Chicago City Council to mull $1.25 billion of bonds

On Friday, the Chicago City Council’s Finance Committee will discuss $1.25 billion of general obligation and Sales Tax Securitization Corporation bonds that Mayor Brandon Johnson has urged the City Council to approve. But no vote will take place on the bonds as of yet.

The Johnson administration is reportedly aiming to pass the bond measure by the end of March. The economic development and affordable housing bonds are part of a $3 billion investment that also includes existing city funding sources, federal and state grants and private funding, according to a business and neighborhood development strategy document posted on the city’s website.

Chicago would not have to raise property taxes to issue the bonds because about 45 tax increment financing districts are going to expire by Dec. 31, 2027. As the TIF districts expire and the overall tax base grows, the amount of property taxes flowing to the city will increase. 

Tax increment financing districts capture tax revenue increases in the district to fund projects and activities within its borders. If they expire, that incremental revenue will become part of the city’s main revenue stream.

“General obligation bonds are issued with a property tax levy, and the share of the tax levy from the expired TIF districts will accrue to the corporate fund and will be available for debt service, allowing for the GO bond levy to be abated,” the document states.

Kroll Bond Rating Agency Managing Director of Public Finance Harvey Zachem raised concerns about the non-recurring nature of the TIF expiration offset the city has come up with.

“Funding from either expiration of a tax increment district, or a declared TIF surplus, is a non-recurring revenue action,” he said. “KBRA believes municipalities should strive for structural balance with recurring revenues matching recurring expenditures.”

KBRA looks at bond issuance in the context of legal security, impact on debt metrics and available financial resources to repay the debt and meet ongoing operating requirements, he said, and it “is constantly monitoring the city’s credit standing.”

Kroll rates Chicago GOs A with a positive outlook.

Absent the $3 billion plan, the Johnson administration contends, Chicago’s investments in community and economic development and affordable housing will drop off. This is partly due to pandemic relief funds expiring. But the more pressing issue is a structural decline in long-term revenue sources.

“The most critical issue is the pending reduction of TIF revenue,” the document says. It says TIFs perpetuate inequities, because TIF districts with higher property values tend to see greater benefits; and yet, it notes, TIF “has remained the most important and reliable source of funds for affordable housing and economic development.”

Still, the legal restrictions on eligible uses of TIF have often prevented the city from undertaking major housing rehab or construction development projects with it, the strategy document says. And the administration predicts TIF will become an even less equitable funding source in future years. With high interest rates and rising construction costs, it all adds up to sharply deteriorating outcomes for these programs without major investments, the document says.

When considering a rating on the proposed bonds, KBRA would factor in an effective management team that has generally reduced reliance on non-recurring revenues; Chicago’s strong tax base and diverse economy; and ample available reserve balances, Zachem said.  

But he noted that Chicago’s credit challenges include its need to identify substantial long-term funding sources to transition pension funding to an actuarial schedule; the budgetary uncertainty created by its ongoing reliance on “economically sensitive revenue sources”; and slow bond amortization due to past use of scoop-and-toss debt restructurings.

“Bond issuance is evaluated in the context of legal security, impact on debt metrics and available financial resources to repay the debt and meet ongoing operating requirements,” he said.

In February, S&P Global Ratings lowered the outlook on the city’s general obligation bonds to stable from positive and affirmed its BBB-plus rating. Moody’s Ratings in January raised the outlook on its Baa3 rating of Chicago to positive from stable. In October, Fitch Ratings upgraded Chicago GOs to BBB-plus, outlook stable.