Chicago Ending Interest-Rate Swaps to Fix Financial Mess
by Elizabeth Campbell
Bloomberg
1:51 PM EDT
April 29, 2015
Chicago plans to end some interest-rate swaps and the use of variable-rate debt as part of a plan to bolster its finances, Mayor Rahm Emanuel said.
“In the coming weeks, we will begin converting it all to fixed-rate debt, eliminating taxpayers’ exposure to the whims of the financial markets and potential spikes in cost,” Emanuel said Wednesday in an address to the Civic Federation, a nonprofit research group that follows the city’s finances.
Chicago, which is grappling with $20 billion of unfunded pension liabilities, has the lowest general-obligation rating among the 90 most-populous cities, except Detroit.
Lower ratings could trigger termination payments by Chicago to banks it contracted with to provide the swaps, putting additional strain on the city. Chicago has ended seven swaps and renegotiated a dozen more, valued at more than $1 billion, reducing “hundreds of millions in taxpayer exposure” to the instruments, Emanuel said.
The city plans to convert all $900 million of variable-rate debt backed by its general fund to fixed-rate debt in coming weeks, the mayor said.
Emanuel presented the steps on Wednesday as part of a plan to move the city forward and fix its financial mess. Chicago will also end its so-called “scoop and toss” practice of pushing off debt into the future, he said. And it will budget funds for legal settlements, rather than borrowing.
Rating Applause
“I think that the rating agencies, while they’re not usually in the tone of applauding, I think they would be positively disposed to the steps we are taking because they are the right things to do to right the ship financially,” Emanuel said in response to a question from one of the federation’s members after his presentation.
Taxable Chicago general-obligation bonds maturing in January 2032 traded Wednesday at a yield as high as 6.93 percent, or about 4.63 percentage points above similar-maturity Treasuries, data compiled by Bloomberg show. On Tuesday, the rate touched 6.95 percent, the highest since January 2014.
The Civic Federation has been a critic of the city’s use of variable-rate debt with interest rate swaps.
Swaps are agreements to trade interest payments on variable rate debt that were designed to cut municipalities’ losses when interest rates rise. The instruments backfired as the Federal Reserve has kept rates near historic lows.
While Laurence Msall, president of the federation, praised the moves as positive for Chicago, he warned that the actions will come at a cost. The termination of swaps will have immediate impact in “the magnitude of hundreds of millions,” depending on what the city is able to negotiate with creditors, he said.
“This is going to require either additional new revenue or further cuts in the city’s operating budget in order to finance,” Msall told reporters after Emanuel’s address. He added that long-term, the steps will be less costly to the city and taxpayers.
Pension Pressure
Pensions are the biggest pressure on the city and led Moody’s Investors Service to cut the city’s credit rating to Baa2 in February, two steps above junk. The city faces the possibility of another downgrade depending on how the Illinois Supreme Court rules in the coming weeks on a pension-reform case.
The rating cut created the possibility of $58 million of swap-termination payments, and moved the city closer to $133 million of payments, said Moody’s, which kept the city on a watch list for more downgrades. In March, Emanuel’s office said it had an agreement to avoid paying $20 million of the payments and was working on a deal on the rest.
“We are not just fixing our fiscal mess because it is the right thing to do,” Emanuel said. “We are doing it to support our larger goal of creating jobs for all of our residents and restoring economic growth to all of our neighborhoods.”
Bloomberg
1:51 PM EDT
April 29, 2015
Chicago plans to end some interest-rate swaps and the use of variable-rate debt as part of a plan to bolster its finances, Mayor Rahm Emanuel said.
“In the coming weeks, we will begin converting it all to fixed-rate debt, eliminating taxpayers’ exposure to the whims of the financial markets and potential spikes in cost,” Emanuel said Wednesday in an address to the Civic Federation, a nonprofit research group that follows the city’s finances.
Chicago, which is grappling with $20 billion of unfunded pension liabilities, has the lowest general-obligation rating among the 90 most-populous cities, except Detroit.
Lower ratings could trigger termination payments by Chicago to banks it contracted with to provide the swaps, putting additional strain on the city. Chicago has ended seven swaps and renegotiated a dozen more, valued at more than $1 billion, reducing “hundreds of millions in taxpayer exposure” to the instruments, Emanuel said.
The city plans to convert all $900 million of variable-rate debt backed by its general fund to fixed-rate debt in coming weeks, the mayor said.
Emanuel presented the steps on Wednesday as part of a plan to move the city forward and fix its financial mess. Chicago will also end its so-called “scoop and toss” practice of pushing off debt into the future, he said. And it will budget funds for legal settlements, rather than borrowing.
Rating Applause
“I think that the rating agencies, while they’re not usually in the tone of applauding, I think they would be positively disposed to the steps we are taking because they are the right things to do to right the ship financially,” Emanuel said in response to a question from one of the federation’s members after his presentation.
Taxable Chicago general-obligation bonds maturing in January 2032 traded Wednesday at a yield as high as 6.93 percent, or about 4.63 percentage points above similar-maturity Treasuries, data compiled by Bloomberg show. On Tuesday, the rate touched 6.95 percent, the highest since January 2014.
The Civic Federation has been a critic of the city’s use of variable-rate debt with interest rate swaps.
Swaps are agreements to trade interest payments on variable rate debt that were designed to cut municipalities’ losses when interest rates rise. The instruments backfired as the Federal Reserve has kept rates near historic lows.
While Laurence Msall, president of the federation, praised the moves as positive for Chicago, he warned that the actions will come at a cost. The termination of swaps will have immediate impact in “the magnitude of hundreds of millions,” depending on what the city is able to negotiate with creditors, he said.
“This is going to require either additional new revenue or further cuts in the city’s operating budget in order to finance,” Msall told reporters after Emanuel’s address. He added that long-term, the steps will be less costly to the city and taxpayers.
Pension Pressure
Pensions are the biggest pressure on the city and led Moody’s Investors Service to cut the city’s credit rating to Baa2 in February, two steps above junk. The city faces the possibility of another downgrade depending on how the Illinois Supreme Court rules in the coming weeks on a pension-reform case.
The rating cut created the possibility of $58 million of swap-termination payments, and moved the city closer to $133 million of payments, said Moody’s, which kept the city on a watch list for more downgrades. In March, Emanuel’s office said it had an agreement to avoid paying $20 million of the payments and was working on a deal on the rest.
“We are not just fixing our fiscal mess because it is the right thing to do,” Emanuel said. “We are doing it to support our larger goal of creating jobs for all of our residents and restoring economic growth to all of our neighborhoods.”
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