Chicago’s Fiscal Future Uncertain after Mayor Exits Race

Inside Subprime: Sept 18, 2018

By Jessica Easto

Chicago Mayor Rahm Emanuel announced last week that he will not be running for re-election in February, throwing bond market participants off guard and the city’s financial outlook into question.

Market participants, many of whom attended Chicago’s investor conference on August 2, expected Emanuel to run and, backed by his $10 million war chest, ultimately win. With 12 candidates formally announced, there is no clear frontrunner for the mayoral seat—which means no real sense of future fiscal policy.

As Mayor of Chicago since 2011, Emanuel has been the steward of city finances, one that market participants describe as a “known commodity,” according to Brian Battle, director of trading at Performance Trust Capital Partners. Now, future policies related to taxes, pensions, bonding, and more are unknown. The implications for the bond market are vast, as the mayor oversees other borrowing entities such as the Chicago Transit Authority, Chicago Public Schools, Chicago Housing Authority, and Chicago Park District.

One immediate question is whether or not the mayor will move forward with a $10 billion pension obligation bond. While many remain skeptical, the pension bond remains in play.

“The mayor’s announcement on Tuesday added another variable to the decision-making process and we are still in the process of making a final decision,” said Carole Brown, Chicago’s chief financial officer. She said the issue is “an ongoing discussion.”

Many market participants have been pleased with Emanuel’s performance, which they say has shown strict fiscal discipline. Since 2011, Emanuel has reduced the structural deficit by $537 million, increased reserves by $121 million, and made progress toward enacting pension revenue streams, in part by raising a series of taxes. One notable success was the $450 million dollar cash injection into the Chicago Public School system in 2017 to prevent school closure (though critics point out that this funding was secured through the equivalent of a government-level payday loan).

Still, the city’s finances are bleak. Its general obligation credit still has a junk rating by Moody’s, and pensions deficits remain the city’s primary challenge. Some market participants fear new leadership will stymie the pension bond deal, which will drive up borrowing rates. According to John Miller, Nuveen Investments head of municipals, if new leadership shows “political willingness to raise revenues again, especially soon after the mayoral and city council election,” it would be a key risk to Chicago credit.” With no clear mayoral frontrunner in sight, others say it’s too soon to tell.

“We will stand ready and eager to work with whoever is lucky enough to come next and ensure a smooth and positive transition. We owe our city nothing less,” Emanuel said.

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