings with their transactions. Investors hungry for yield snapped up the debt, despite skeptical grumbles about whether the security would stand up in a courtroom standoff between pensioners and investors.

Everyone’s a winner, right?

Maybe, maybe not.

For one thing, both cities structured the deals so that the refinanced debt is backloaded, with final maturities of 2048 in both cases. Bridgeview, which has struggled financially since it borrowed $135 million in 2005 to finance a soccer stadium that has failed to perform up to expectations, structured the bulk of its debt as bullet maturities to come due in 2037, 2048 and 2033, according to bond documents.

Chicago structured its most recent deal with maturities that don’t begin until 2031 and go through 2048. The city’s December borrowing featured maturities from 2020 through 2030.

Both transactions also feature a significant amount of the so-called “scoop and toss,” a controversial practice in which near-term debt payments are pushed off into the future.

Pushing debt payments out by 30 years or more is not an ideal financial practice, as Chicago Mayor Rahm Emanuel has admitted. Among other risks, long-term debt means more interest costs, negating what supporters say is the point of the new credit.

More worrisome is whether Chicago, Bridgeview and other cities will be able to restrain themselves from loading up with fresh debt, not just accessing the market to deal with existing obligations. Many of the low-rated cities that will be candidates already have large debt burdens and pension obligations that strain their balance sheets.

Now that the state has eased the path to cheaper debt, it may be tough for some local to resist.

Caitlin Devitt is a senior reporter for Debtwire covering stressed credits in Illinois, Texas, Louisiana, charter schools and school districts.
She can be reached at
caitlin.devitt@acuris.com.