Whether it’s Rahm Emanuel or Jesus “Chuy” Garcia, the victor in Chicago’s mayoral runoff will face the unenviable task of reversing a fiscal decline that’s left the city’s credit rating on the cusp of junk.
Emanuel, who’s guided the third-most-populous U.S. city since 2011, led Garcia, a Cook County commissioner, by as much as 28 percentage points in polls going into Tuesday’s election. Chicago’s finances became a focal point during the campaign after Moody’s Investors Service lowered its rank by five steps since 2013 to Baa2, the second-lowest level of investment grade.
In the $3.5 trillion municipal-bond market, some investors Chicago depends on to finance its operations, including AllianceBernstein Holding LP, already consider the city equivalent to speculative grade. The next mayor will confront the prospect of a politically poisonous property-tax boost as one of the few possible solutions to halt the fiscal decay.
“If you take all the Chicago issuers, we calculate they basically have to double their property taxes, and take them to one of the highest property-tax levels in the country,” said Guy Davidson, head of munis in New York at AllianceBernstein, which oversees $32 billion in local debt. He said the company deems the city below investment grade.
The debt load reaches almost $33 billion, four times the city’s general obligations, when including issuers such as the park district, water agency and Cook County, home to Chicago and its suburbs, data compiled by Bloomberg show. The school board, the second-largest borrower behind the city itself, was cut last month by Moody’s to one step above junk.
Emanuel, 55, and his challenger, Garcia, 58, have barely mentioned a possible increase in property taxes, though they’ve both stopped short of promising not to raise the levy.
The mayor, former chief of staff for President Barack Obama, faces the runoff after failing to win a majority against four opponents in a Feb. 24 election. Emanuel led Garcia by a margin of 58 percent to 30 percent, according to a Chicago Tribune poll published March 31. The first-term mayor led by 18 percentage points in a poll conducted April 3-4 by Ogden & Fry.
Emanuel came under criticism among black voters because of persistent violent crime and his support for a decision to close 50 public schools, most of which were in minority neighborhoods.
In the last televised debate, on March 31, Garcia pinned blame for the struggles on the mayor.
“He said four years ago that he would put the fiscal house in order, and four years later we’re in a much worse situation, in a financial freefall,” Garcia said.
Emanuel, in turn, said Garcia lacked a plan for the city of 2.7 million residents, and held his predecessors responsible for the challenges.
“Everybody knows the attacks on me are a smokescreen for the fact that you lack an agenda to attack the problems,” Emanuel said. “We have a serious crisis, but I am trying to actually work through that and end what has been 30 years of politics.”
The mayor has recommended building a casino, using the revenue to pay retirement debt, and extending the sales tax to services. Garcia is proposing “performance audits” of city finances and a luxury tax on items like boats.
While Chicago would need state legislative approval for many of the potential fiscal measures, it has direct control over its property-tax rates.
The city’s residential property-tax rate of 1.84 percent in 2012 was the lowest among 12 Cook County communities included in a report last year from the Civic Federation, a nonpartisan research group in Chicago.
AllianceBernstein’s Davidson projects an increase in the levy because the area’s pension burden extends beyond Chicago’s $20 billion unfunded liability. Moody’s said in 2013 that Chicago’s retirement obligations were highest among the 50 most-indebted local governments relative to revenue. Cook County was second, and the Metropolitan Water Reclamation District of Greater Chicago ranked sixth.
“You get the picture when you pile all the debt on top of one economy,” Davidson said. “That will look very similar to Puerto Rico.”
Comparing Chicago with Puerto Rico is the ultimate vote of no confidence. The Caribbean commonwealth and its agencies are staggering under $73 billion of debt, and the island’s U.S. representative is pushing for a law to allow its agencies to seek bankruptcy protection.
Chicago’s debt isn’t considered nearly as risky as that of Puerto Rico, which lost its investment grades last year. Ten-year Puerto Rico general obligations yield about 10 percent, compared with about 4.3 percent for Chicago general-obligation bonds maturing in January 2026, Bloomberg data show.
Yet investors demand extra yield to hold the Chicago securities, which carry insurance, instead of similarly rated municipal benchmarks.
The 2026 debt yields about 2.2 percentage points more than top-rated munis, Bloomberg data show. By comparison, the spread on 10-year revenue bonds with a rating similar to Chicago’s is about 0.9 percentage point.
In another sign of investor wariness, the Board of Education delayed a bond sale set for March 31 until April 21, according to Bloomberg data.
Thornburg Investment Management in Santa Fe, New Mexico, sold some Board of Education debt last week on bets that yields may rise, said Chris Ryon, who helps oversee $11 billion in munis at the company.
“It’s going to be very difficult” for the next mayor, Ryon said. Emanuel has “had proposals out in the past that seemed to be a well-balanced solutions, but given how ungovernable both Illinois and Chicago are, I don’t know that they’re going to play well.”