The City of Chicago, led by Mayor Brandon Johnson, has announced a significant financial maneuver aimed at reducing its debt burden. The Finance Committee recently gave the green light to an ordinance allowing the city to issue $1.5 billion in General Obligation (GO) bonds and for the Sales Tax Securitization Corporation (STSC) to issue STSC bonds. This move is designed to refinance or tender certain outstanding City GO and STSC bonds.
The anticipated outcome of this refinancing plan is approximately $110 million in present value savings, contingent on current market conditions. Notably, the STSC was established in 2017 and enjoys higher bond ratings than the city's GO bonds. Its primary function is to refinance these GO bonds and further reduce the city's debt service costs.
Scheduled for consideration by the City Council on October 9, 2024, the $1.5 billion ordinance aligns with best practices for responsible debt management. It stipulates that all funds must be allocated solely for cost-saving refinancing purposes unless an amendment is passed by the City Council. The funds are prohibited from being used for operating costs.
Mayor Brandon Johnson emphasized the importance of this initiative, stating: “The City of Chicago is committed to finding innovative and responsible ways to meet our financial challenges while prioritizing the long-term stability of our budget.” He added that this plan represents a crucial step toward creating a more robust financial foundation for all residents.
Similar to refinancing a mortgage, Chicago will issue new bonds at lower interest rates to replace existing higher-interest bonds, achieving cost savings in the process. On January 1, 2025, $850 million worth of GO bonds will become callable—eligible for refinancing through a call action. Additionally, the city intends to use a tender process to purchase approximately $500 million of GO and STSC bonds for refinancing purposes.
Under this strategy, debt carrying an average interest rate of 5.62 percent will be replaced with new debt at significantly lower rates around 3.75 percent. This effort follows other successful refinancings earlier this year involving Midway Airport, wastewater systems, and water system debts.
Pending approval from the City Council, both the city and STSC plan to issue these bonds as soon as late October 2024. The transaction aims for minority underwriter representation exceeding 40 percent—a target consistent with previous transactions.