City faces higher borrowing costs as bond rating is downgraded

City faces higher borrowing costs as bond rating is downgraded
BY FRAN SPIELMAN
Copyright by The Chicago Sun-Times
August 6, 2010
http://www.suntimes.com/news/cityhall/2570066,city-bond-rating-downgraded-080510.article


Struggling through its worst-ever budget crisis, Chicago has suffered the first in what could be a series of body blows: a downgrade in the all-important bond-rating that determines city borrowing costs.

Citing a record, $654.7 million budget shortfall and Mayor Daley’s “accelerated use of reserves to balance operations,” Fitch Ratings has reduced its rating on $6.8 billion in outstanding general obligation bonds from AA-plus to AA. The ratings outlook is negative.

“The downgrade reflects the city’s weakened financial flexibility as the result of sharp tax revenue declines and the accelerated use of reserves to balance operations,” the report states.

“Achieving structural balance in the near-term will be difficult, given rising employee costs and a reluctance to increase property taxes. Significant additional expenditure reductions, mostly related to personnel, will be required.”

The higher the city bond rating, the less it costs for the city to borrow money. The lower rating, particularly if it’s followed by similar downgrades, could cost Chicago taxpayers millions.

Daley has ruled out a pre-election property tax hike — while putting other tax increases, services cuts and a raid on previously sacred economic development funds “on the table” — to erase a record shortfall that could rise considerably to settle claims tied to the city’s discriminatory handling of the 1995 firefighter’s entrance exam.

But, Fitch noted that the mayor’s ability to further cut personnel was “extremely limited, given a highly unionized workforce, generous wage increases and benefits” and the fact that personnel costs represent 80 percent of corporate fund spending.

Reserves that once approached $2 billion — generated by the parking meter and Chicago Skyway leases — will drop to $790 million by year’s end. Fitch also cited the ticking time bomb created by $14.57 billion in city pension liabilities.

The mayor’s own pension commission has concluded that reduced employee benefits, higher worker contributions and “new revenue” from taxpayers will be needed to bail out four city employee pension funds that will run out of money by 2030.

The $654.7 million shortfall sets the stage for another raid on long-term reserves. But, reaching into the $500 million long-term fund generated by the Skyway windfall could prompt other Wall Street rating agencies to follow Fitch’s lead.

In a May 11 report that reaffirmed Chicago’s AA- rating, Standard & Poor’s wrote, “The stable outlook reflects our expectation that [the city] will, with the help of careful budgeting, improve its financial operations and not draw on its long-term reserves.”

The rating agency warned that city finances “could be challenged for multiple fiscal years” because of Chicago’s reliance on “economically sensitive revenues currently in the downward trend.”

“Maintenance of the rating at its current level is contingent upon the city’s maintenance of its long-term reserves at strong levels,” the report stated.

Daley’s $6.1 billion 2010 budget was precariously balanced by draining the parking meter reserves and ordering city employees to take unpaid furlough days that amounted to a nine percent pay cut.

Since then, an independent arbitrator granted rank-and-file Chicago Police officers a ten percent pay raise over five years with a pricetag of $385 million.

On Monday, retroactive paychecks averaging $10,830 will be issued to 13,963 present and former police officers.

The back pay — dating back to July 1, 2007 — will be financed by a $151.2 million short-term borrowing. The so-called “commercial paper” is almost like a line of credit. It was already factored into the budget shortfall.

The Fitch report ominously warned that the city’s

“inability to enact working structural solutions” to balance the budget “will result in negative future rating action.”

“It will be difficult for the city to achieve balanced operations in the near future given its increased fixed expenditures and limited revenue raising measures,” the report said.

Gene Saffold, the city’s chief financial officer, said the city anticipated a possible downgrade but said “we don't believe it will have a significant impact on our long-term borrowing costs.”

“During the deepest economic recession in 70 years, many cities, states, and private corporations have felt the negative impact of this economy on their credit ratings,” Saffold said in a statement. “Perhaps most importantly, utilizing one-time resources like reserves (as Fitch mentions in their report) is not something Mayor Daley wanted to do, but he was forced to choose that option in order to combat the catastrophic effects of the national recession on our City budget and Chicago residents.”

Saffold said cost-cutting measures including unpaid furlough days and lay-offs, the city’s “broad economic base,” and strong long-term reserves are all “positive notes.”

This rating falls within the average of most local governments,”